Franchising in Africa: Opportunities and Challenges

Vol. 17 No. 2

By

Dentons

Africa presents some of the most dynamic markets in the world for franchising. Within the next five years, seven of the 10 fastest growing economies of the world will be in Africa. Foreign direct investment into Africa in 2015 is estimated to reach US$54 billion. Some 200 to 300 international brands are reported to be active in Africa, in addition to a thriving market for indigenous franchise systems ranging from fast food, retail, and hospitality brands to micro franchises, which use single-person franchise units with seed capital to support key infrastructure needs such as mobile phone sales, farming, and doctors or nurses on bikes.

The story of Nando’s illustrates the progress fast food concepts have made in Africa. This concept was launched in 1987, when Robert Brozin and Fernando Duarte bought a restaurant in Johannesburg called Chickenland that used recipes from the Mozambican–Portuguese community. The business was later renamed Nando’s. Today, the South African chain is one of Africa’s famous brands, with more than 1,000 locations in 30 countries, including Botswana, Mauritius, Namibia, Nigeria, Zambia, and Zimbabwe.

Australian franchisor Cash Converters is another African success story. Cash Converters is the world’s largest specialist in buying and selling second-hand goods and providing fast and easy access to cash. Cash Converters uses a well-thought-out franchise system, with modern retailing practices, to overcome the image of the traditional second-hand dealer. The first South African store opened in 1994 in Parow, Cape Town. Today, South Africa is the fourth-largest territory for the brand internationally, with 65 units.

Tough Challenges for Franchisors

But these encouraging stories should not be taken as evidence that franchising in Africa is easy. On the contrary, franchisors face tough challenges. Africa’s standards for protecting intellectual property remain substantially below those of Western economies. Many African countries have enacted intellectual property laws, but enforcement can be difficult. Equally, although anti-corruption and anti-bribery laws are in place, enforcement is sporadic. Only three African countries—Rwanda, Botswana, and the Cape Verde Islands—scored 20 points or more (out of a possible 100) in the Transparency International Annual Report on perceived corruption. Withholding taxes of 15% to 20% erode margins. And registration requirements in some countries, such as Nigeria and Uganda, impose unrealistic restrictions on franchisors.

This article considers the countries that are attractive for foreign franchisors and the legal considerations that impact the decision to franchise in Africa.

Top Countries for Franchise Investment

Africa has a 300-million-strong middle class, with 16 million households having disposable incomes of $5,000 a year or more. From an economic perspective, top countries to target for franchised businesses in Africa include oil-rich Nigeria and fast-growing Kenya, Uganda, Mozambique, Ethiopia, and Rwanda (which have GDP growth of at least 5% annually). South Africa, Cameroon, and Kenya are also attractive because they have a high number of households with relatively high disposable incomes.

Political stability is another important consideration. With four decades of uninterrupted civilian leadership and significant capital investment, Botswana is one of the most stable economies in Africa. The Cape Verde Islands also have a stable democratic government, but the commercial potential of these dry and remote islands is low.

Nigeria, poised to become Africa’s largest economy, is already a magnet for foreign investment and is widely expected to be the next big market for franchise brands. But terrorist threats and fears of insurgency in the wake of the 2015 election affect investor confidence. (Some say that terrorism can reduce GDP growth by up to 1%.)

Egypt, with a population of 80 million, a growing middle class, and a per capita GDP of $3,000, is commercially attractive. The political situation there appears to be stabilizing, and franchisors should be returning. Ghana has been politically stable since 1981. With a per capita GDP of $1,600, it remains relatively poor, but it has a rich, diverse resource base and an advanced industrial manufacturing sector. Mozambique’s economy has grown at an average annual rate of 9% for most of the past decade—one of Africa’s strongest economic performances. But despite this impressive progress, 52% of its population remains below the poverty line.

Franchising is booming in post-apartheid South Africa, which remains an interesting target for global brands. After robust growth from 2004 to 2007, the credit crunch and global economic crisis led to a devaluation of the South African Rand. Still, with a population of 51 million and per capita GDP of $7,500, South Africa is a major global economy. An impressive 12% of South Africa’s GDP is attributed to franchising—2% more than in the United States, where franchising is estimated to represent 10% of the economy.

Finally, Zambia should be of interest. The World Bank re-classified it as a middle-income economy, and two internationally recognized credit agencies assigned it a B+ sovereign credit rating.

Ten Countries Have Franchise Laws

Franchise laws exist in at least 10 African countries. South Africa and Tunisia have express franchise laws. Kenya and South Africa apply certain aspects of their Consumer Protection Acts to franchising. African nations have no classic franchise registration laws, but registration requirements arise in relation to technology transfer and commercial agency laws. In Nigeria, Ethiopia, and Uganda, for example, franchise agreements may have to be registered as technology transfer agreements. Government agencies in these three countries may refuse to register an agreement if it contains “black-listed” provisions that affect the franchise relationship. A number of African countries with a Portuguese or Middle Eastern heritage apply commercial agency laws to franchise agreements, including Angola and Egypt, but not the Cape Verde Islands. In Mozambique and South Africa, franchise agreements must be submitted to the National Reserve Bank for examination and approval.

