Companies pursue international expansion for various reasons: to gain global market share, expand into new markets to take advantage of new customers, and enhance the cost-effectiveness of their operations. Companies operating in highly competitive markets or nearly saturated home markets may court international expansion to foster future growth. Rocky Mountain Chocolate Factory (RMCF) is a global franchisor, retail operator, and confectionery manufacturer based in Durango, Colorado. The exclusivity of the company’s products has helped to preserve the high quality of the product. In order to entrench its positioning in the chocolate market, RMCF’s strategy encompasses looking for opportunities to expand via franchising and licensing. In the last few years, Rocky Mountain Chocolate Factory RMCF has increased its franchising initiatives by signing License Agreements with strategic partners across the Middle East and Asia. The paper explores RMCF’s international expansion strategies with a strong focus on its franchising endeavors in Asia, especially Singapore. RMCF has successfully averted the perils of global development by adopting a franchising business model. The franchising strategy is a win for the company since it requires little capital for growth and generates solid cash flows from the operations.
International growth can generate unlimited opportunities for growth, especially in fast-growing and emerging markets. The purchasing and selling overseas markets provide firms with an opportunity to develop and broaden their activities, with little or no risk. Royal Mountain Chocolate Factory (RMCF) can select several approaches in its quest for international expansion, namely: exporting, strategic alliance (joint ventures), mergers and acquisition, and licensing and franchising. The risks and benefits attached to each strategy are contingent on multiple factors including type of product or service, the necessity for support, and foreign political, economic, cultural, and business environment. In recent years, RMCF has co-branded stores with retailers of matching consumables (Mull, Takano, & Owings, 2014). For instance, in 2012, RMCF ventured into the frozen yogurt business with Aspen Leaf Yogurt, a wholly-owned subsidiary of RMCF. Aspen Leaf Yogurt is a retail operator and a franchisor for self-frozen yogurt. Bryan Merryman, the CFO of Rocky Mountain Chocolate Factory, recognizes the need to nurture the firm’s brand image by selling the company’s products via franchise outlets (Merryman, 2014).
RMCF Company Overview
RMCF is a globally renowned premium chocolate and confectionery manufacturer and international franchisor. Presently, RMCF operates ten company-owned outlets, 49 licensee-owned and 296 franchised stores. RMCF was founded in 1981 and establishes a presence in over 40 states in the US and operates stores in Japan, Canada, and the United Arab Emirates (UAE) (Mull, Takano, & Owings, 2014). The consumers of RMCF’s products include tourists and impulse buyers, which explains why the company sets up its shop in areas with high level of foot traffic.
RMCF employs about 350 employees based at the firm’s factory and company-owned stores (Mull, Takano, & Owings, 2014). RMCF’s revenues stem from the sale of chocolates and related confectionery products at company-owned and franchisees’ stores, and, the collection of royalties and franchise fees. RMCF’s 2014 revenues of $39.18 million and net income of 4.39 million (2014) represented a small fraction of the $13 billion chocolate market (Mull, Takano, & Owings, 2014). Nonetheless, the company has successfully carved out a concrete niche as a chief retailer of “Premium” chocolate candies and related products. RMCF derives the bulk of its sales from on-premise purchases from the company.
RMCF shops manifest a blend of conventional and contemporary styles with a keen focus on establishing an inviting and fun atmosphere within all of its locations. RMCF sees the value of the aroma of its products and the in-store preparation in improving store ambiance and conveying a message of homemade quality and freshness. The visually striking stores are designed to appeal to the contemporary discerning shoppers. The confections and chocolates sold in the stores are handmade with the best ingredients shipped fresh from the RMFC factory in Durango, Colorado (Mull, Takano, & Owings, 2014). RMCF’s marketing objectives center on establishing a distinct brand identity. RMFC exploits low-cost, high-return publicity opportunities by engaging in charitable causes, sponsorships, and local and regional events. All products prepared within franchised outlets use RMCF’s proprietary recipes and ingredients bought directly from RMCF or RMCF’S approved suppliers. RMCF believes that the on-site chocolate making process is a central factor that differentiates the company’s products from those of competitors (Mull, Takano, & Owings, 2014).
