High growth, low risk
Article Date: Aug 23 2006
in association with Ernst & Young
Looking for high growth within your domestic market? Franchising provides a low-investment way ahead, says Ernst & Young’s Dan Murphy.
A successful franchising idea is one that can be delivered as a ‘cookie cutter’ model – one that’s easily packaged and replicated. Potential franchisees need to know what they’re buying and quickly learn how to make it work.
The decision on whether to franchise or not depends a lot on the personality of the business owner. The returns are much smaller but this is balanced by a much smaller risk. There is also no need to find cash for staffing, training, property and so forth. It’s also easier to control: once you get the model right, new outlets become a simple matter of sending out another copy of the rulebook. Even rapid expansion doesn’t dilute management’s focus. It’s much more predictable and the exit routes are much easier.
So the local model represents a low-cost model to growth. It’s ideal for entrepreneurs who would rather not focus on opening a national chain of shops but prefer to concentrate on other areas of the business, such as product development or sourcing.
But franchising won’t work in any environment. Pubs, for example, are notoriously difficult to franchise because of the high element of service involved. In an average retail environment, about 80 per cent of the customer’s perception of value – the ‘brand promise’ – comes from the product itself (including price) but only 20 per cent from the service. So you can still largely fulfil the brand promise even if the service isn’t all there.
In a hospitality business it’s the other way round, so it’s very easy to fail on the brand promise, which in turn impacts on the whole franchise. High-service models are also very dependent on individuals, so they’re not so easy to replicate. The franchise model generally breaks down in these environments.
International franchising involves different considerations to a domestic operation. It’s currently a very hot topic among large UK retail chains, who are seeking to compensate for flat demand at home by seeking new markets such as Eastern Europe and Asia. International franchising operates on a far larger scale: franchisees will often be big businesses in their own right, holding multiple franchise rights and owning considerable property portfolios. They are powerful enterprises and will own the delivery and the perception of your brand.
International franchising offers a relatively easy entrée into a new market. Local franchisees will already have extensive knowledge of the local language, business culture and employment conditions. They will also be equipped with finance teams who can handle the complexities of local regulations and taxes, VAT, customs duties and so on.
The key issue for an international franchiser to establish is the tolerance between a core range of centrally defined products and the need for local flexibility. Some companies are ruthlessly intolerant of any local deviations from the range: for example, it may be a key element in the brand promise that all products come from sustainable sources. It is sensible to allow for a certain amount local sourcing of products, subject to quality approval from the franchise’s own buyers and, where necessary, co-ordination with other items in the range. A clothing brand, for example, might find its own products don’t cover the extremes of climate in all its franchises. Some items might simply be culturally unacceptable, leaving gaps in the range that need to be sourced locally. Most franchises will allow some local sourcing but set an upper limit (such as 15 per cent of merchandise).
