There's an adage in franchising which often comes to light when matters come to a head: “Did I fail the model or did the model fail me?” Things do go wrong between the mothership and its children.
Those advocating the franchise system often cite the franchisee not sticking to the “proven” business formula. The obvious retort is: was the formula proven at all; were there cultural or sociological reasons behind it not working; was the franchisee a good “fit” with the business in the first place or did they just have enough money to start it up?
Bad site selection is another often cited reason – a location, or territory without the right local demographics to make the business a success. Growing too quickly is another issue. Before a legislative framework was introduced in 1998, it used to be much easier to “sell” a franchise based on hype. Fads are another problem according to Phil Blain, a franchise consultant. “I don't like businesses which are fads. I like to see that people will want the product 10 years from now. It's for this reason that I'm concerned with the rash of cupcake businesses.”
Here are some no-nos in the franchising business.
1. Lack of suitability to run a business
Operating a business involves hard work and long hours, and is typically much harder than working as an employee. “Although industry surveys show that over 90 per cent of franchisees would still buy their franchise knowing what they now know, around 70 per cent say they substantially under-estimated how hard it would be,” says Stephen Giles, the head of franchising at law firm Norton Rose Fulbright. There are other issues here. Poor customer service skills or operating capabilities are often cited for franchisee failure, he says. “Customer service excellence is still the biggest determinant of success in my experience. We know that as a consumer - if we get good service, we return. If we don't, we simply go elsewhere,” Giles says.
2. Lack of financial viability
The franchisee goes into the business without enough capital to get through the initial start-up period, or endure any economic downturn, a status always exacerbated if the franchisee borrows a lot of money. Blain mentions what is commonly referred to as “the rent-taking ratio”.
“A business model may stipulate that the franchisee can pay up to 15 per cent on turnover on rent if all things are equal. People enter high-end shopping centres with their heart and not their head and pay 20-25 per cent and even more on rent.”
Blain says he asked Jon Sully, former owner of Michel's Patisserie (which has about 320 franchisees) what works best. “He told me: 'A franchisee that can say my stock holding is x grand this week, my wages are y per cent and I need to turn over z this week is one which knows intimately where they are sitting'.” Those who don't know the numbers tend to fail.
3. Poor systems and communication
If it follows that success is predicated on quality of systems and support, then failures in this area tend to not only demoralise franchisees but fragment the underlying businesses. Kym de Britt, general manager of he Franchise Council of Australia, says that for any franchise system to work mutual benefit must be built into the relationship. There must be consistent service offered to them – whether that be IT, marketing or accounting support.
4. Lack of a compelling customer proposition
Long-term business success requires that customers continue to buy and sometimes a better idea comes along. Giles gives the example of Miniskips, which launched a franchised model of a skip on the back of a truck. At first, the franchise system and the franchisees prospered. Then someone else figured out how to put multiple skips – one full one, and several empty ones – on the back of a truck. Miniskips lost its edge. This is also why we no longer see Kleins jewellery stores, which had locations in prime shopping centre locations selling cheap and cheerful jewellery. “The customer proposition was not sufficiently attractive to pay the rent on these high profile sites,” says Giles. He also mentions Knitwit, the knitting supplies franchise that ceased to exist when people essentially stopped knitting.
5. Foreign franchises and co-operatives
There are many tombstones in the graveyard of foreign franchise systems that have tried to enter our market. Usually the problem is that the business lacks fundamental appeal to the Australian consumer and lack genuine commitment to the Australian market. Other franchise systems that tend to fail are co-operative and buying group franchises which are owned by the franchisees. According to Giles they “typically lack leadership, lack discipline in terms of purchasing and promotions, and only survive outside the CBD”. He cites Retravision and ToyKingdom as examples of co-operatives that have struggled in the current hyper-competitive market.