Future-proof franchising strategies
Tuesday, 13 February 2007
Last Updated: Wednesday, 22 August 2007
By Rod Young
A strategy for franchising in increasingly uncertain times.
The biggest threat the franchising community faces today is complacency. There is a whole generation of franchise executives who don’t “know” what a recession means. The year-on-year average unit sales of many franchise systems have grown consistently over the last decade, and especially since the turn of the century. Some would argue that before franchise owners and executives indulge in a round of self-praise for their fabulous performances, they should consider how significantly economic conditions have contributed to their huge run up in positive results.
If we learn the lessons of the past 20 years and the cycles within that period, we can create a foundation of strong and vibrant franchise systems with executives capable of taking on and beating the challenges that will invariably surface as we approach 2010.
It is clear to most astute observers that a good franchise system cannot simply continue to do what it has been doing over the past five years and hope to achieve or retain the number one or two position in its market place.
So what strategies does a franchise network require in order to build, consolidate, and maximise profit and value over the next three to five years?
The following provides a plan for future-proofing your franchise system.
Keep cash flow positive
Interest rates have crept up to five-year highs. It will be critical to build cash reserves to ensure against any unforeseen downturn created by economic or political circumstances. Now is the time to establish generous credit facilities with at least two bankers to ensure your business remains liquid. The worst time to ask your banker for a facility is when trading is tight or the economic outlook is dimming. Now is an ideal time to ensure your banking relationships are sound and established.
Operate company-owned stores
Continuing to operate company-owned stores not only gives you direct control over cash flow and a more substantial profit pool than just royalties obtained from individual franchise owners, but will be the nursery for your future management team. If you have aspirations for further growth, either on a national or international scale, the importance of developing a pool of capable performers will be critical to your success. Company-owned operations not only provide an incubator for future talent, but also keep you close to the action, where you can feel the pulse of your customers’ response to your products and services, and importantly allow you to maintain empathy for the position your franchise owners occupy at the coal face.
Be an employer of choice
As the economy has boomed, it has created a record number of jobs and as a result, not only is unemployment at a record low, but the flexibility of employees to change jobs and the career opportunities being offered have never been greater. As a result, good franchise systems will need to ensure that both opportunities for advancement, and remuneration and reward processes are in keeping with the market to retain key employees within a franchise network. Your business and that of your franchisees should not only look to retain your current employees, but be a magnet for the top employees of other franchise systems. There is no doubt that the calibre of your staff will dictate your future success over the coming years and it is critical to have a business that will attract the very best of the franchising community.
Franchisee selection
The recruitment, screening and selection of franchisees will always be crucial to the future success of a franchise network. With more banks now offering franchise lending packages, it is worth reflecting a little on the basic qualities that you should be looking for in your prospective franchisees. In one way these new lending packages, which have opened up franchising opportunities to previously less qualified individuals, hold inherent risk. In attaining the highest quality prospective franchisees for your system, there are two key elements that need to be brought to the table. The first of course is that the franchisee is the right fit for your company. This person will bring with him or her the personal qualities necessary to operate your franchise to its optimum performance. The second, and equally important element is that they have capital necessary to establish the franchise.
We need to understand that an individual’s net worth is an excellent indicator of both thrift and self-discipline. We must remember that thrift and self-discipline are key elements of any successful small business. The lowering of the financial barrier of entry brings with it the potential for mediocrity in your franchise network. Ultimately, your business will be built on the calibre of your franchise owners and while new finance packages make it easier to sell franchises, history has shown us that no good franchise system has built a sustainable business on “selling” franchises.
Maintain profitability at all levels
The profitability of both your company-owned and franchised operations is crucial to your network’s survival. This means you must monitor the profitability of your franchisees regardless of whether you have a fixed or variable royalty arrangement. Many franchise systems have flourished over the past five years without having a clear and regular measure of the financial performance of the individual franchise business. Favorable economic conditions have lulled many of these networks into a false sense of security. However, no prudent manager could possibly contemplate operating a multi-unit network without having a clear understanding of system-wide revenue, operating expenses and profitability. Without these fundamental reporting procedures in place, good management decisions are almost impossible to make, and marketing initiatives have little opportunity to be measured, as competition continues to tighten. Poor financial reporting will surely take its toll.
Strive to be Number 1
If you do not have a clear plan to be number one or two in your market within the next five years, there is a considerable risk that your franchise system will be sidelined by bigger, better and stronger competitors, who will outgun you with advertising, marketing, service and network development. You need to be realistic in your outlook. If you cannot develop your business to put you in that position, you should consider looking for an acquisition, a merger with another smaller competitor, or perhaps the sale of your business rather than to settle for being number four, five or six in your market. History has taught us that there are often two or three dominant players in each market place, with the rest simply being scramblers who are unable to realise significant value.
Quantify and achieve your value prize
Every franchise system should set themselves a target of what the value of their business will be three years from now, and create a dynamic strategy to achieve that goal. The value of your business will largely be dictated by the performance of your brand, both in the number of points of presence you have in your market place, and the exposure you have in terms of advertising, marketing and public relations. Often, very little strategy or management initiative has been focused on building brand value, which ultimately drives revenues and maximises the value prize of an organisation. Instituting strategies to achieve these outcomes will result in your business always being saleable and increased demand by potential buyers, franchisees and employees.
Customer service
As consumer confidence has grown, the ability to make sales without high levels of customer service has created an environment where customer service levels have remained static or declined under the weight of largely free-spending consumers. Many businesses have failed to maximise sales opportunities during these booming economic times. Now is the time to focus on increasing service standards and creating the “wow” factor to build long-term relationships with your customers. Now is the time to future-proof the business by instituting mystery shopping programs to monitor your customer experience and starting to create the foundations to combat intense competition for your customers’ share-of-wallet. Careful analysis of consumer trends, docket or job averages and sales-mix can heighten the awareness in your management team and staff about your customers’ spending habits in your best operations, and can help transfer those best practice skill sets to your total network. This will reap significant benefits.
