Retail franchising is going through a metamorphosis.
Retailers riding on the back of rising employment and the weight of retail spending that came with it
offering a mere “me-too” experience are either already shutting down or will do so in the year ahead. Consumers today, who may have been less discriminating over the last five years are returning to a more considered purchase decision making process.
Winds of Change
Networks with franchise owners are not immune to these influences but are proving much more resilient than wholly company-owned networks where slowing sales are putting the whole brand under threat.
There are a growing number of fully company-owned networks carrying more and more lossmaking stores stripping group profits and putting pressure on cash flow. Better performing stores are carrying the burden of poor performers and are being starved of resources that could maximise individual store performance.
This trend will see some brands failing to revise their business models and business plans collapse as bankers refuse to roll over facilities and impose stricter loan covenants. Stretched creditors will also react to market conditions and may need to push wind-up proceedings to access credit insurance policies and meet their own loan covenants.
However, there are many good news stories of retailers prospering in these environments. Savvy owners of company-owned networks are releasing capital locked up in goodwill, fixtures and stock in company-owned stores and turning this into much needed cash by developing a franchised model for part of the network. The new, better-capitalised franchised owner-operators are lifting sales by up to 20 percent more than the company achieved when it owned the store.
Sounds like alchemy. “No way” says David Stafford, Executive Consultant at the specialist consulting and legal firm, DC Strategy.
“Carefully recruited and selected, motivated owner-operators bring commitment, stability and drive to a business that often has potential but has never been realised by the employee model,” he says. Those retailers focussed on staff training and customer service are growing market share as many of their competitors slash costs and staff to decrease overheads. The downside of cutting too close to the bone is the negative impact on product knowledge and customer service which creates a significant effect on store and network profitability.
However, it is not all doom and gloom. Pushing aside the more alarmist elements of the media reports that we are in recession is critical so that the opportunities emerging can be recognised, uncovered and acted upon.
Both local and overseas manufacturers and wholesalers keen to keep cash flowing are offering lower prices to gain volume. “Franchising is part of the solution to delivering a better customer experience and taking advantage of new opportunities. How can a company at the limit of its banking facility take advantage of good sites in shopping centres?”
Stafford points out in reference to the franchised owner model. Retail networks with a business model that are a mix of company-owned, franchised and emerging hybrid employee structures that DC Strategy has developed such as the Luxotica brands, OPSM, Laubman & Pank, Sunglass Hut and Budget Eyewear are proving not only very resilient but are growing market share against fierce competition and the inevitable price cutting that comes from those retailers that are barren of ideas, cannot differentiate or cannot execute retail strategy.
Aiyoh!* What to Do?
Differentiating the product and service offer from your competitors helps the newly discriminant shopper choose your business as their shop of choice.
One store in Chapel Street, in the Melbourne suburb of Prahran, has improved sales by 30 percent over last year by re-ranging and focussing on a specific market segment of men aged 40 to 50. The result is sales are up as traffic on the street is flat or some say has declined. This retailer plans to franchise his business model rather than relying on company owned staff to get a better quality of person at the customer end of his business. He claims he is performing because, in part, he is focussed on the lifetime value of every customer that comes through his door not just a sale to keep his job. He feels a well-selected and trained owner-operator will do the same.
At a time when capital is hard to come by for a new store set-up, stock, and fixtures and fittings, franchising provides a source of funds that is interest-free, without giving up equity or control. Stafford says franchising will be the growth strategy that will influence the face of retailing during these harder economic times.
“As unemployment rises, it will create a new wave of prospective franchisees cashed up from redundancies but unable to find employment that will give them the income they enjoyed during the past several years.”
The discriminating franchisor will screen and select the best of the best of these displaced employees, sorting those who want to buy a job from those who want to own their own business and selecting and granting franchises to the best of the latter group”. Many retailers think the fall of the share market is affecting consumer confidence but this is much too simplistic. The need for product range, marketing and the service experience relevant to customers to provide differentiation is needed to get traffic through the door. Retail network Matchbox has recently invested in rebranding with brand strategy company BrandsRPeople2. After adopting a franchised model three years ago Matchbox has grown the network three fold and now operates stores across Victoria and Perth with new growth planned for NSW and Queensland.
Managing Director, David Cohen says, “We could never have achieved this growth with our own resources and would have never contemplated a WA entry without a franchised business model.
“While we are very happy with the profit contribution of our company-owned stores, the bulk of our profitability is now coming from our franchise network.”
“Sales are up across the group compared with last year and our future growth will come from careful selection of new sites and new franchisees and the development of some of our current franchise owners into multi-unit operators.”
Two of the current Matchbox store franchise owners are multistore operators.
Management throughout the world are recognising the benefits of franchising as an HR strategy to better magnify the perception of the brand at the customer end of the business. Thus, the trend towards franchising is proving a strength in the retail sector.