South Africa

South Africa’s Consumer Protection Act 2008 (CPA) affords franchisees many of the protections intended for consumers. The statute provides that franchise agreements must be in writing, in plain, understandable language. A franchise agreement is broadly defined to include both the traditional concept of franchising and certain licensing and distribution arrangements. The CPA requires franchisors to disclose to franchisees: the number of franchise outlets and a list of current franchisees; the franchisor’s turnover and net profit; any significant changes in the franchisor’s financial position; written sales or revenue projections; detailed financial statements; and contact details and the support system provided to franchisees. In addition, the franchisor must certify that the business is a going concern. The franchisor’s disclosure document must be provided 14 days before execution of a franchise agreement. In addition, franchisees must be provided a 10-day cooling-off notice.

South Africa’s CPA gives franchisees the right to select suppliers. This limits franchisors’ ability to impose purchase ties; however, ties for branded goods of the franchisor are exempted. In all cases, franchisors must fully disclose benefits received from suppliers, such as marketing contributions. Further, all goods that franchisors supply to franchisees must be reasonably fit for their intended purpose and of good quality. The CPA also restricts unreasonable fees and provisions not reasonably necessary to protect franchisors’ business interests. In addition, the statute regulates advertising funds and imposes restrictions on how franchisees’ advertising contributions may be spent.

Complaints against non-compliant franchisors may be pursued before South Africa’s National Consumer Commission or in the High Court. Fines of up to 10% of the annual turnover of the franchisor may be imposed.

Kenya

Kenya’s Consumer Protection Act (CPA) protects franchisees against excessively one-sided contractual agreements. Terms that are “so adverse to the consumer as to be inacceptable” can be challenged under the statute. Because the CPA is so recently enacted, (in December 2012), no case law is available to provide guidance on the types of provisions that may be deemed unacceptable. If the CPA is treated as mandatory law, it will apply even if a franchise agreement provides for another nation’s law to govern. Sanctions for violating the CPA include rescission of the agreement and damages, including punitive damages. If an agreement is rescinded, the rescission also terminates all related agreements, including, for example, guarantees and product supply agreements.

Tunisia

Tunisia’s Law No 2009-68, through its Article 15, requires franchisors to disclose: basic information about the franchisor and its business history; evidence of trademark registration; information about the franchise network, including a list of franchisees in Tunisia; a franchisee’s required investment and fees; and the franchisor’s financial statements. Disclosure must be made 20 days before a franchise agreement is executed.

Nigeria

Nigeria’s National Office for Technology Acquisition and Promotion (NOTAP) requires registration of franchise and license agreements that convey rights to use trademarks or technical expertise or managerial assistance and staff training—that is, virtually all franchise agreements. See Ch. 62, Laws of the Federation of Nigeria, 2004. NOTAP reviews franchise agreements to ensure that they do not include “black-listed” provisions. For example:

  • The term may not exceed 10 years.
  • Franchise fees must be commensurate with the value of the technology or know-how transferred, and may not exceed 5%.
  • Quality controls and brand standards may not be unnecessarily onerous, and no unnecessary design changes may be imposed.
  • Franchisees may not be obligated to purchase equipment and supplies exclusively from the franchisor and its nominated suppliers.
  • The franchisor may not require franchisees to assign at no charge the rights to any improvements made.
  • The technology conveyed must be technology not already freely available in Nigeria. Franchisees may not be required to purchase more technology or services than are necessary for the franchised business. And franchisees must be allowed to use complimentary technology, conduct their own research and development, and export their products and services.
  • The franchisor’s powers to intervene in franchisees’ business must be appropriately limited.
  • Franchise agreements must be governed by Nigerian law, and franchisees may not be forced to submit to the jurisdiction of a foreign court.

If a franchise agreement must be registered with NOTAP, the application must include proof of trademark registration.

The NOTAP “blacklist” captures a broad range of vertical restraints—some typically found in franchising, others more commonly found in product manufacturing licenses and automobile dealership contracts. NOTAP restrictions that often concern franchisors are the 10-year term limit (particularly in the hotel sector), NOTAP’s power to determine whether brand standards are “too onerous,” and the prohibition on exclusive purchasing obligations, which can make it difficult to ensure that uniform standards are maintained.

To avoid the NOTAP restrictions that come with registration, franchisors have devised strategies such as split agreements. In this two-step process, the franchisor registers its trademark license and then enters into a separate service agreement with the franchisee that does not transfer any trademarks or technical expertise and thus, arguably, is not subject to registration. Without registration, however, Nigerian banks cannot facilitate payment of royalties in foreign currency. An alternative fee payment structure then may be needed, permitting the franchisee to use offshore funds to make payments. Another option for franchisors is to register their agreements and apply for a waiver of certain of the NOTAP restrictions. Royalty cap waivers have been granted, particularly in the hospitality industry.