Invest in training
There is no doubt that the 21st Century has also spawned the most sophisticated consumer ever to walk the planet. Increased competition in every sector has meant that there are multiple opportunities for a consumer to shop with your competitor or buy competitive services from the business down the road or from the web. The big difference in the future and the elements that have made market leaders thrive in the past are the quality of staff and the knowledge staff transfer to their customers. Training and retraining of franchisees and staff is critical to survive the even more intense competition that will surely develop in the future. It is important to budget for training and dedicate a percentage of your total payroll costs to this purpose.
Mediocrity drains away opportunity
The best developed corporate brand, the most uniquely designed uniform or the best advertising and marketing program can all be destroyed in an instant if executed with mediocrity. The great risk that many franchise systems face is complacency in operational compliance, by both the staff in company-owned operations and the franchisee network. This complacency is often evident during good economic times when profitability is at comfortable levels, leading to mediocrity and a lack of urgency at every level of the network.
Now is the time to future-proof by taking a fresh and open-minded look at every aspect of your operation and asking yourself honestly: “Is this the best our people can do at every element of the operation?” With trading levels being at record highs, many of your people will be tired or overworked. You must balance the need to strive for even better performance with the requirement to keep your team fresh. A good start may be to roster some appropriate holidays for yourself, your staff and even assist facilitating holidays by your franchise owners to reinvigorate the whole team for the years ahead.
Growth targets
With a run-up of profitability in many businesses and networks, record sales levels and franchisee numbers, many franchise networks have achieved or exceeded set targets as they passed the half-way mark of this decade. There is a danger that your network will start to drift unless new and challenging targets are put in place for both your franchise owners and the network as a whole. It will be important to ensure that these targets are supported by putting people in place early so they are a resource for future growth, rather than have growth targets that are required to be met by your current team before new personnel are employed.
These growth targets create career opportunities. In addition to assisting franchisors to become employers of choice, this will create the opportunity to lift the performance of your existing employees or create the opportunity to bring new blood into your network.
Time to sell or time to buy?
With the growing interest by banks and venture capital organisations in the franchising sector, it is an excellent time to address the motivations of the proprietors, shareholders and management in every franchise network. Do the key players in the business have the desire and the ability to set and achieve new growth targets, or is it time to seriously contemplate a change of circumstance? There is no doubt that the Peter Principle applies in the franchising community, and there is evidence that some proprietors or major shareholders have built their businesses to a stage where their level of competency to lead the business into the future has reached its zenith. Is it time for the proprietor or major shareholder to replace the entrepreneurial skill-set that built the network to its current level, with new management who are more suited to operational compliance and micro-management of the network. Is a sale an appropriate strategy?
Just as this question is being asked by the proprietors and shareholders, they should also be looking at how they can make a quantum leap in the size or geographical spread of the network. Is this a time to acquire your competitor or buy up some strategically placed independent to continue to accelerate the growth of the network and maintain or achieve market leadership?
Sunrise, mature or sunset?
Every business has an orbit. It travels across the horizon starting in new sunrise industries being pushed in a wave of an emerging trend, such as the wellness industry, which has spawned fitness centres, juice bars, health and beauty salons and day spas, then progressing at its peak to a mature industry where margins are tightening and consumer demand begin to fall. The ultimate trajectory as a business or industry travels past this top is into a sunset, with an outlook of diminishing growth.
A realistic assessment of where your network sits in this orbit will give rise to an appropriate strategy. A “head in the sand” approach to this question will only hasten the demise of a business. However, an early assessment can significantly reinvigorate an organisation and utilise its core physical and human assets before the sun has set.
Think global
As the world economy strengthens and the amount of new consumers with discretionary expenditure increases, in both “old” markets like America and Western Europe and emerging markets such as South America, Eastern Europe, South-East Asia, India and China, the opportunities to take your franchise to the world have never been better. If you have consolidated your brand in the Australian and New Zealand markets, and are approaching the 75% penetration level, you face a slowdown in growth. It is incumbent on the management team to consider your next horizon to future-proof the business.
When you are green, you grow, and when you are ripe, you rot. There is no better stimulus for new growth than to reset your sights on a new horizon. While there are many challenges in entering new markets, there are substantial rewards to be reaped from turning a local business system that has flourished in these small, highly competitive markets, into a world brand.
The vision that may have established your franchise network with a horizon of $10 million, $50 million or $100 million in system-wide revenue now needs to take a whole new paradigm shift. One thousand, 5000 or 10,000 unit or store networks are not unusual on a world scale. The challenge will be whether the management team of today’s franchisors are able to grasp the magnitude of this opportunity and put in place the strategy, management processes and expertise necessary to achieve more ambitious growth horizons.
So where is franchising heading in the big picture?
Franchising will continue to grow and global markets beckon. The world's biggest brands such as Coca-Cola, Pepsi, Shell, BP, General Motors, Ford and Toyota, and of course KFC and McDonald's, have been built using franchising strategies. The compelling reasons that have driven this trend are more evident as we focus on the future. There is no doubt that the application of the fundamentals, such as sound procedures and training, open communication with each and every one of your franchise owners and staff, good recruitment, screening and selection to attract the very best franchisees, and appropriate network development strategies including regional and international master franchising, will continue to future-proof franchise networks.
Those organisations that apply future-proofing strategies in their franchise systems will thrive.
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