Singapore features among the smallest countries in Asia with a total population of 5 million people. Singapore is totally urbanized with 100% of the population residing in urban areas. Singapore’s economic model features a blend of free-market practices and policies and intervention within macroeconomic management (Fletcher & Crawford, 2014). Since Singapore has a comparatively small domestic market, the country’s economic strategy has largely leaned towards opening its economy to foreign investment. Singapore positions itself as a hub for corporations seeking to do business in the South East Asia or the larger Asia-Pacific region. Singapore is also one of Asia’s biggest importers of food products (agricultural products and processed drinks and food). Singapore has a high level of food consumption per capita. For instance, in 2011, Singapore imported $12.2 billion worth of food products (Orissa International Pte Ltd & Swiss Business Hub ASEAN, 2013).
Justification for RMCF Expansion into Singapore
There are multiple reasons why Singapore would be an attractive market for RMCF. Firstly, Singapore is the richest economy in the Association of Southeast Asia Nations and has a highly attractive consumer base. The bulk of Singaporeans are middle class leading comfortable lives with strong aspirations for fine living. The middle income earners make up the biggest pool of active consumers who drive consumption of imported food and premium products (Orissa International Pte Ltd & Swiss Business Hub ASEAN, 2013). Furthermore, Singapore attracts a large number of tourists annually who add to the consumer demand. It is estimated that Singapore attracts over 10 million visitors annually, which rivals other popular tourist destinations in Asia (Orissa International Pte Ltd & Swiss Business Hub ASEAN, 2013).
Secondly, Singapore remains one of the most open markets globally. Singapore has consistently ranked in the top 10 of global index of best countries to do business. The language of doing business is English, which means that a company does not need to alter the labeling of the products. Furthermore, the regulatory authority overseeing the importation of food and beverage products does not compel burdensome import requirements.
Thirdly, Singapore lacks capacity to produce much food owing to limited land and resources. As a result, Singapore imports over 90% of its food products and the demand for food imports is projected to continue increasing in the near future. Food retail, which represents 40% of the total retail spending, is anticipated to increase owing to the rising incomes and the increasing visitor numbers (Orissa International Pte Ltd & Swiss Business Hub ASEAN, 2013).
In the light of the outline of positive reasons for expanding into Singapore, it is essential to highlight some of the challenges that a company venturing into this country may face. Multiple firms are pursuing business opportunities in Asia as the domestic demand slow down. In addition, the high rating in the ease of doing business globally implies that Singapore attracts many firms, which translates to stiff competition. Competition in the market also stems from regional suppliers located in Asia with manufacturing base in Asian countries.
The shifting consumer attitudes and new markets availing new opportunities for growth increase the challenges that chocolate companies face in the quest to keep up with the rivals. RMCF together with its franchisees compete with multiple businesses that offer confectionery products, ranging from big, publicly held global entities to small, privately owned local entities. Some of the competitors enjoy better brand recognition, both locally and internationally, and bigger marketing budgets. Singaporean chocolate confectionery industry manifests a high level of competition between various firms including Mars (China and Australia), Cadbury (New Zealand and Australia), Ferrero (Italy), Lindt and Frey (Switzerland), and Nestle (the UK, the USA, and Australia). Ferrero (Italy) enjoys a leading position with 25% market share (Orissa International Pte Ltd & Swiss Business Hub ASEAN, 2013). Health and convenience are core factors driving growth in the chocolate market. In recent years, increased health awareness has led to a dramatic rise in sales of sugar free, reduced calories and reduced fat chocolate offerings.
International Expansion Strategies
The five preferred mechanisms for international entry encompass exporting, partnering and strategic alliances, mergers and acquisitions, licensing arrangements, and establishing wholly-owned subsidiaries. Exporting can be cited as the easiest mode of entering into an international market. Exporting represents the sale of services and products in foreign countries in which products are sourced from the home country. Exporting remains one of the least expensive entry modes since firms avoid the expenses associated with establishing operations in a new country (Wheelen & Hunger, 2012). However, exporting firms must institute a way of distributing and marketing their products, which requires entering into contractual agreements with a local firm. In addition, the exported goods sometimes attract high tariffs, which may adversely affect the firm’s profits.
