FRANCHISING AMERICA : Japan’s Changing Economy and Passion for U.S. Goods and Services Drive Licensing Fever

Mark and Christina Huckins were pretty sure they had a good thing going, but a phone call last year caught them by surprise.

The Huckinses, owners of the Original Mr. Miniblind Inc. of Irvine, began franchising their miniblind sales and installation business in January, 1988. By September, they had signed up 20 dealers, all in California.

Then they got a call from Nobu Hatanaka, executive vice president of Idea Link Japan Inc., an international matchmaker based in Los Angeles.

Less than six months later, they signed a deal to sell master franchise rights for Mr. Miniblind Japan to LEC Inc., a Tokyo housewares firm that Hatanaka calls the “Rubbermaid of Japan.” As a master franchisee, LEC can franchise Mr. Miniblind to other firms in Japan. The Huckinses won’t disclose exact terms, but said they received a cash payment in the high six figures and will get royalties from the Japanese operations.

Not too long ago, American companies wanting to franchise in Japan needed to be big, well-known and patient. Deals such as the franchising of McDonald’s or Kentucky Fried Chicken took years to hash out

But as the Huckinses learned, that is no longer the case.

Healthy Japanese Market

Changing economic and social conditions in Japan have created a healthy Japanese market for franchise rights offered by small and mid-sized U.S. companies. And the Japanese, who have a reputation as slow and formal negotiators, are snapping up deals at a pace that starts some entrepreneurial hearts afluttering in the United States. Experts believe that the number of master franchises sold by American firms in Japan has increased to about 100 from 69 at the end of 1986, making it the No. 2 foreign market for U.S. franchises.

Franchising specialists say increasing Japanese interest is driven by the decline in the value of the dollar, a need to diversify and a fascination with new products and services offered by American businesses.

In addition, some big Japanese companies are trying to reconcile the need to streamline their work forces and the traditional policy of lifetime employment. Buying franchises from U.S. companies is one way they can take care of a growing corps of under-utilized middle managers, said Candace Brosowsky, a spokeswoman for the International Franchise Assn. in Washington.

The 29-year-old trade group conducts several trade missions to Japan and other Asian countries each year. Under a federal privatization program, it recently took over most of the international franchise marketing duties once performed by the U.S. Department of Commerce.

One reason the Japanese are eager to acquire franchises from U.S. companies is that the dollar has lost almost half of its value against the yen over the past five years, allowing Japanese buyers to acquire more for their money. “They effectively get a 50% discount when they buy an American franchise,” Brosowsky said.

When Profusion Systems Inc. of Aurora, Colo., sold a master franchise in Japan for $850,000 after a 14-day whirlwind courtship last year, the exchange rate was half of what it was in 1984. “It was like we were the Mexico of the world, and they were taking advantage of it and buying up as much as they could,” said William Gabbard, president and founder of the high-tech plastics repairing firm.

Growth of High-Tech

In addition to favorable currency trends, a lot of the big trading and manufacturing companies in Japan are becoming more efficient and productive than they once were. As a result, they can produce more with fewer people.

“But at the same time,” Brosowsky said, “there is a cultural practice in Japan of lifetime employment. Buying a U.S. franchise becomes the perfect way to build a new business into which they can plug these under-utilized workers--a lot of them in middle management--without the costs and headaches of creating a business from scratch.”

Another reason for the growing Japanese hunger for U.S. franchises has been the maturation of Japan’s high-technology industry, according to Pacific Rim observers.

In the mid-1980s, growth in the technology sector slowed in Japan, said Idea Link’s Hatanaka. A number of smaller technology firms were acquired by bigger companies, while others simply went out of business.

“A whole new era of business development dawned in Japan in 1985, with a dramatic acceleration of Japanese companies looking for opportunity to diversify or expand into various specialty niches,” Hatanaka said. “With the high-tech companies gone, Japanese investors started looking into the niche businesses, the service businesses and franchising.”

Many of the Japanese investors are large corporations, said Anne Yumi Hayashi, assistant vice president of LCA-International, a New York-based competitor of Idea Link.

“They are looking for new types of businesses they can put their older employees into so they don’t have to lay them off,” she said, “and they also are looking for new businesses, especially service business, that aren’t in Japan yet.”