Uganda

Uganda’s Investment Code Act provides that franchise agreements involving the transfer of foreign technology must be registered to be valid. Uganda’s statute imposes the following restrictions on registered agreements:

  • Royalties and other fees charged must bear a reasonable relationship to the licensed technology or expertise.
  • Liability to pay royalties must cease if the agreement is terminated or the technology or expertise becomes publicly available.
  • Royalty fees may be reduced if the licensed technology is also used by a third party.
  • The franchisor must provide assistance with marketing programs and with purchasing of any necessary equipment.
  • Franchisees must be permitted to continue using the technology after termination and to buy spare parts and raw materials from the franchisor for up to five years following termination.

In addition, registered agreements are not permitted to restrict: the use of competitive techniques; the manner of sale of products and exports to foreign countries; sources of supply; or the way in which any patent or know-how may be used.

Many of these provisions—aimed primarily at technical licenses for industrial property and manufacturing licenses—are inappropriate for franchising. For example, permitting franchisees to continue using the franchise system’s technology after termination would prevent franchisors from enforcing any covenants against competition. In light of such restrictions, franchisors have been reluctant to apply for registration of their agreements. That said, however, the Uganda Investment Authority (like its Nigerian counterpart) has the authority to exempt an investor from the restrictions and prohibitions referred to above. See Sec. 30, Investment Code Act Cap. 92 Laws of Uganda.

But unlike the Nigerian authorities, who enforce the registration requirement aggressively, the Ugandan authorities are relaxed about the requirement, particularly as to agreements that do not involve the importation of industrial property. In Uganda, it is also easier to argue that a particular franchise agreement is not subject to registration because it does not involve the “transfer of foreign technology into Uganda.” The definition of a registrable “agreement” refers to a “commercial franchise or hire purchase involving the importation into Uganda of technology or expertise” (a narrower definition than that used in Nigeria). Uganda’s registration requirement is under review and is likely to be abolished. In the meantime, many investors and franchisors have chosen not to register their agreements, and Ugandan authorities reportedly permit this practice to continue.

Ethiopia

In Ethiopia, the Parliament’s Investment Proclamations of 2002 and 2003 require registration and approval of certain technology transfer agreements by the Ethiopian Investment Commission. See Investment Amendment Proclamation No. 375; www.chilot.me. This applies to franchise agreements that fall within the definition of “technology transfer,” which in turn is defined as “the transfer of systemic knowledge for the manufacture of a product, for the application or improvement of a process or for the rendering of a service including management and marketing technologies but shall not extend to transactions involving the mere lease or sale of goods.” See Art. 14 of Investment Amendment Proclamation No. 375/2003.

This narrow definition is helpful to franchisors because it captures only franchise systems that involve the manufacture of a product, the improvement of a process, or the provision of services. Under this definition, a pure retail franchise would not require registration. By contrast, a service franchise, in which the franchisor typically transfers systemic knowledge for the rendering of a service, including management and marketing techniques, would require registration.

A technology transfer agreement that is not registered has no legal effect. See Art. 30/3 of Proclamation 375/2003. Payments related to technology transfer agreements can only be made out of Ethiopia in foreign currency if an agreement has been registered. See Art. 20 Investment Proclamation 280/2002, www.wipo.int.

Angola

Angola’s contract law expressly stipulates that the provisions of the commercial agency law apply to franchise agreements. This law provides that franchisees must be compensated for loss of their client base upon termination. The Angolan courts follow the Portuguese courts in their strict application of commercial agency law to franchising. See João Afonso, Franchising in Angola 2012, LexNoir at 101.

Egypt

Egyptian law requires the registration of franchise agreements as commercial agency agreements. Agency is defined as concluding “purchase, sale or lease contracts on behalf of and for the account of manufacturers or distributors.” This definition clearly includes the sale or purchase of goods or services, see www.agentlaw.co.uk, so it may well cover retail franchise systems. But because retail franchisees typically sell products on their own account and not for the account of the franchisor, opinion is divided on whether these franchise agreements fall within the scope of agency law and must be registered. See Joyce G. Mazero and J. Perry Maisonneuve, Franchising in the Middle East and North Africa, ABA 32nd Annual Forum on Franchising, 2009. Egypt’s Agency Law requires franchisors to provide cure notices and permits termination only in the case of a material breach. See id. The agent is also protected against non-renewal. In addition, if a franchise agreement involves the transfer of technology, it must be construed under Egyptian law, and disputes must be resolved by the Egyptian courts or by arbitration in Egypt. See Khaled El Shalakany, UK Practical Law.com, 3-500-5425.

The Cape Verde Islands

Despite their Portuguese heritage, the Cape Verde Islands have not followed the Portuguese concept of applying agency laws to franchising. See João Afonso, Franchising in the Cape Verde Islands 2012, LexNoir, at 127.

Conclusion

The regulation of franchising in Africa is in its infancy. In some countries, inappropriate technology transfer laws are applied to franchise agreements, creating unnecessary obstacles for franchisors. The emergence of legislation giving franchisees the protections typically given to consumers creates additional difficulty. It is hoped that the South African example, now followed by Kenya, will not take hold in other African countries. Despite the significant legal and political challenges that exist, however, Africa’s dynamic markets present equally significant opportunities for international and indigenous franchise systems to thrive there.

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