[THE franšize] Closing Surf’n’fries in Rijeka was a business-wise decision, but emotionally very difficult

The recent ultra-success of the Croatian franchise Surf’n’fries breaking into the American market has reopened the question of why entrepreneurs in Croatia still rarely resort to the franchise business model? In the last 20 years, several very successful examples of franchises have emerged both in the domestic and global markets; however, we still lag behind global trends. According to recently published data from the Croatian Chamber of Commerce, there are currently about 220 franchise systems operating in Croatia from various sectors of the economy, of which 20 percent are of Croatian origin. They employ a total of about 17 thousand people. Much less than our regional and western neighbors.

Surf’n’Fries had to decide at one point whether it wanted, roughly speaking, to sell fries or franchises. Today, owner Andrija Čolak, along with his partner Denis Polić, is opening new locations in the USA with one of the largest American (and global) retail chains, from where he reached out to us with his view on the success of his model.

What would you cite as the key factors that influenced your business success in markets around the world?

I will divide them into three key factors. The first is that we had a concept that performed very well, meaning it had above-average sales results in the market. I am referring to our first store in Rijeka, which had an average of about a thousand transactions per day in its first year. The second element relates to branding, which was set up in a way that it can function in international markets and generally has no problems with scaling logistically, etc. The third is, of course, the franchise business model, which is certainly key to scaling on a global level. Without the franchise business model, we would literally have no chance of internationalizing the business, and with such a model, we gained an incredible amount. The franchisor brings local knowledge from language, through knowledge of laws, etc., to the capital with which a facility is opened in a country.

How do franchise business models differ across certain markets (for example, the Middle East, Europe, and the USA)?

The franchise model is essentially always the same. The franchisor provides rights, knowledge, and support, while the franchisee purchases rights, invests in the business, and operates the business. However, there are some differences. In the USA, for example, the franchise business is completely regulated, and it cannot be franchised without a document called the Franchise Disclosure Document, in which the franchisor must transparently present everything about their franchise system. The creation of such a document usually costs from $20,000 to over $100,000. This is very specific to the American market, which is by far the most developed and powerful in the world. The Middle East often has large groups that buy foreign franchises and bring them to the Middle Eastern market. They are often already in established relationships with, for example, shopping centers, so they have access to locations, contractors, and so on. The Middle East is particularly specific in that it likes to take foreign franchises. In Europe, there is really everything, from the UK, which has a developed market, such as franchise brokers, established groups, and investors, to countries that have not developed franchises at all. Or, for example, Italy, which has developed a large percentage and share of its own franchises of about 90 percent, which is the opposite of the Middle East. Above all, there are, of course, cultural differences that can be very interesting and where caution is needed.

Do we fall into this group of underdeveloped?

In Croatia, the franchise industry is generally in its infancy; we only have the first brands deciding to franchise, so I believe there will be many business opportunities, new jobs, investment opportunities, etc., in that segment. I do not mean exclusively franchise brands. The franchise industry also needs franchise brokers, consultants, lawyers, architects, marketers, in other words, many service providers for both franchisors and franchisees. I will take the example of New Zealand, where seven percent of small businesses are franchised (about 37,000 establishments), operating through over 630 franchise systems, and where over 120,000 people are employed in the franchise industry. By the way, New Zealand has about five million inhabitants, so I always find it interesting to draw parallels with Croatia to understand the potential.

What financial and infrastructural capacities must an interested franchisee possess to become your partner?

We have a very standard approach in this regard. The franchisee must have capital to pay the entry fee, invest in the construction and equipping of the facility, a marketing campaign, and capital for the first three to six months of operation (so-called dry powder). In addition to capital, they must have an appropriate location and a company that will hold the franchise rights.

What would you advise entrepreneurs entering the franchise business?

I would advise them to educate themselves as much as possible, not to reinvent the wheel by setting up “franchise” models that are not really franchises and result in failure. Often, as a franchise consultant, I see models that seek help as franchise systems, but in reality, they are not at all; they have poorly combined elements of licensing and distribution into one and called themselves a franchise. If they had talked to a consultant who knows the franchise industry and set up the same concept correctly, they would have prospered incomparably more. Franchises should be built in a correct and healthy way, which means standardizing a large part of the business, having proper contracts, and operating transparently so that both franchisors and franchisees can achieve long-term success. A franchise should be seen as a marathon, not a sprint. The franchisor should certainly prioritize the satisfaction of the franchisee and ensure that the franchisee receives everything necessary for a return on investment. If that is achieved, then the franchisor is on the right path, and only the sky can be the limit. The franchise industry in Croatia is indeed very young, and we have the chance to build an entirely new industry on solid foundations. It would be a shame to squander such an opportunity.

What were the hardest business decisions you made?

When we decided to close the facility in Rijeka, where it all started. Due to the circumstances that arose, the facility was taking an enormous amount of time, and we simply had to make a decision about whether we were going to engage in hospitality or franchising because we could no longer do both. We are talking about years of severe economic crisis and very difficult moments in general. I believe the decision was business-wise correct, but emotionally very difficult. Even today, people in Rijeka ask us or even blame us for the fact that there is no Surf’n’Fries in the center of Rijeka.