SUMMARYFranchising is a relatively new phenomenon in Pakistan, butthisconcept has gained tremendous acceptance in this marketas can beseen from the recent growth trends in the market. Most ofthegrowth in the past few years has taken place in the foodbusiness, where the present market size for internationallyfranchised outlets is estimated in excess of Pak Rupees 1.2billion (USD approximately 24 million) in terms of annualsales.U.S. food outlets such as Pizza Hut, Kentucky Fried Chicken(KFC), McDonalds, TGI Fridays, Subway, Taco Maker, andNachoNanas are already present in Karachi. Pizza Hut,McDonalds andKFC are also present in Lahore.The non-food sectors such as retailing, convenience stores,hotels & motels, courier service, security services, andeducational training centers are going to be the growthareas ofthe future.U.S. companies dominate the franchise market in Pakistanin largepart due to the fact that U.S. firms were the pioneers in thissector and the first to set up their outlets in Pakistan. Inaddition, the U.S. firms entered the market with a long-termcommitment and provided full support to their localpartners.Also, U.S. firms and their products are internationally knownfortheir quality products and superior service. Many U.S.productssuch as McDonalds and Kentucky Fried Chicken were well-known and
recognized in the urban areas of Pakistan even beforestartingtheir operations in the country.There are no local firms offering indigenous franchiseopportunities, although several Pakistani entrepreneurs haveacquired master franchise for this region with the objectivetore-sell the franchise to interested parties in the country.The Government of Pakistan does not impose anyrestrictions oninvestors who wish to establish a franchise in the country,butforeign investors are required to inform the Board ofInvestmentand the State Bank of Pakistan, primarily for the purpose ofrepatriation of franchise fee or any profits accrued.STATISTICAL DATA:This report attempts to briefly describe the franchisingindustryin Pakistan, which is still in a nascent stage. Few statisticsare available for this market so an outline of franchiseoperations in Pakistan is given as follows:U.S. FRANCHISE OPERATIONS IN PAKISTAN:1. Restaurant: McDonalds, Kentucky FriedChicken, Pizza Hut, TGI Fridays, Subway,Taco Maker, Nacho Nanas, Sno Biz2. Hotel/Motel: Sheraton, Marriott, Best Western,Ramada Renaissance3. Security: Brinks, Wackenhut4. Car Rental: Avis5. Printing: Alphagraphics6. Mineral Water: Culligan7. Soft Drinks: Pepsi-Cola, Coca-Cola, Seven-up, RCCola8. Courier Service: DHL, TNT Skypak, United Parcel,
Federal Express9. Apparel: Walt Disney, Jockey, Hang Ten10. Footwear: Hush Puppies, Caterpillar11.Entertainment: Time Warner12. Consulting Services: Dunn & BradstreetNON-U.S. FRANCHISE OPERATIONS IN PAKISTAN:1. Apparel: Benetton (Italy), Schieser (Germany)2. Hotels/Motels: Serena Group3. Restaurant: Pizza Express (U.K.)4. Education: Asia Pacific Institute ofInformation Technology (APIIT) of MalaysiaA. MARKET HIGHLIGHTS AND BEST PROSPECTS:Pakistan is the worlds ninth most populous country with apopulation of more than 130 million and growing at a steadypaceof 2.6 percent per annum. The official per capita income ofPakistan is estimated at US$480; however, this figure canbequite misleading. Pakistan has a very strong and resilientparallel economy (or the so-called informal sector), which isnotaccounted for when calculating the income per capita. Inaddition, Pakistan has a population of more than 3.5 millionexpatriate workers. These are the people who work abroad(primarily in the Middle-East, Europe and North America)andremit their earnings back home. The "expatriate" Pakistanihousehold has a very large disposable income as comparedto anaverage citizen of Pakistan.In view of the aforementioned data, it can safely beassumed thatPakistan has a viable middle-class with ample purchasingpower.Based on this profile, Pakistan offers good opportunityinternational firms seeking to establish franchise operationsinthe country.
