In 1984 Mohamed Alshaya, the young scion of a wealthy Kuwaiti dynasty, educated at Wharton business school and working at Morgan Stanley in New York, received a telephone call from his father.
“You had better come back to the family,” said the elder Mr Alshaya, with a summons Mohamed had always known would come. Business school and the bank had been mere staging posts before a return to the family company. But before the journey home there was one last educational stop for the suave son – a stint on the shop floor in a Mothercare store in Manchester.
The apparently unlikely link that then developed between Mothercare and the Middle East is much closer today. The UK mother-and-baby products retailer has been the most important partner for M H Alshaya, which has expanded from a relatively small family conglomerate into one of the world’s most successful franchise operators.
Franchising has its share of believers and sceptics. Critics argue that allowing a third party to manage your brand and take profits off the back of it can never be the right way to proceed.
But now the model may be coming into its own. Retailers in the US, UK and much of Europe are seeing the fall-out from the credit crisis translate into slowing sales. Those that laid the foundations early for expansion in emerging markets are reaping the dividends as fast overseas growth helps offset the torrid markets at home.
“This is an incredibly important time to push hard,” says Ben Gordon, chief executive of Mothercare. “The retail markets are being built now. The brands are being built now.”
Alshaya now operates 116 Mothercare stores, but it also has dozens more branded stores in the Middle East and as far as Poland and Russia, with brands ranging from Topshop to Starbucks. This year the company expects turnover of more than $2bn, up from $1.6bn last year.
“Mohamed, on the back of Mothercare, has built a £1bn company,” says Mr Gordon, whose admiration for his Kuwaiti partner’s success is plainly reciprocated.
For the brand owner, the appeal of franchising lies in its low-risk structure and speed: little capital has to be deployed, the franchisee bears most of the cost of store openings and staff, pays cost-price for the products and a royalty to the franchiser when they are sold.
“Some people say to me ‘Gosh, you’re giving away net margin,’ ” says Mr Gordon. “Then I say: ‘We are charging a royalty and frankly you’d have to do pretty well to outperform’.” Today, the company – with a market capitalisation of less than £350m – has about 500 stores in 48 countries and international sales are expected to overtake the UK in the next few years.
“We have got 400 stores in the UK with a 60m population,” says Mr Gordon. “You’re not expecting that ratio in India but in Greece we’re more than that [ratio] now. If you did it yourself, you’d do it at a 10th of the speed.”
The structure also mitigates the difficulty of operating in countries where local laws and culture can prove testing – even insurmountable – barriers. “Pigs are cute in some countries and offensive in others,” notes Mr Gordon. Purple, says John Lappas, the Greek franchisee for Mothercare, is funereal in Greece but fine in Romania, where Mr Lappas has recently introduced Mothercare. More practically, pushchairs with broad wheels are good news in sandy countries but also in snowy ones.
Choosing the wrong partner in franchising, however, only crystallises the risk. As the chief executive of one franchiser recalls: “The franchisee started opening stores without telling us, which is a no-no. They broke the rules. They were effectively stealing from us.”
Trust is essential for both parties, with both able to affect brand value and both invested financially and emotionally in its success. Mr Lappas attests to the importance of the relationship with the retailer’s management: “Mr Ben Gordon is the perfect manager. We feel confident that we will not die with them.”
Mothercare allowed its new Indian franchisee to develop its own billboard advertising campaign, with the slogan “Baby is coming…” plastered all over Mumbai. BS Nagesh, chief executive of Shoppers’ Stop, Mothercare franchisee in India, says he values that freedom and wryly notes the principal benefit of becoming the Indian franchisee of one of the world’s leading mother-and-baby brands: “With a never-ending population boom we could see the opportunity.”
That confidence was not so great in the past decade. Both Mr Alshaya and Mr Lappas say they were worried by Mothercare’s dwindling success in the UK and unimpressed with the previous management’s ability to cope, a development that underlined the risk for a franchisee of owning a business built on a waning brand.
Increasingly, however, retailers are trying to have their cake and eat it. Gavin George, head of retail at financial services company Ernst & Young in the UK, who has helped retailer New Look launch in Russia and Argos launch in India, says: “We ensure that every franchise agreement has a buyback [clause].” Zara, part of Spain’s Inditex group, has always preferred to have full control of its overseas stores and has bought bigger slices of joint ventures and franchises in Germany and Russia. UK fashion retailer Next has bought its franchisee who operated in the Czech Republic, Slovakia and Hungary. Marks and Spencer bought out its joint venture partner in Greece and the Balkans.
Although the franchise model has fallen in and out of fashion over the past decades, it may be that the close relationship such as that between Mothercare and Alshaya becomes rarer as the biggest brands come to feel increasingly confident about operating in emerging markets.
That offers potentially greater rewards for those companies with the skill and capital to go it alone, but it also extends the list of pitfalls they must face directly – from legal risks to the more arcane but equally explosive elements of pigs and the colour purple.
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