Companies can also expand internationally by entering into partnerships and strategic alliances with local partners. A strategic alliance represents a business arrangement in which two or more firms cooperate for mutual gain. A strategic alliance may be forged when one organization awards another firm the authority to exploit technology, marketing rights, and research and development knowledge. A strategic alliance is mostly in the form of a joint venture. Under the joint venture, the partners allocate resources, evaluate risks and potential benefits, and delegate operational responsibilities to the members while maintaining autonomy. An international joint venture allows a firm to establish a marketing or manufacturing presence abroad with the help of a local partner. In order to appraise whether the alliance approach is appropriate for the firm, the entity must establish the value that the partner could herald to the venture (Fletcher & Crawford, 2014). Partnerships and strategic alliances are advantageous since the local firm understands the local market, culture, and ways of doing business. Partners are highly valuable, especially if they have a recognized, reputable brand, or existing relationships that the expanding firm can readily exploit. However, partnering may orchestrate a loss of control, especially where the partners hold divergent views.
Acquisitions and mergers may occur when a firm gains control of another firm by purchasing its stock, swapping stock for its own, or buying the firm at market price. Mergers generate value when managers pursue goals such as enhancing operating profit, realizing strengths from restructuring poorly structured firms, or generating greater entry barriers within the industry. Acquisitions are appealing to firms seeking international expansion since they award the company quick access to the new market (Megginson & Smart, 2009). Nevertheless, acquisitions are costly and may be out of reach for small and medium sized companies. Acquisitions are most rewarding and cheaper if the acquiring firm comes from a country with a strong currency since the firm can derive a bargain. Acquisition is most appropriate when the firm pursues scaling or consolidation.
The process of instituting a new, wholly owned subsidiary (Greenfield entry) is mostly intricate and potentially expensive. Greenfield investment represents a form of direct investment in which the parent company launches a new venture in a foreign country by setting up new operational facilities from scratch. The parent company creates new long-term jobs in the foreign country by hiring new employees besides creating new facilities. Subsidiaries afford the company maximum control and above-average returns (Fletcher & Crawford, 2014). Moreover, the costs and risks associated with subsidiaries are high given that the firm is compelled to acquire the expertise and knowledge of the existing market.
Licensing and franchising represent two specialized modes of international expansion in which a firm licenses its technology, trademarks, patents, production techniques, marketing and managerial expertise to a foreign firm. A franchise represents a contractual license to operate individually-owned business as part of a bigger chain. In a franchise arrangement, the franchisor is not required to invest its own capital and resources. Licensing is attractive to small and medium sized entities since it affords global expansion, while simultaneously mitigating risks. Franchising averts the challenges of slow growth, as well as problems related to human and financial capital (Wheelen & Hunger, 2012). Franchising transfers almost the whole cost of expansion to franchisees since the franchisees bear the cost of renting or building premises, purchase inventory, provide working capital, and pay the employees. Largely, it is much easier to launch franchises compared to setting up company-owned units. Studies have demonstrated that franchisees make brilliant managers since they have a vested interest in the business (Megginson & Smart, 2009).
RMCF’s International Franchising Activities into Asia and the Middle East
RMCF’s overseas expansion started roughly two decades ago (1992) when RMCF entered into a franchise development contract with an associate in Canada who was awarded the exclusive right to franchise and operate RMCF’s stores. By 2014, RMCF operated 53 stores across Canada. Bryan based his international expansion plans on the success of Canadian stores, as well as the four franchise stores in UAE. Initially, the international expansion strategy delivered about 30-40 new franchises per year and gave entrepreneurs a chance to be part of the RMCF family with a capital of $50,000 in liquid assets, with close to 90% of the outlet build-out expenses financed by the US Small Business Administration (Merryman, 2014). This arrangement reduced RMCF’s requirements for capital necessary for financing the expansion. Nevertheless, the tightening of the credit rules in the wake of the financial crises shrunk the pool of potential domestic franchisees since a potential retailer needed a minimum of $100,000 of liquid assets and a secured loan of $250,000. Indeed, the number of franchises for the company tumbled from 30-40 to 5-10 annually (Merryman, 2014).