In Pakistan the concept of franchising was introduced as farbackas in early 1950s when soft drinks, such as Coca-Cola, wereintroduced by local bottlers who manufactured under alicensefrom their foreign principals. But since then, barring a fewareas like residential hotels, franchising remained dormantupuntil very recently. It was only in the 1990s when, as aresultof globalization and greater development of the internationalcorporate culture, did franchising get a boost in Pakistan.With the gradual saturation of franchise opportunitiesworldwide,investors started looking at other under developed markets,andPakistan with a population of 130 million people was seen asthe"worlds largest untapped market" for franchising. InPakistan,like many other developing countries, the food retailingbusinessis not organized in a modern and sophisticated way. Thissectorlacks in terms of quality, packaging, nutrition, hygiene andpresentation.In 1993, Pizza Hut surveyed the market and established itsfirstrestaurant in Karachi. Since then, it has opened six outletsandemploys more than 500 people. Kentucky Fried Chicken(KFC) hasbeen another success story. It was introduced in themarket bythe Artal Group of Belgium, and although a late entrant, italready has eight outlets in Karachi and Lahore combined
andseveral more in the pipeline.McDonalds entered the Pakistan market in 1997 with twoseparatepartnerships--with Siza Foods (Southern region) and AkberEnterprises (Northern region). Also, McDonalds has comeintothe market as an equal partner with its local affiliates.The Artal Group (sponsors of KFC) has now diversified intoothersectors, including poultry business and mineral water.Other franchises which have done well in Pakistan includethehotel business. In this sector, the first entrant in the marketwas the Intercontinental Hotel chain. Intercontinentalenteredthe market in the 1960s and established hotels in Karachi,Lahore, Rawalpindi and Peshawar in partnership withPakistanServices Limited. This arrangement came to an end in the1980swhen Pakistan Services was bought over by the HashwaniGroup, thethen owners and operators of the Holiday Inn hotels inPakistan.Later, the Hashwanis discontinued their arrangement withHolidayInn in favor of the Marriott.In security services, Brinks has a strong presence and itranksamong the three leading security services firms in Pakistan.Wackenhut, another U.S. security firm entered the market in1995and has maintained a steady growth.The Pakistan franchise market has shown tremendousgrowth duringthe last four years. The number of active franchise
operationshave increased from 15 to more than 37 during this period.Inall likelihood this trend will continue for the next few years,however, it is anticipated that the growth will not be verysubstantial in the food-related sector, rather other sectorssuchas educational/training institutions, consulting services,amusement parks/arcades etc. will be the growth areas.BEST SALES PROSPECTSAccording to trade sources the best prospect opportunitiesare tobe found in the following sectors:1. Education:- Computer Science and Information Technology- Business Administration and Management2. Courier Service3. Retailing:- Food and convenience stores (e.g. 7-Eleven concept)- Consumer retailing4. Financial Services- Credit cards5. Hotels and motels6. Amusement parts and arcades7. Food products:- Bakery products- Dairy products- Baby foods8. Personal Care Products9. Home/Office Furniture10. ToysB. COMPETITIVE ANALYSISOut of the thirty-seven plus franchising systems operationalinPakistan, thirty-two are of U.S. origin. The U.S. firms haveasubstantially larger market share primarily due to theirstrong
background in the franchising business, and also due to thefactthat the American brands have a worldwide recognition.Since the franchise market in Pakistan is still in anembryonicstage, it is very difficult to generalize the competitivesituation. However, one observation that ca be made is thatanewcomer in the food business will be expected to facefiercecompetition from the established outlets, both local andforeign.Not only has the number of franchised outlets reached asaturation point, the competition from the local restaurantsisalso posing a serious challenge to the international chains.Thelocal outlets, with lower overhead costs, have the pricingadvantage; in addition, some of the well-known localrestaurantshave developed new "themes for their restaurants as astrategyto differentiate their product. This strategy seems to beworking given the brisk business these restaurants aredoing.In the hotel business, at this time most of the internationalchains in Pakistan are running much below the desiredoccupancyrate. Given this scenario, several upcoming hotels may notwantto go for a franchise option as a cost-cutting measure.However,within the next few years this situation may change andseveralnew hotels may see the benefits of going for a franchise.In the car rental business, Avis has been the loneinternationaloperator for a very long time. Hertz, Thrifty and Budget
