Asia Enjoys New Zealand Franchise Flavour

In the global market, it is the US-based multinationals who dominate the most competitive sector of franchising - the food sector. That makes it all the more exciting, then, when a man like Geoff Mitchinson comes along who not only establishes a successful food franchise in New Zealand (Long John Silver, now known as LJS) but takes his knowledge to Asia and does the same all over again - but bigger. He now has 18 outlets in Malaysia with four more under construction, and final arrangements being made for the first five in Taiwan. All trade under the name of The Fish Shop.

Geoff Mitchinson is a man with a colourful history. Before entering the food industry his careers included being a film cameraman, flying helicopters as a professional deer hunter, and sailing yachts round the Pacific.

He discovered franchising when he worked for Denny's and KFC, where he rose through the ranks to become Operations Director for 14 years. During that time he came to believe that there was a gap in the market for a quality fish & chip chain which was not being serviced by any of the major companies, despite it being worth some NZ$1 billion per year. After taking a year out to study the concept further, he brought in some partners to provide the financial support and in 1989 Long John Silver was born.

There are now 17 LJS restaurants throughout New Zealand and the company, which has won several retail excellence awards, is still expanding as suitable sites become available. However, Geoff Mitchinson is no longer involved, having sold his interest in the company to focus on his new venture - developing a fish & chip franchise in Asia.

Why Overseas?

'I think every New Zealand franchisor has to accept that there will come a time when further expansion is going to be limited by our small population,' says Geoff. 'At that point, you have to decide what you are going to do. You can look around for ways of miniaturising your concept to make it suit smaller areas, as McDonald's and Burger King have done, or you can look for markets overseas where your existing concept might work.'

In Geoff's case, he hadn't quite reached that point when an opportunity fell into his lap. 'I was approached in 1996 by a group of Asian businessmen who came to New Zealand looking for investment opportunities. They bought a block of apartments in Auckland, and were looking at other options when they had a meal in a Long John Silver outlet. They obviously enjoyed it, because they decided they should talk to me about taking the concept to Malaysia.'

Geoff hadn't been to Malaysia before, so he had no preconceptions - and no knowledge either. But his hosts were able to provide him with contacts for his researches, and the more he found out, the more interested he became.

'I started by looking at the dietary habits of the Malays to see what they were eating and how they were changing. It came as no surprise to find that the young people are looking more and more towards western concepts, which is a trend throughout Asia. Films, music, satellite TV - they're all influencing local tastes.

'But they're also very health conscious, and there is a big swing towards fish which is perceived as a very healthy, natural product. Malaysia is a Muslim country so some meat products need extensive modification by the big chains, but fish is considered halal so it is acceptable to all.'

Geoff was also encouraged to find that the retail environment was less unfamiliar than he had expected. 'At that time, the shopping centre scene was just starting to get into full swing. Malaysia has a population of around 22 million, and there are some massive areas - the latest centre has 1000 shops! Compare that to St Lukes which has about 110.'

And one final positive finding which would have a considerable effect upon the new chain's marketing was that Malaysians were well-disposed toward New Zealand and New Zealanders. 'A lot of Malays have been educated overseas - virtually all the professional people and most of the fast-growing middle class. New Zealand, Australia and the UK are particularly popular, and the large universities from all those countries do big business here. Apart from making them familiar with fish & chips, that's also given Malays an appreciation of New Zealand's environment - the clean green image and the pristine waters. Lots of Asia is very polluted by comparison.

'New Zealand's contribution during the war is much appreciated, and New Zealanders have contributed a lot to various charity projects here - I'll never forget driving through the country and coming across the Kampong (village) New Zealand totally out of the blue. I had to stop and talk to them. The head man has a prized photo of himself with Brian Tallboys! We've since established a close connection, and in fact we'll recruit all the staff from there when the restaurant we're building in the local town opens.'

The Joint Venture

Having established that there was a market for a Long John Silver-type operation, Geoff then had to decide how best to go about setting it up. He agreed on a joint venture with his investors, Ibraco, who are a big construction group based in Kuching in Sarawak (formerly Borneo). 'The new company is a 50/50 venture,' Geoff explains. 'Ibraco provided the initial loans to begin developing stores together with their share of the capital, while I and my NZ partners brought expertise and our half of the share capital.

'The relationship actually works very well because we respect each other's areas of knowledge. I have contact with them all the time as a courtesy, but they are not involved in operational issues at all. There's a lot of mutual trust, and when I need advice I go to them and they respect that.

'They have also understood the need to re-invest as we grow. So far, we have re-invested everything - profits are further down the line.'

The New Brand

The first outlet opened at Sungei Wang Plaza in Kuala Lumpur in January 1997, and was an immediate hit. As a result of Geoff's careful researches, a number of changes had been made to the concept as we know it from LJS in New Zealand. The first was the name.

