The Next Stage
John O'Brien • Chair — Franchise Council of Australia CEO PoolWerx Corporation
As an entrepreneurial model, franchising has always moved ahead fast.
We had the single fast food franchise idea that spread quickly throughout the entire retail arena, then services franchising, the introduction of master franchising, and of late, the concept of area development. By its very nature, franchising can't sit on its hands – it has to move forward or implode. Franchisors have to be looking for double digit figures in terms of system and turnover percentage growth.
For the past several years, that growth has been inhibited by two key factors.
1. In a tight labour market, the pool of quality intending franchisees has diminished and most of the systems I know are bewailing it loudly. This we all know about. Let's leave that for the moment.
2. The second, less obvious factor, is that faced with dynamic, franchised competition, non-franchised business has been forced to lift its game in terms of pricing, service, look and feel – the entire customer experience. These days, I see ever more discerning consumers making it difficult for the man with the van or the single store owner to meet their expectations. All this, while retailers like David Jones, Harvey Norman and Bunnings have substantially raised the bar.
LET'S START WITH POINT NO. 2
You need to look within your own network, identify the gun operators, and work out how they can help bring the rest of the network up to their levels of excellence so that your product remains competitive. This statement is borderline trite. Of course franchisors want the non- or lesser performers to emulate the stars and most do everything imaginable to help them do so. But it's easier said than done.
I work on the 20:60:20 rule. Twenty percent of the network is up there with the best. Sixty percent are hard-working, rock-solid people who have entered a system for all the right reasons. The remaining 20 percent struggle, and these (who have slipped through the recruitment process net) we gently encourage to sell, and help them to do so as profitably as possible to a timescale that suits them.
The top 20 percent are going to prosper whatever their competition does. The low 20 percent area drain on the network and a hazard to themselves. It's the mid-level 60 percent whose futures need to be considered, as that retail bar goes up and up.
So how? You can train, communicate, refine systems, encourage networking, bring in more specialists and get so far, but only so far, and for only so many – because the whole game has just become harder. It's like asking your backs to form the scrum.
There is no question in my mind that in many, if not most cases, the answer is to find new ways for your 60 percent to participate effectively and with confidence in the system, or exit comfortably. The answer is multi-unit franchising.
`MUF' is simply the principle of a single high-performance franchisee owning three, ten or 100 outlets, and bringing them all up to his or her expectations of performance. A single franchisee owns around 15 Subway outlets in Adelaide. One very bright fellow owns 100 KFCs in Louisiana. And there is everything in between.
I recently returned from the Washington IFE Franchising Exhibition where it was highly apparent that multi-unit franchising, which has been emerging in the States for the past five years, now has dramatic traction. It is inevitable that this will occur in Australia. I am not just convinced about that. It is happening, it is here, and it will solve the twin dilemmas currently impacting the sector's growth.
This reality provides Australian franchisors with opportunities and hazards. It will be harsh for some, and brilliant for the movers.
WHICH FRANCHISORS?
Multi-unit franchising will best suit larger, mature franchisors, will be vital for medium-sized franchisors, and while more complex for emerging franchisors, should definitely be built into their future planning.
WHICH FRANCHISEES?
Given the diversity of franchising I have to be general, however the principles are sound enough.
Step one is to consciously identify the 20:60:20, bearing in mind that some of the guns might be ready to move on and some of the 60 percenter's will be moving up. But basically, you are looking for the franchisees who have risen to the top of your organisation, probably come from a fairly senior managerial background, are operationally-driven, who stick to the system, manage people well, and can drive economies of scale. In fact, in the absence of continuing opportunity for growth, these kinds of people tend to lose interest and move on, which is not what you want.
Step two is to identify those within that group who have weak neighbours who really should sell. Obviously it is easier for a multi-unit franchisee to exercise management control within a reasonably compact geographic patch. Help them acquire their immediate or near neighbours (more on this to come). This will allow them to 'local area market' effectively, move employees around the patch as needed, and provide career paths within their (say) ten outlets.
Step three is to establish which franchisees are willing to sell under what arrangements. This is really part of the `how', but they might be very happy to stay on as a manager, perhaps with junior equity, so that their experience and enthusiasm is not wasted.
Then identify means of helping and incentivising your short-list to go multi, and leverage the skills and character they have already proved, to their profit.
WHO NEXT?
As always there are competent people looking for a sea change and opportunity, from the middle and senior executive roles – but multi-unit franchising pushes higher up the executive scale to CFOs, Chief Operating Officers and CEOs interested in a larger opportunity. And don't forget the up-and-comers. They might have an aggressive business-building mindset and burning ambition to be their own bosses. If you can show them, at age 28, that they can have a 10 store operation, a staff of 100, and $15 million turnover by the time they're 32, you will be able to cherry-pick. Then put them through an MBA program and show them how to get finance.
HOW?
Franchisors definitely need to be the conduits in making this happen – not only in identifying the talent and partnering the guns with neighbours, but in helping arrange the financial modeling and finance to make it possible, because often existing franchisees have coaxed themselves out. The upside is that banks need to lend and given economic circumstances, have never been more willing to lend to franchisees. The franchisor needs to be arranging packages with leading banks. Perhaps you also need to be prepared to go guarantor or provide a second guarantee.
HAZARDS
Beware. Multi-unit franchisees can come with lumps. One is that they might well win a big patch of the business and should something go sour, then the problem becomes exponentially greater. If you have 100 franchisees operating 100 outlets and one relationship goes wrong, it is a bad day, not a mortal day. But if one franchisee turns ten percent of your business into chaos in one hit, it's more serious. In fact, in the States, some multi-franchisees are generating more income than the franchisor. This isn't a bad thing but it will become very important to involve MUFs in your decision making early, have strong communication and allow plenty of representation through Regional Advisory Councils, Franchise Advisory Councils etc. The upside is that this is a fine way to capture their intellect and experience to the benefit of the network.
Perhaps the greatest hazard is a multi-unit franchisee who might come to believe that he or she is bigger than the system.
WHY?
There are plenty of reasons listed or implied in the above. But one of the great advantages I see is that there becomes a neat separation between the executive and operational arms of the business. High-performance multi-franchisees deal effectively with operational matters, freeing the franchisor to become increasingly specialist in terms of services and to drive the IP. And in terms of communication, you are dealing with fewer people, for greater penetration.
There is also point No. 1: The recruitment angle. Most successful multi-franchisees will be looking for more and more territory as their operations progress. Perhaps the greatest 'why' is that franchisors must continue to compete successfully and grow, and multi-unit franchising is proving to be a very effective 'how'.
UPSHOT
As Chair, I would rarely become so detailed; I would talk more about principles. However I did not think I could convey the importance of this development without providing at least some practical context. There will be much more discovered and written about multi-unit franchising by others. I know that the sector's eminent psychologist Greg Nathan has sent a delegate to a convention in the US specifically devoted to this topic and there is a brief report in this edition of The Franchise Review. He is also holding one of his famed day-long sessions on the subject in Brisbane on August 18th, plus a (same day) master class for interested franchisees (refer to advertisement p.13). For that matter, I am sure that many of the sector's advisors, consultants, suppliers and indeed, some franchisees will be analysing the situation as I write. Multi-unit franchising is a natural progression and the sooner that we, in Australia, engage heavily with its principles, the better.
The Franchise Council of Australia is the industry representative body for the Australian franchise sector. We represent franchisors, franchisees and suppliers to the sector – including financial institutions, legal advisors, bookkeepers, IT consultants, HR consultants and many more.
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17.05.2008
FCA Member
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