Retail Revolution
The employee was a product of the Industrial Revolution to facilitate the production and distribution of goods manufactured by the inventors and industrialists of the time. The small businessman emerged to provide the many shop fronts and points of presence necessary to get those goods to market. Now the franchisee is emerging as the storm trooper of the 'Retail Revolution' bridging the gap between an employee's shorter term commitment to the success of his or her employer and the enterprising but with limited resources, outlook and expertise of the independent businessman.
US retailing is under real pressure and is much further into the cycle than Australia, yet the franchised networks are proving to be the most resilient survivors with over 30 percent of the US retail dollars said to be taken through franchised outlets.
The 21st century will see the evolution of the franchised owneroperator in retailing as the most efficient last-mile-to-market business model yet developed, combining the service ethics of an individual who understands that the centrepiece of his or her goodwill is the lifetime value of each customer. The strategic planning capability, buying power and marketing muscle of bigger networks and brands will come from the head office but franchise owners will deliver the message to the customers.
While the true value of the franchised business model is being muddied by opportunist franchisors focused on selling franchises, rather than granting franchises to qualified operators, the more experienced franchised networks have learned that a focus on establishing profitable businesses creating greater value at the customer end of the business is critical to building long term enterprise value.
The trend of well run franchisors recruiting, screening and selecting better quality franchisees and those better quality franchisees gravitating towards well managed franchises will drive the growth of these franchised networks.
Consolidation, acquisition, & private equity gathering pace As competition intensifies in each market segment, the top players will seek to establish market dominance by acquisition of competitors and customers. This will push growth past that provided by organic development.
In the past we have seen this occur when Nestle purchased Jenny Craig Weight Loss Centres in the US, Domino's purchased the Pizza Haven network in New Zealand and Eagle Boys bought the remaining network in Australia. The giant Italian-based eyewear manufacturer Luxotica purchased the optometrist networks OPSM, the licensed Laubman & Pank network as well as the franchised Budget Eyewear and Bright Eyes franchised chains in Australia as well as other networks in Asia.
This demonstrates that the blending of franchised and nonfranchised networks will see franchising become a much more mainstream management and marketing tool. Linked to the globalisation of brands will be the market-entry strategy of the 'buy rather than build' approach by foreign companies, both franchised and non-franchised and the purchase of foreign franchise networks by franchisors seeking a faster, lower risk entry into overseas markets.
The competition for acquisitions will not just come from competitors. There are other emerging trends driving franchise network growth in the retail sector.
One trend is emerging from downstream suppliers seeking to secure distribution, more attractive margins and brand value as a product or service gets closer to the consumer. An attractive feature of a franchise network is a franchisor can also be a supplier to the franchisee, creating a tied distribution network. The example of wholly or partly franchised networks now owned or part owned by venture capital groups further blurs the franchising lines and demonstrates the value being created by franchised networks around the world.
Another is the private equity and venture capital groups, who understand the value of branded networks. As more of this capital looks for a home these groups will facilitate or participate in acquisitions and mergers of franchised networks, which will help to drive consolidation in the franchising marketplace.
Globalisation
The world will see more competition from foreign franchisors attracted by a target country's position near the top of the list of most desirable nations in which to grant a master franchise. A nation’s desirability is measured by a combination of the Graft Index involving political stability, educated workforce, business transparency, a well developed financial system and a legal system that protects intellectual property and upholds contractual obligations. For example, while Australia is a small market it punches well above its weight in terms of profit per retail unit.
As more and more of the one thousand franchise systems currently operating in Australia start to consolidate and maximise their businesses in their domestic market, they will reach a point at which they have already opened more locations in that market than they will in the future. From that point they face slowing growth unless they develop a new strategy to continue to leverage the know-how and expertise they have created and refined. There is a growing trend towards international growth by Australian retail brands. Cotton On, RipCurl and Boost Juice are just a few of a growing number of Australian companies now operating stores overseas.
Future trends
Over the next five years, the franchise component of retail sales will grow at an annualised rate of at least 10 percent a year. There will be a substantial increase in the number of franchised owner operators, many of them moving to multi-unit ownership. Globally, many governments have introduced franchising legislation leading to better conduct in the franchising sector and there are only a few countries without a National Franchise Association.
Access to information is creating better decision making and franchise research sites such as www.dcsreport.com are fuelling this knowledge. There are more accountants and lawyers who understand domestic and international franchising and are better able to advise prospective franchisees.
This franchising education is diluting risk for both franchisees and franchisors.
Networks and brands will become more valuable as the number of franchised networks grow more slowly than the number of franchisees in those networks.
Franchising know-how will become a bigger element of retailing. The executive with specialist franchising know-how on his or her resume will be sought after as bigger businesses and public companies include business format franchising in their business models.
Franchising in the retail sector is healthy and the prospects for continued global growth look good.
* Aiyoh is the Asian slang term for exasperation and is similar in meaning to the Yiddish term, Oy Veh.