Franchises in Pakistan

Pakistan is experiencing robust economic growth with a growing middle class that demands a variety of products and services. This growing consumer base provides franchisees with a unique opportunity to gain access to a variety of sectors, including food and beverage, retail, education, healthcare and more.

The concept of franchising has gradually gained acceptance in Pakistan, especially in the hospitality sector. Several major global hotel chains, as well as several restaurant and fast food chains, currently have a presence in Pakistan through franchisees.

Pakistanis value excellent quality control and customer service standards.

Franchising opportunities

The implementation of potential franchises began with the successful entry of Pizza Hut into Pakistan in 1993. Over the past 20 years, many international brands have come to Pakistan and offered franchise rights to local companies or individual investors. Today, this franchising phenomenon is really gaining momentum and is likely to match the growth of franchising in other parts of Asia.

Demand for brands remains strong, and the marked increase in the number of shopping centers in major urban areas will open up additional opportunities for foodservice, fashion retail and cinemas. Currently, more than 200 global brands are located in Pakistan, these multinational companies have collectively invested over US$2.5 billion and have a combined annual revenue of around US$4 billion in the country. Approximately US$900 million is paid to franchisees each year in royalties.

There is also growth in the retail sector: according to Deloitte, the retail market is worth US$155 billion. Consumer spending in Pakistan has grown 83.4% over the past five years, compared with 48.7% in the Asia-Pacific region, according to Euromonitor International. Pakistan is also the seventh largest food market in the Asia-Pacific region out of 24 countries, according to Planet Retail. It is estimated that the average Pakistani consumer spends up to 42% of their income on food.

Pakistan's franchising market includes restaurants, hotels, courier services, telecommunications, cosmetics, apparel, footwear, jewelry, technology, B2B services, educational and pharmaceutical brands and continues to expand.

The largest franchise companies in Pakistan include McDonald's, KFC, Pizza Hut, Marriott, Hardees, Sheraton, Subway, Day's Inn, Best Western, Dunkin Donuts, Gloria Jean's Coffee, Papa John's Pizza, Nike Retail, Debenhams, Levis, Adidas, Caterpillar, Nando's, Metro Cash and Carry, Hyperstar, Solitaire, Damas, GNC, Oracle, Microsoft, IBM, Domino's, Burger King, Sarpino's pizzeria, Texas Chicken, Golden Chicks, Coca Cola, Popeye's Chicken, Fatburger, Doner Kebab, Sakura, TGI Fridays, Pizza Express, Steak Escape, Butler's Café, Cinnabon, Second Cup Coffee, Coffee Republic, Nestle, Coffee Planet, Mrs Fields, Juice Zone, Smoothie Factory, Solen, Hagen Daz, Menchie's, Snog, TuttiFruitti , Yogenfruz, Red Mango, Cold Stone Creamery, New Zealand Natural, Marble Slab Creamery, Monolo Gelato, Yogurberry and many others.

The growth of the franchising market in Pakistan over the past two decades reflects the transformation of the multi-layered domestic market. Experts see a deepening trend of the country's economic growth due to consumption.

Other factors that make Pakistan a lucrative market are low competition between brands, higher profits due to low labor costs, transportation and cheap real estate.

When searching for a Pakistani franchisee, foreign firms are advised to identify a number of candidates and carefully evaluate each one. The franchise agreement must be carefully drafted taking into account the interests of the parties. The franchisor must be able to retain some direct control over operations even after the transfer of business and technical know-how. The most important elements of a franchise agreement are territorial scope, duration, franchise rate, protection of trade secrets, quality control and minimum performance provisions. The foreign company must ensure that its patents and trademarks are registered in its own name and not in the name of the franchisee.

The Government of Pakistan does not impose any restrictions on investors, but foreign investors are required to inform the Investment Board and the State Bank of Pakistan, primarily for the purpose of repatriating franchise fees or any profits made.

Franchising Laws in Pakistan

There are no technical franchise laws in Pakistan. Notably, this does not require the preparation of a formal franchise disclosure document. Registration of a franchise agreement with the State Bank of Pakistan is required to obtain permission to transfer franchise fees abroad.

FOREX restrictions on transfer of franchise fees from Pakistan

Strict restrictions apply to maximum transfers of fees abroad. At the moment it is:

• USD 100,000 in a lump sum payment over the term of the agreement
• 5% recurring fees (including franchise and marketing fees), with recurring fees only applicable on eligible income

Franchisors should review their definition of gross income to ensure it meets these requirements before submitting an agreement to the Bank. There are certain limited exceptions, but these may be difficult to enforce.

Validity period of the franchise agreement

The maximum period for registering a franchise agreement with the State Bank of Pakistan is five years. The bank generally does not approve foreign money transfers for more than five years. Therefore, the parties need to consider the possibility of multiple renewals, supported by re-registration.

Competition law applicable to franchising agreements entered into in Pakistan

Local mandatory laws prohibit all forms of restrictions on the exercise of a lawful profession as a matter of public policy. This could cover both term and post-term non-compete provisions commonly found in franchise agreements.

Exemption is available to protect the reputation of the franchisor, provided that the restrictions are reasonable in geographic scope and duration and do not permit the conduct of a similar business.

The franchise agreement must also be notified to the Competition Commission of Pakistan. Notice is necessary not only to enforce non-compete obligations, but also any obligations of the franchisee to purchase products from the franchisor or its designated suppliers. Usually this procedure is simple and quick.

The key point when setting up a franchise business in Pakistan is quality control, especially if the business offers to use locally produced goods. In Pakistan, all relevant imported food products must be certified "halal". (butchered in accordance with Islamic ritual).

Additionally, Pakistan's energy crisis and less developed market for processed foods (meat, fish and poultry) pose challenges for franchisees who rely on imported raw ingredients.

Investing in a franchise in Pakistan offers many opportunities. However, potential franchisees must carefully weigh the benefits and challenges. Before making a decision, you should consider the high initial investment, ongoing royalties and limited autonomy.

As with any business venture, it is extremely important to conduct thorough research and exercise due diligence. Potential franchisees must evaluate their financial capabilities, compatibility with the franchisor's vision, and the competitive environment in the target market. A well-chosen franchise that aligns with the investor's goals can pave the way for a successful and profitable entrepreneurial journey in Pakistan.