Sweetening the franchising deal with discount incentives

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Discounts can help convince franchisees to make the move into franchising.

Owning your own business as part of a franchise system has a number of benefits over doing it on your own. There’s the support offered by the franchisor in terms of marketing and territory allocations, there’s the tried and tested business model and there’s often a degree of bulk buying power as well. That doesn’t mean that there’s no element of risk however, and the current economic climate can’t be doing much for consumer or investor confidence.

In order to convince potential franchisees to take that leap of faith, or for existing franchisees to expand, a number of franchises around the country are offering financial incentives. For example, Flowers by Fruit founder, Tania Katsanis, is hoping financial incentives will help to get her business up and running.

“We only started looking to expand via the franchise model in June or July of this year, and we did get a bit of interest, but we also understand the economic climate and the fact that we need to incentivise people,” Katsanis says.

Katsanis has split the Flowers by Fruit franchise model into two distinct opportunities for franchisees: creation centres and EGGS or Edible Gift Gurus.

“A creation centre franchisee will be responsible for a region and they’ll need to make and deliver the goods, and then within that region will be anywhere between three and five territories,” she says. “Within each territory will be an EGG, who we consider to be a foot soldier, and their responsibility is to sell and market the product.”

The franchise fees for both roles have been reduced to get the business on its feet, but only for the first EGG and first two creation centre franchisees.

Edible gift hampers by Flowers by Fruit.

“One of the challenges that we’ve discovered is that we don’t have any franchisees at the moment, so that raises concerns for people wanting to come in because they’ve got no one to talk to and there’s no history. So we’re encouraging some pilots to come on board and we’re offering them 50 percent off the franchisee fee.”

Costs for an EGG now stand at $5000, down from $10,000, and a creation centre now costs $25,000.

Katsanis says that while there is interest in the product — edible fresh fruit bouquets — potential franchisees are still reluctant to invest in a franchise that has no track record, and so a financial incentive is a good option.

“It’s a good way of getting people in because there is genuine interest in the business and genuine excitement, but there’s also that little bit of fear, so if you give them the incentive that they’ll save some money, I think that’s quite important,” she says.

Tina Towers from Begin Bright, an early learning and primary school education program, is also tempting potential franchisees with a discounted offer, successfully signing two new franchisees.

“Because we’re a new franchise we can’t offer much in terms of funding ourselves, we’re not big enough to be able to do that yet, so we’re doing it in other ways. We only cost $20,000 to start up ... so it’s very discounted for the return on investment, and we’re hoping that that way we can have a lot of franchises start up and show a good profitability and return on investment, and that will sustain our growth,” Towers says.

For that $20,000, new Begin Bright franchisees get all of their promotional activity designed and printed including posters and 15,000 flyers, four days of induction training, local area marketing research as well as their own budgets, business and marketing plans.

The $20,000 franchise fee includes $3,000 for marketing, with any ongoing marketing fees waived for new franchisees, further enticing them towards being the business’s “guinea pigs”.

Begin Bright's Tina Towers

“We thought that with the size of our business, starting out, if we introduced a two percent marketing fee, which is fairly standard throughout the industry, it wouldn’t be enough to have a whole national campaign so there’d be no point. We don’t plan to introduce a marketing fee until about five years down the track,” Towers says.

Financial incentives don’t have to come in the form of a discounted franchise fee. A number of well established franchises are looking to expand by offering potential and existing franchisees a range of different business opportunities which make entry into the system more accessible.

Home appliance rental franchise, Mr Rental, has recently launched a lower cost kiosk model as part of its strategy to improve market penetration in regional areas.

General manager Alan Payne says the upfront costs of the new model are about 50 percent less than Tier 1 Mr Rental stores, which are part of the standard business model whereby the territories have access to at least 3,000 customers, costing $85,000 which includes training for two people. The franchise also offers a Tier 2 outlet which is a scaled down version of Tier 1 and can be in the form of a smaller roadside shopfront or warehouse with between 700 and 2,500 customers within their territory, depending on its size and location. Tier 2 models cost $42,500, including training for one. The new kiosk model is cheaper still and has no warehouse attached to the site.

“[With the kiosk model] we’re going out to regional centres and approaching local business people generally, and offering them a lower cost model to come onboard and that includes a kiosk-style set up, lower franchise fees, they don’t need to train as many people, all those sorts of things. So it still maintains our standard and our image, but it’s a lower cost entry for them,” says Payne.

He says the new kiosk model is a solution for the limited number of territories available for Tier 1 stores, and can help existing regional franchisees to get greater penetration in their area.

“You might have a guy in a metropolitan area with a Tier 1 store and that’s going well ... but with the new model, franchisees can take that kiosk unit to a shopping centre at a much lower cost but then get the penetration, so it’s a win win for everyone. It’s not just the franchisor getting more turnover and royalties. The franchisee can very quickly get to break-even on that additional site and generate more business”.

The new kiosk model is suitable not only for new franchisees wanting a piece of the appliance rental market, but also for established franchisees wanting to expand without too heavy an investment.

“For under $100,000 franchisees can add another unit to their franchise operation that utilises existing logistics, making it an easy investment and a quick contribution to their business.

“One of our Adelaide franchisees has already started with their main warehouse and store in Edwardstown, a retail showroom display in Arndale and kiosk shops to be opened in the three remaining territories, all using the same warehouse, which is a much more efficient operation logistically.”

Rather than offering a cheaper business model, baking franchise Bakers Delight has two programs in place to encourage existing employees or promising young people to join the system as a franchisee, offering financial assistance along the way.

The Fresh Franchisee program is an internal program targeting young, talented, highly energetic employees within the network, who have aspirations to be franchisees but might not have the training requirements or start-up capital in order to do so. The Manage to Own program is essentially the same thing, however it is open to external applicants as well.

Baker's Delight's Fresh Franchisee and Manage to Own programs help passionate, driven young people towards business ownership.

“With the Fresh Franchisee program and the Manage to Own, once the candidate has successfully completed the training, there are a number of ways that we approach the financial situation,” said Gabby Kelly, group development manager.

“With the Fresh Franchisee, they’re working for a franchisee who is a multi-site operator, and their interest might be to work with that Fresh Franchisee to take on a lease of their business, or they might consider vendor financing them into a position to buy if they can’t raise the capital or need that initial assistance.”

The franchise provides financial assistance in a number of ways, including supporting working capital, vendor financing or structured bonus schemes.

“Obviously these young ones can’t get finance from a bank and that’s when the franchisee or the franchisor might consider supporting them financially into the business.

“The goal is that they get into the business with that initial kick start. They can’t get bank finance because they don’t meet the criteria but perhaps six or 12 months down the track under vendor finance... they’re then in a position to go to the bank and look at changing over to get their own personal loan,” Kelly explains.

On the job training is extensive for both the Fresh Franchisee and Manage to Own programs, with applicants for the latter receiving five months of training, followed by six months experience managing a company-owned bakery before leasing and potentially purchasing their own Bakers Delight outlet. The length of both programs is generally between six and 12 months.

Kelly says both programs help young people to get their foot in the door of business ownership, recognising that there’s more to creating a successful business than just sufficient start-up capital. She adds that both programs are popular, but the Fresh Franchisee program, over the last financial year, has experienced growth of 50 percent.

“I think a lot of people want the security of having their own business and being in a position where they can control their own destiny and they don’t want the fact that they’re young or may not have the start-up capital to be a hindrance or a road block. So when they see opportunities and programs like this, which are quite rare out in the market, I think a lot of them fully embrace it — grab the opportunity and run with it.”

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