Your franchise on the German market!?
by Karin Weinzierl, Editor of Franchise Direkt - Franchise Direct Germany
Even though the concept of franchising a business is by far not as widely known in Germany as it would be in the US or the United Kingdom, the franchise-industry in Germany has grown significantly over the last decade. From 1998 to 2008, the total number of franchisors increased from 630 to 950 companies. During the same time-period, the total number of employees working within the franchising-sector grew from 250.000 to 450.000. The continuity of this upward-movement proves that franchise-industry in Germany still has room for further development. And even the growth rates that can be seen within the annual turnover of the franchise-companies in Germany look very promising: In 2009, the franchise-industry as an entity, produced an annual turnover of 48 billion. Compared to the 1999 figure of 19.4 billion, the whole industry has increased its turnover by 150% over a period of 10 years1.
A survey that has been conducted in 2007 by Deutsche Bank, one of Germany’s biggest financial institutions, shows that, over the next five years, the expected growth rates for the turnover within the franchise industry will at least double the estimated GDP growth-rates for Germany2.
Even though the most active franchise-companies originate mainly from Germany and Austria, the market still offers opportunities for foreign franchisors. The success of companies like McDonalds and REMAX has shown the possibilities for foreign franchisors in certain sectors in Germany. On request, the German Franchise Association estimated that the figure of American Franchises operating within the German market lies between 5 – 7% of the total number of franchise companies3.
Franchising in Germany actively operates in 16 different industries of which the professional-services sector proves to be the most popular as more than 50% of all franchises in Germany are linked to the trade of professional services. But equally, there seem to be some new possibilities for franchisors to get their slice of the cake:
What are the most popular franchise-industries in Germany at the moment4?
- Service-Industry: 50%
- Retail: 29%
- Food and Hospitality: 14%
- Small trade: 7%
Other statistics show that, in some sectors, the number of service-providers available will not be able to sufficiently serve the growing demand: With an ageing population and a constant shortage of money within the German Health Service, the demand for alternative home-care solutions for elderly people is booming. This would be an excellent opportunity for franchisors with suitable concepts to start thinking about an expansion into Germany. Especially as projections show that the total number of people in Germany who will need professional care assistance might increase up to 4.6 Mio in 20505. This proves that there could be a huge opportunity for a franchisor to expand his home-care business into Germany.
But even though there is huge potential in the market, there are some downsides to the German Franchising Business: One of the key points of every business venture is the availability of suitable financing concepts for franchisees. Given that the minimal investment for a franchise-business can be lower than 15.000€, a franchise might not be taken up because the potential franchisee does not have the means to finance it on his own. So far, it was not easy to get right funding for a franchise-business. Potential franchisees often had to organise their funding using a number of different financial institutions.
One of Germany’s biggest banks, Deutsche Bank, is trying to fill the market gap with a financing concept called FranchiseFinance. It is tailored towards the very special needs of a franchise-business and can easily be customized to any franchise-concept.
Once this problem is solved, the potential of expanding a franchise-business into Germany will be considerably higher.
Another very important aspect of franchising abroad are the legal differences between the countries concerned: First of all, the franchise-legislation in Germany differs slightly from the American system. A franchise disclosure law per se does not exist in Germany. Instead, we mainly rely on “Good Faith Laws”. The contracts used in the German Franchise Industry cover a wide range of aspects from different codes of law such as commercial law, company law, law of obligations, competition law and anti-trust laws. In addition to that, the German Franchise Association provides a guideline stating the required content of information within franchise contract. According to the German Franchise Association6, the current guideline from 2003 is being reviewed at the moment.
Thirdly, there are a couple of cultural differences that need to be considered when planning a business-expansion: Small trade companies (e. g. carpenters, carpet-layers etc) are currently holding 7% of the total of franchise-companies in Germany. Compared to the size of that segment in other European countries, this figure seems to be surprisingly low. The reason for this is that, in Germany, those professions are subject to strict Crafts and Trade Codes. Those rules limit the potential group of people who could even take up a certain franchise. Due to the nature of our education system, there are certain requirements that have to be met before somebody can run a particular business. Mostly, those requirements are related to individual qualifications. For certain types of businesses, an apprenticeship or a master craftsman’s diploma can be required. The franchisor needs to be aware of those differences so that he can avoid problems from the start.
1All statistics according to the German statistics database www.statista.de
2According to the Deutsche Bank Survey from 2007
3Quoted from a statement from Torben L. Brodersen, chairman of the German Franchise Association
4Statistics published by the Institute for Scientific Publications at www. http://www.institut-wv.de/index.php/1452/
5According to a scientific publication by INSM at http://archiv.insm.de/Downloads/PDF_-_Dateien/Pflegemarkt_2050.pdf
6Quoted from a statement from Torben L. Brodersen, chairman of the German Franchise Association