That has been important for the success of U.S. franchise sales in Japan, said John Emery, chairman of the finance department at California State University at Fullerton.

“Japanese companies are very market-share oriented,” Emery said. “They want position in the market and aren’t concerned about short-term profitability. Buying the master Japanese franchise for a U.S. business gives them 100% of the market right from the start.”

All of that has made Japan the second-largest foreign market for U.S. franchises behind Canada, according to the International Franchise Assn.

Through 1986, the last year for which hard data exists, 69 U.S. firms had sold master franchises in Japan, the Department of Commerce reports, mostly for restaurants and other prepared food retail outlets. As of the end of 1986, those 69 master franchises had set up a total of 7,366 outlets throughout Japan.

Identifying Hot Prospects

Although more recent statistics are not available, several experts agreed that the number of U.S. firms with master franchises in Japan has grown to about 100, a 44% increase in less than three years. And service businesses make up a growing percentage of the total, they said.

The market has become so important that two Japanese consulting firms have financed U.S. operations whose sole function is to identify hot franchising prospects and introduce them to prospective buyers in Japan: Idea Link and LCA-International.

Idea Link, with an office in Los Angeles and a 49% owner in Japan, has arranged seven successful deals since it was founded in 1985. It is about to close three more, said president and 51% owner Ichiro (Roy) Fujita.

Its completed franchise deals include California Closet in Woodland Hills, the El Pollo Loco chain owned by Denny’s Restaurants in La Mirada, Graphic Gallery art prints in Newport Beach and Johnny Rockets, a group of 1950s-themed diners based in Westwood.

Fujita said his firm is about to complete franchise sales for the Sizzler steakhouse chain owned by Collins Food International in Los Angeles, the Office Club warehouse outlets headquartered in Concord and the Medieval Times theater-restaurant in Buena Park.

To help market its American clients, who don’t pay a fee unless a deal is signed, Idea Link publishes a hot prospects magazine in Japan.

Until late last year, the magazine was a Japanese-language licensee of Irvine-based Entrepreneur magazine. Entrepreneur’s owner, Peter Shea, also owns Stained Glass Overlay and has sold a master Japanese franchise for the firm through LCA-International. Shea’s franchisees use a proprietary process to make regular glass windows look like stained glass.

Experience Typical

Shea, who has studied the Japanese franchising scene for several years, said his experience with Stained Glass Overlay is typical of other small firms marketing franchises in Japan.

Shea sold the master franchise to a mid-sized Japanese company in the food market business. That firm, in turn, sold separate licenses in Japan’s 47 prefectures, or states, Shea said.

Buyers included Nippon Steel and Ashai Glass, both giant manufacturing companies. “They bought the prefecture licenses so they could sell individual franchises to mid-management employees who wanted to retire early or whose jobs were being phased out,” Shea said.

Service businesses like Mr. Miniblind or Ceiling Doctor, a Canadian firm that cleans acoustic ceilings, are popular in Japan in part because of the increasing Westernization of that country.

The desire to emulate American concepts and practices, including construction techniques, is creating a need for services that had no place in the Japan of a decade ago, said Hayashi of LCA-International.

Her company, a franchise matchmaker similar to Idea Link, has put together about 20 deals in four years, she said.

By traditional yardsticks of Japanese-American business negotiations, the Mr. Miniblind franchise sale was a pretty fast transaction. While it spanned nearly six months, it required only three negotiating sessions with LEC’s president, Sadao Ishikawa.

Requires Little Investment

Christina Huckins said the buyer was intrigued by the business because it is mobile and requires little investment in real estate, which is extremely expensive in Japan.

“But besides our concept being solid, I think he (Ishikawa) liked us,” she said. “He said he started his business with his wife and liked it that Mark and I are in business together.”

Ishikawa, whose firm makes rubber and plastic household accessories sold in some 40,000 Japanese stores, told the Huckinses that he plans to offer Mr. Miniblind franchises to Japanese store owners who are looking for additional business opportunities.

One unusual aspect of the deal was that all negotiating sessions with Ishikawa were conducted at Mr. Miniblind’s tiny Irvine office. The Huckinses were never asked to travel to Japan, which may indicate how eager LEC was to close the deal.