'Long John Silver wasn't an option. A US company already uses it in other countries, and in any case the Treasure Island character is too much a part of British culture to be readily understood. We chose the name The Fish Shop because we wanted something really simple which could be understood by all - there are four different official languages and many different cultures in Malaysia. If we could have copyrighted Fish & Chips, we would have gone for that,' Geoff laughs.

The second change was to adjust the menu. 'That was a question of tweaking rather than making major changes. We offer hot and spicy butter as an option, and chilli sauce rather than tomato. In addition, the salads are made with local vegetables, so they're a different style. But if you localised the major items too much, you'd lose the factor that makes it different and exciting.'

The restaurants have also developed a very strong 'underwater' theme. All restaurants offer both take-away and eat in options, and there are tanks of decorative fish, undersea murals and, in the newer restaurants, giant fish swimming across the ceiling and even an angler rowing a boat upside down across diners' heads.

And New Zealand is prominent in the restaurants' marketing. The fascias proclaim The Fish Shop - New Zealand's Traditional Fish & Chips, and the line is an integral part of the company's logo. All fish is bought from New Zealand and snap-frozen at sea within a few minutes of being caught to ensure its freshness. It is imported to Malaysia by the company, and on-sold to franchisees at no margin.

'We used to use just one supplier, but when the Asian economic crisis hit someone at that company panicked and insisted on payment in advance for the next shipment rather than our usual terms. I'd never defaulted on a payment to them in 15 years, so I was rather offended by that.' Geoff took his business elsewhere and now uses a variety of suppliers including Simunovich Fisheries - a name familiar to all America's Cup watchers from their prominent position in the Viaduct Basin.

Franchising In Malaysia

There are currently 18 outlets of The Fish Shop in Malaysia, with four more under construction. Two are company-owned and managed, but all the rest are franchised.

Franchising is fairly new to Malaysia, but the government is extremely supportive of the concept which it sees as a way to upskill the workforce and encourage productive local investment. In 1992, a Franchise Division was set up by the Prime Minister's Department as a direct initiative of the country's leader, YAB Dato' Seri Dr Mahathir Mohamed. In 1995 the responsibility was assigned to the new Ministry of Entrepreneur Development (MED), which has continued to produce franchise-friendly policies. The objectives of the Franchise Development Programme are:

• to encourage local business people to become franchisees, master franchisees and franchisors who are competitive and motivated through the franchise system.

• to bolster the involvement of such business people in the commercial, service and industrial sector through the franchise system as a source of contribution towards the growth of the national economy.

One of the outcomes is that prospective entrepreneurs are able to obtain finance on preferential terms for franchise operations under various schemes. The Franchise Financing Scheme enables prospective franchisees to apply for finance from participating banks at an interest rate not exceeding 1.5% above the base lending rate. This allows the borrower to reduce his financing costs by 2-6%. Applicants for this scheme must be Malaysian citizens.

The Franchise Development Scheme provides financial assistance to both individuals and corporations as an incentive and support for the development of home-grown franchises in Malaysia. It is available for five different phases of development: screening; concept evaluation; preparation of prototype outlet; preparation of a franchise package; and launching of a franchise.

Another initiative has been the passing of a Franchise Act in 1999 which requires all franchisor companies, master franchisees, foreign franchisor companies and franchise brokers to register with the MED. Franchisors are required to submit their disclosure document, franchise agreement, standard operations manual and training manual upon registration. Although not perfect, the Franchise Act is seen as being considerably more conducive to the development of good franchise systems and practices than the equivalent Code of Practice in Australia.

'We like it - it's actually a good Act,' says Geoff Mitchinson. 'There's nothing in the Act we didn't already comply with. You might get the feel for it from the fact that one of the clauses says something like "A franchise agreement must be a written document". There were a lot of fly-by-nights operating on the fringes before who were just taking the money and running - they were giving franchising a bad name.

Franchising The Fish Shop

For Geoff Mitchinson and his joint venture partners, the government support for franchising has been a considerable help. 'The Minister for Entrepreneurial Development, YB Dato' Mustapa Mohamed, will come along in person and do an official opening to all our restaurants, which guarantees press attendance.

'We're in the mid-range investment level for food franchises, and the franchise financing scheme is a great help in terms of making franchises affordable. The ministry actually vets applicants before sending them to the banks, which virtually guarantees them the loan. That then means we are able to choose from a number of people who already have finance, and we can choose the best. We probably turn down 60% of applicants.

The Fish Shop promotes its franchises via the flourishing Asian expo scene such as the forthcoming Global Franchising2000 in Singapore, the internet, magazines such as Asia Franchise, and through signs in its restaurants. As usual, franchisees come from a variety of backgrounds but are predominantly professional people: a dentist, a lawyer, a retired army colonel, a bank manager. 'They tend to be successful people in their own right who will invest in the franchise then put a family member in to run it. We vet the franchisee and the family members too.'