RMCF’s franchising philosophy focuses on service and dedication to the franchising system through vibrant support services. RMCF’s persistent growth and success hinges on its capacity to obtain suitable sites, and contract capable franchisees committed to promoting and entrenching RMFC store concept, product quality, and reputation. Some of the criteria that RMFC employs when evaluating prospective franchisees include applicant’s liquidity and net worth, as well as work ethic and personality compatibility with RMCF’s operating philosophy
In 2012, RMCF entered into a Master Licensing Agreement (MLA) for the establishment of RMCF outlets in Japan. The licensing agreement demands opening of at least ten stores in the coming decade for a total minimum of 100 stores by the expiration of the agreement. In addition, RMCF test stores are set to be opened in Hong Kong, Singapore, the Philippines, Shanghai, and Beijing, which will open the door for entry into the rest of Asia. Expectedly, the cost of shipping the chocolate and confectionery products overseas is higher compared to the US; nonetheless, the cost of shipping is not prohibitive and the refrigerated shipping was anticipated to be an extra $1 per lb (Merryman, 2014). Although, RMCF bear no production capacity in Asia, RMCF has invested heavily within its existing capacity sufficient to satisfy Asian demand.
The MLA award the holder the right to open corporate stores on its own account, as well as sell franchises provided that the stores exclusively sell RMCF product. The franchisee pays royalty fees and a franchise fee that accrued partially to RMCF and the holder of the MLA. On average, the total investment needed to open a RMCF store ranges from $114,700 to $514,590 depending on the location and size of the store (Merryman, 2014). The Franchisees are expected to pay the company royalties equaling 5% of the monthly gross sales, as well as a marketing fee equaling 1% of the monthly gross sales (Merryman, 2014). There is no fee levied on the RMCF Inc. manufactured products sold in the store; however, there is a 10% royalty charge levied on products procured from outside vendors or products manufactured in the store (Merryman, 2014). The franchisee must also complete a seven-day comprehensive training program on areas such as store operation and management at RMCF’s headquarters. The training is designed to equip the franchisee with expertise in areas such as customer service, cooking, pricing, merchandising, inventory, record keeping, and quality standards.
Justification of Franchising and Licensing
Franchising, as a strategy for international expansion, is justified since it lowers cost. Franchisees make an initial payment in exchange for becoming part of the business and the franchisee continues to pay a percentage of the revenue generated throughout the duration of the Franchise Agreement. Hence, the cost of training, setting up the franchise, and launching the business are covered by the franchisee instead of the parent company. Indeed, the franchise system can avail a cost-effective route for business development and international expansion. Franchising also offers a simpler management model since the franchisees are responsible for the day-to-day running of the business units as dictated by the Franchise Agreement. The Franchise Agreement ensures that the objectives of the franchisee and the organizations are closely connected with the level of success of the arrangement hinging on the degree of success of the entities. The franchise network demands a simplified and comparatively low-cost management system grounded in the close monitoring of the key performance indicators (Wheelen & Hunger, 2012).
Franchising also offers the platform for faster expansion compared to company-owned outlets. Franchising replicates successful business formula in which the franchisor makes reasonable investments in marketing the products. As such, franchising is highly likely to create increased sales volumes and stronger purchasing power through which the organization can derive greater discounts from the suppliers (Fletcher & Crawford, 2014). Franchising also enhances market penetration since franchises are well established as part of the local community. In addition, franchising leads to greater commitment since the franchisees have vested interest in the success of the business. Logically, the substantial financial investment made by the franchisees is most likely to attract higher commitment to increase business performance.
The appeal of international markets can be captivating. The selection of the international expansion strategy is essentially a product of the firm’s financial strength, size, and the overriding economic and regulatory conditions of the target country. The expansion into Singapore offers RMCF an opportunity to exploit the increase in the disposable income in the emerging economy and take advantage of the shifting taste preferences. Since Singapore is governed by sound rule of law and manifests a strong adherence to business contracts, franchising and licensing, as well as partnerships and strategic alliances are the most appropriate approaches. Franchising, in particular, is justified since it is less risky and less expensive of the two options. The franchise agreement will reinforce RMCF’s market positions in Singapore where demand for premium chocolate and confectionery continues to increase.
The franchising model also offers an opportunity for future growth and a sound financial base for continued international expansion. Indeed, franchising solves some of the challenges faced by companies seeking out international expansion in terms of people, time, and money. Franchising will allow RMCF to increase the number of outlets with a minimum capital outlay, which, in turn, accelerates the network’s growth and, potentially, the profitability. Undoubtedly, the Master Franchising strategy will continue to deliver huge benefits to RMCF in its international expansion efforts. Most importantly, the Master Franchising leaves the franchisee free to adapt the model to suit the Singapore market devoid of creating subsidiary companies in the target country. The franchising model offers RMFC the platform to control its products so as to guarantee high product quality standards, manage costs, and exploit new under-utilized distribution channels.