The people at Environmental Air Protection in Spokane did go to Japan, but their franchising deal may have set a world record for speed.

The company, which franchises a system for sanitizing air conditioning and heating system ducts, had a one-hour meeting with a prospect in Osaka during a trade mission to Japan and Taiwan last month.

Two days later, company officials signed a letter of intent to sell a master franchise to a mid-sized real estate development and building maintenance firm in Japan called Active Co. They also received a $1-million check.

“And since we’ve been back, we’ve gotten half a dozen calls from representatives of other Japanese companies who met with us,” said Richard Moore, vice president of operations for Environmental Air.

Even though the dollar has regained some of its strength, franchising specialists don’t expect much dampening of the Japanese appetite for U.S. franchises.

In fact, said Brosowsky of the International Franchise Assn., a secondary market for franchises has begun to develop in Japan.

“It is not a trend yet,” she said, “but we are seeing the growth of individual entrepreneurship in Japan. Some of the younger people no longer see working for Sony or Mitsubishi for their entire careers as the ultimate goal.”

Idea Link’s Hatanaka agreed that the Japanese are undergoing profound changes in attitudes.

“It is no longer true for everyone that to be successful is to work for all your life for one big company,” he said.

“Some younger Japanese are looking to entrepreneurial business careers. And franchising can be better than starting a business from scratch because it is lower risk. You get the know-how and support of the franchiser. And buying an American franchise, you also get the American image.”

U.S. FRANCHISES SOLD IN JAPAN

Some U.S. companies that have sold master franchises in Japan in the past four years.

Company Headquarters El Pollo Loco La Mirada Mr. Miniblind Irvine Fantastic Sam’s Memphis, Tenn. California Closet Woodland Hills Graphic Gallery Newport Beach Johnny Rockets Westwood Ride ‘N Show Engineering* San Dimas Stained Glass Overlay Irvine Le Croissant Shop New York Zack’s Famous Frozen Yogurt Metairie, La. Carol Block Ltd. McHenry, Ill. C.J. Caryl’s Marion, Ind. Steamatic Grand Prairie, Tex. The Perfumery Houston Profusion Systems Aurora, Colo. Molly Maid International Oakville, Canada Ceiling Doctor International Toronto, Canada Language Pacifica Mountain View, Calif. Schlotzsky’s Austin, Tex. Le Pafe Los Angeles Miracle Method Los Angeles Club House Inns of America Overland Park, Kan.

Company Business Mr. Miniblind Sale, installation of blinds, shades, shutters Fantastic Sam’s Haircuts California Closet Closet organizing systems Graphic Gallery Poster art Johnny Rockets 1950s theme diner Ride ‘N Show Engineering* Amusement park rides Stained Glass Overlay Imitation stained glass windows Le Croissant Shop Croissants Zack’s Famous Frozen Yogurt Frozen yogurt Carol Block Ltd. Electrolysis C.J. Caryl’s Low-cholesterol fried chicken Steamatic Carpet and general cleaning The Perfumery Reproduction of designer fragrances Profusion Systems Vinyl repair Molly Maid International Home cleaning service Ceiling Doctor International Ceiling cleaning Language Pacifica English instruction Schlotzsky’s Sandwiches Le Pafe French cafe Miracle Method Bathroom restoration Club House Inns of America Hotel chain

* Joint venture

Sources: LCA International and Idea Link Japan Inc. U.S. FRANCHISORS DOING BUSINESS OVERSEAS

Country or Region U.S. Franchisors (as of 1986) Canada 237 Caribbean 87 Australia 79 Asia (other than Japan) 79 Continental Europe 75 United Kingdom 74 Japan 69 Middle East 41 South America 31 Mexico 30 Africa 29 Central America 29 New Zealand 27

Source: International Franchise Assn. U.S. FRANCHISORS’ OUTLETS OVERSEAS

Number of Outlets by region Canada 9,031 Japan 7,366 Continental Europe 4,844 Australia 2,816 United Kingdom 2,415 Asia (not Japan) 1,703 Caribbean 792 Africa 641 Mexico 559 South America 521 New Zealand 420 Middle East 339 Central America 179

Source: International Franchise Assn.