Shelley Nadler, of Bird & Bird, and Farrah Rose, of The International Franchising Centre, report on why the two firms have collaborated in organising a seminar to explain the opportunities and challenges for franchisors to enter Iran.
The International Atomic Energy Agency confirmed the lifting of some of the sanctions placed on Iran by the EU and U.S. on 16th January 2016 (the so called Implementation Day). Iran, on the face of it is ‘open for business’ but what are the opportunities and challenges in this exciting new market?
There are certainly huge opportunities. A recent report published by PricewaterhouseCoopers said that Iran has a young well-educated population (over 60% are under 30 years old) with an unquenched thirst for foreign-branded consumer goods – as a glance at The Rich Kids of Tehran Instagram feed confirms – filled with holidays in Europe, fashionable parties and gold plated supercars.
Iran is the second largest economy in the Middle East with a market of 80 million consumers and 400 shopping malls across the country (65 in Tehran alone). Two of the malls rank amongst the 10 largest in the world, in terms of sales area, according to Business Benchmark Middle East.
There is a huge demand for fashion in Iran for both high street and premium designer brands. The brands currently with stores in Tehran include H&M, Sisley, Ralph Lauren, United Colors of Benetton, Zara, Massimo Dutti, Tommy Hilfiger and Clarks.
There are certainly great opportunities for retail franchises in Iran and also for food and beverage brands.
During the years of sanctions, the Iranian public’s appetite for fast-food franchises and coffee shops has been met by local replicas – Mash Donald’s, Kabooky Fried Chicken, Pizza Hat and Raees Coffee. Iranians are now looking forward to having more options when they eat out and shop.
As with all emerging markets, well-known brands in the food and beverage and retail sectors will lead the way, with services following on in the medium term.
Concepts that would be of interest include education and training. There is a great deal of interest in children’s development and wellbeing in Iran, for all ages, toddlers to university level.
With an aging population and poor local provision, there would be demand for domiciliary care franchises that would train staff to provide care to a higher standard. Fitness and weight management is another area with potential, particularly for full service gyms, segregated at different times for men and women.
As with other Middle Eastern countries, franchising is an ideal way to expand your network. Iran potentially has many well-financed candidates, as in the UAE and Saudi Arabia, but Iran is particularly suited to franchising given its large geographical area and diverse regions.
However, the initial enthusiasm to exploit opportunities in Iran has been tempered by certain challenges posed, in particular in relation to the continued U.S. sanctions and the attitude of European banks.
Whilst the EU has comprehensively lifted sanctions against Iran, the U.S. has not lifted sanctions for ‘U.S. persons’. The definition of ‘U.S. persons’ is wide ranging and potentially includes foreign companies with a certain (and quite often existing) U.S. connection.
Some U.S. clearing banks have warned banks in Europe that their U.S. dollar accounts will face close scrutiny, if they do business with Iran and this fear has prevented normal banking transactions with Iran starting up again.
Although at least nine Iranian banks have been reconnected to SWIFT (the international payment system between banks), the large European banks remain wary of being the first to handle payments from Iran (with billion dollar fines imposed by the U.S. on banks for sanctions breaches in the forefront of their minds).
This means that at the present time, if you grant franchise rights in Iran, your franchisee will probably not be able to pay you royalties, fees or payment for products into your usual UK bank account. In a bid to combat this, the Iranian Foreign Minister in early February called on the U.S. to make a clear public pledge that it would not penalise European banks for legitimate trade with Iran, in a bid to build the bank’s confidence in trade with Iran.
Officials from the European Central Bank have also reported that banks from a number of countries, including Germany, France, Italy and the UK, have been involved in talks regarding opening branches in Iran since Implementation Day.
Franchisors looking to expand into Iran at some point will want to apply to register their trade name and trademarks, at the Patent and Trademark office of Iran, which reassuringly is a member of the World Intellectual Property Organisation (WIPO) and the Madrid system for the international registration of trademarks.
Trademark laws are based on the WIPO model act and there is a specific court that handles trademark infringement cases that is fairly knowledge about the need to protect international brands.
There is also some evidence that brand owners have been able to stop local companies from illegally using their brands in Iran.
There are a number of commercial and contract laws which are being updated. Sharia law is not a mandatory source of law or the basis of the Iranian legal system. The only requirement is that any laws passed should not contradict Sharia law.
Sharia law has a greater influence on the laws of Saudi Arabia and UK companies have been franchising into that country for decades. As with Saudi Arabia, enforcement of contracts against a local party may be an issue but this only emphasises the critical importance of selecting the right local partner in this part of the world.
A potential franchisee in Iran would have to go through certain approval and registration processes and will need to have the right connections in order to be able to trade successfully. Obviously due diligence will be extremely important.
Clearly, Iran represents a huge opportunity for franchisors but there are also great challenges, and this is why Bird & Bird and The International Franchising Centre have decided to organise a seminar on ‘Franchising into Iran’, on 28 April at Bird & Bird’s London office.
The seminar will provide franchisors with the information necessary to weigh-up the risks and rewards. There will be expert speakers, business and legal, on the opportunities offered by Iran, how best to exploit these, franchisee recruitment, plus the latest situation on sanctions and banking issues.