The selection process takes, on average, 5-6 meetings. 'It's a question of getting to know people,' says Geoff. The initial screening is done by a member of our staff, but I always do the final selection myself.' Language is not a problem, as English is the common language of business in multi-lingual Malaysia.

The Fish Shop franchise office employs ten staff who provide all the support services you would expect of a professional food franchise: group purchasing, national marketing, research and development, training and support. 'We make regular visits to all the restaurants, carry out technical audits and talk the results through with the franchisees. In addition we have a mystery shopper programme to keep standards high, and a local marketing adviser.

'Marketing is a different ball game here. We're quite newsworthy, so we get a lot of coverage on television and in the papers when we open a new store, and we like to give them a bit of a story. But there are 28 TV channels so we don't use TV for our ongoing marketing - it's just too fragmented. Instead, we're strongly into outdoor advertising: for example, we've had 64 painted buses going around Kuala Lumpur. We also do a little bit of radio and some magazines, but we pitch on the lifestyle/dining out approach rather than 'fast food'. The New Zealand thing is part of the lifestyle.'

And Geoff is proud that all The Fish Shop franchisees are making money. 'Some are making more than others, of course, but you'll always get that. We say investors will achieve payback within three years, but most are within two. The best was just seven months!'

Further Afield

With the Malaysian operation up and running, Geoff is now looking further afield. The company is in the final stages of appointing a master franchisee for Taiwan. As with Ibraco, the investor is a major consortium including the largest rice producer in Taiwan. Geoff is also currently establishing the first five stores in Taiwan, and is actively considering other enquiries.

'I'm going to Thailand next week, then possibly the Philippines and Saudi Arabia... We've been looking at China but that's a vast undertaking, and then surprisingly enough we've been talking about the UK - the home of fish & chips.'

To take The Fish Shop to the UK would mean coming full circle for Geoff - he originally talked to the UK-based Harry Ramsden's chain before establishing Long John Silver, but discussions foundered over the franchise's insistence on using only British fish.

'Harry Ramsden's did open a store in Kuala Lumpur, but it closed down after about six months,' Geoff says. 'I believe they still have one restaurant in Singapore and Hong Kong.'

Thinking Asian

Geoff Mitchinson says that having had the Malaysian experience, he finds the move into another new Asian country is relatively easy. 'I've been coming to Malaysia and living here for five years now, and I "think Asian" - I never thought I would. It's affected my whole way of doing business.

'In western society there's a lot of straight talking, but here it isn't done just to say what's on your mind. You very rarely have a conversation with someone here and understand where they're coming from straight away.

'Once they've made up their mind to do a deal they'll do it quickly, but it won't be the first thing they will discuss at a meeting. But when you do agree, a handshake is almost as good as a signed contract.

'Yes, crony capitalism does exist, and you need to make sure that the people you work with have good connections. The Malaysian government is pulling out all the stops to end corruption, and anything we have encountered has been very minor.

'But those are all little differences which make you aware that you are doing business in a different country and keep you sharp. I like Malaysians, both personally and as business people.'

Lessons For NZ Franchisors

What advice would Geoff have for New Zealand franchisors considering expanding into Asia?

'Open your mind! Recognise that Asia is completely different to work and do business in, and do live in Asia if at all possible - certainly you'll need to spend a lot of time here. If you're coming into the Asian marketplace, you just have to immerse yourself and learn, learn, learn. Recognise that people are different, then learn the local culture and the way they think and operate. Try to act the same way - I don't think most of my staff even think of me as a New Zealander any longer.

'You can't run things from a distance, so if you're not here yourself you'll need to have someone who is - someone who knows you and your system, and someone you trust. If you have joint venture partners, you need to have mutual trust there too, and mutual areas of responsibility.

'Research and adapt. In the early days when KFC got into international franchising they got into terrible trouble, because they thought the way it worked in the US was the way it should work everywhere. It didn't. Then they went to the opposite extreme - taking on local joint venture partners and letting them get on with it. That doesn't work either - you have to be involved. KFC learned from their mistakes and now have a very powerful international operation.

'Use the resources available to you. I've found the Malaysian Franchise Association very helpful, and the NZ Trade Commission has been super to work with all over Asia. It's not so much their specific knowledge as their ability to steer you in the right direction. Now I find I get invited along to their functions quite often, and they can be very valuable - plus all the visiting NZ politicians come and see us. In return, we use the restaurants to promote New Zealand - we're putting a big display for the 100% Pure New Zealand campaign up at the moment.

'And do make use of being a New Zealander with the people you meet. In the food industry - and in others as well, I dare say - not coming from the US is a definite advantage, and coming from New Zealand is an even bigger plus. I'm striking it throughout the region - mention that you're from New Zealand and people immediately give you a big warm smile.

'Above all,' Geoff says, 'If you're coming to Asia, don't do it half-heartedly. The market is enormous, and franchising is on a boom. Research it, commit to it and get involved.