DC Strategy on the growth of franchising

DC Strategy recognises that, for franchising, the first five years of the 21st century are about as good as it gets, as well as for the broader business community. Since the 2000 Olympics and the release of the first Lord of the Rings film, the Australian and New Zealand markets have been discovered by the world and enjoyed economic boom times with low interest rates, record low unemployment and a thriving and fast growing franchising sector.

The run up in real estate values in Australia and New Zealand have created more equity than has been consumed by the development of franchising in both countries. More bankers are offering ‘accredited’ franchise systems finance packages that allow franchisors to grant franchises to a substantial pool of previously under-funded potential franchisees. The business outlook is good and the recovery of Asian, European and American economies point to a continuing economic growth outlook.

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 unit-on-unit average sales of many franchise systems have grown consistently over the last decade, and especially over the last five years. Some would argue that before franchise owners and executives indulge in a round of self-praise for their sterling performances, they should consider how significantly economic conditions have contributed to their huge run up in positive results.

This has created a foundation of strong and vibrant franchise systems with experienced executives capable of taking on and beating the challenges that will invariably surface as we approach 2010 – if we learn the lessons of the past.

It is clear to most astute observers that a good franchise system cannot simply continue to do what it has been doing for the last five years and hope to obtain or retain the number-one-or-two position in its marketplace.

So, what elements does your franchise network require in order to build, consolidate, and maximise profit and value over the next three to five years? The following provides a blueprint.

Keep cash flow positive

Interest rates are beginning to rise. 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 a 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 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 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 coalface.

Be an employer of choice

As the economy has boomed over the last five years, 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 the network. Your business and that of your franchisees should not only look to retain current employees, but be a magnet for the top employees of other franchise systems. There is no doubt that the calibre of 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 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 the franchise to its optimum performance. The second, and equally important element, is that they have the capital necessary to establish the franchise.

If we 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 a 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 that no good franchise system has built a sustainable business on ‘selling’ franchises.

Maintain company operation and franchisee profitability

The profitability of company-owned and franchised operations is crucial to a network’s survival. This means you must monitor the profitability of franchisees regardless of whether you have a fixed or variable royalty arrangement. Many franchise systems have flourished over the last five years without having a clear and regular measure of the financial performance of the individual franchise business. Favourable 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 one or two

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 that will outgun you with advertising, marketing, service and network development. You need to be realistic in your outlook. If you cannot develop a business to put you in that position, consider looking for an acquisition, a merger with another smaller competitor, or perhaps the sale of your business rather than settle for being number four, five or six in the market. History has taught us that there are often two or three dominant players in each marketplace, with the rest simply being scramblers that are unable to realise significant value.

Establish and achieve your value prize

Every franchise system should set a target of what the value of the 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 marketplace, and the exposure you have in terms of advertising, marketing and public relations. Often little strategy or management initiative has been focused on building brand value, which ultimately drives high revenues and maximises the value prize of an organisation. Instituting strategies to achieve these outcomes will result in a 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 customers. Now is the time to institute mystery shopping programs to monitor customer experience and start to create the foundations for combating intense competition for your customers’ dollar spend. Careful analysis of consumer trends, cheque averages and sales mix can heighten awareness in your management team and staff about customers’ spending habits in your best operations, and transferring those best practice skill sets to your total network. This will reap significant benefits.

Training and retraining

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 there are multiple opportunities for a consumer to shop with your competitor or buy competitive services from the business down the road. 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 evolve as the economy continues to develop. It is important to budget for training and dedicate a percentage of total payroll costs to the purpose.

Don’t settle for mediocrity

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 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 take a fresh and open-minded look at every aspect of your operation and ask yourself – honestly – ‘Is this the best our people can do at every element of the operation?’. With trading levels at record highs, many of your people will be tired or overworked. 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 to even assist facilitating holidays by your franchise owners so as to reinvigorate the whole team for the years ahead.

Set 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 approach the half way mark of the decade. Unfortunately, there is a danger your network will start to drift unless new, exciting 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 which are required to be met by your current team before new personnel is 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 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 proprietors, shareholders and management in every franchise network. Do the key players in the business have the desire and ability to set and achieve new growth targets, or is it time to seriously contemplate a change? 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 more suited to operational compliance and the micro-management of the network. Is a sale an appropriate strategy?

Just as this question is being asked by 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 the wave of an emerging trend, such as the wellness industry, which has spawned fitness centres, juice bars and day spas. It then progresses to a peak as a mature industry where margins tighten and consumer demand begins to fall. Ultimately, the business or industry travels past this summit into a sunset, with an outlook of diminishing growth.

A realistic assessment of where your network sits in orbit will give rise to an appropriate strategy. A head-in-the-sand approach will only hasten its demise. However, an early assessment can significantly reinvigorate an organisation and utilise its core physical and human assets before the sun has set.

Take a global outlook

As the world economy strengthens and the amount of new consumers with discretionary expenditure increases, especially in emerging markets such as India and China, opportunities to take a franchise to the world have never been better. If you have consolidated your brand in the Australian and New Zealand market and are approaching a 75-80 percent penetration, you face a slowdown in growth in these countries. It is incumbent on the management team to consider the next horizon.

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, $50 or $100 million in system-wide revenue now needs a paradigm shift. Thousand-store networks or 5000 outlet service businesses are not unusual on the 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 funding necessary to achieve more ambitious growth horizons.

So where is franchising heading in the big picture?

There is no doubt that the fundamentals of sound procedures and training, open communication with each and every one of your franchise owners, good recruitment, screening and selection to attract the very best franchise owners, and appropriate network development strategies, will apply as they always have.

Organisations that bullet proof their franchise system will thrive.

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