haveexplored the market but have yet to make a commitment.In thissegment, Avis does not have any real competition since itcatersmainly to corporate clients. There are several local carrentalfirms, but they are generally small outfits with a fairly oldfleet of vehicles.Another area where competition will intensify in the comingyearsis the education/training sector. Presently, the Asia PacificInstitute of Information Technology (APIIT), a Malaysianfirm,operates a center in Karachi in collaboration with a localpartner. However, there are several local institutionsofferingsimilar service under dubious international (includingAmerican)names. These mushrooming institutions, which abound allurbancommunities, have little or no credibility, but pose a seriousthreat to international franchises from entering the market,especially because of their very low fee structure.C. END-USER ANALYSISPakistan has a population of more than 130 million with atrendtoward urbanization. Karachi (population: 9.3 million),Lahore(5.9 million), Faisalabad (2.0 million) andRawalpindi/Islamabad(1.9 million) offer some of the best prospects for franchisecompanies. At this time, most of the international firmshaveconfined their operations to Karachi and Lahore, but theymaygain a greater market share by expanding into othergrowing urban
areas.All the aforementioned cities have a sizeable middle-classthathas a disposable income to spend on restaurants, apparel,entertainment, etc. Interested firms wishing to enter thismarket are strongly recommended to focus on these urbanareaswhich are inhabited by most of the target end-users.In general, franchise outlets in Pakistan have been well-receivedand most of the firms entering this market have reaped thedividends. The success rate for the investors has been fairlyhigh and only three food-related outlets (Wimpys, ShakeysPizzaand Carvell Ice Cream) closed down during their first year ofoperation.D. MARKET ACCESS AND TRADE PROMOTIONThe Government of Pakistan encourages foreign investment,therefore, establishment of a franchise presents no majorproblemfor an investor. In general, an investor is required to informthe State Bank of Pakistan, Board of Investment, and theMinistryof Industries in case if certain exemptions are required orfundsneed to be repatriated overseas.A. Import Climate: There are few barriers to imports inPakistan(with the exception of certain food items which areprohibited onreligious grounds). Imports are well accepted by tradersandend-users alike. Foreign exchange may be repatriated bythe
investors, but getting permission to repatriate funds fromtheState Bank of Pakistan can at times pose problems.However,foreign exchange is freely available in the open market at aslight premium. On the whole the economy is headingtowardgreater liberalization and the duty rates are graduallydeclining.B. Duty Rates: Duty rates vary from product to product.Mostproducts fall under the category where duty rates are lessthan45 percent. The Government of Pakistan provides certainconcessions to imports which are considered beneficial toPakistans tourism industry.C. Value Added Tax: Most services in Pakistan are charged a"Central Excise Duty (CED)" Tax of 12.5 percent. In somecases,the CED and other local taxes amount to approximately 25percent,especially in Punjab province where restaurants are requiredtocharge a 25 percent tax on all food items.TRADE PROMOTIONThere are no trade events scheduled in Pakistan which caterexclusively to the franchise sector; however, the U.S.CommercialService organizes the "Exhibit USA" trade events twice ayear.The next exhibitions are scheduled as follows:1. Exhibit USA99 August 24-25, 1999 Karachi2. Exhibit USA2000 April 2000 Islamabad3. Exhibit USA2000 August 2000 KarachiThese exhibitions will be organized by a turnkey contractorappointed by the U.S. Commercial Service.
Franchise firms interested in exploring the Pakistan marketcanalso place an advertisement in any of the following nationalEnglish-language daily newspapers:1. Dawn2. The News International3. Business RecorderOther possibilities include single company promotion andotherservices offered by the U.S. Commercial service. Pleasecontactthe nearest U.S. Department of Commerce office for moreThe U.S. Department of Commerce would appreciate inputfrom U.S.businesses that have used this ISA report in conductingexportmarket research. Please take a few moments to completetheattached survey and fax it to 202/482-0973, mail it to QAS,Rm. 2002, U.S. Department of Commerce, Washington, D.C.20230, or1. Country covered by report:_______________________________Commerce domestic office that assisted you (if applicable):________________________________________________________2. How did you find out about the ISA service? __Direct mail __Recommended by another firm __Recommended by Commerce staff __Trade press __State/private newsletter __Department of Commerce newsletter __Other (specify): _______________________________3. Please indicate the extent to which your objectives were
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