The Elephant in The Room
Lots of media about Franchising and rogue Franchisers lately. The sector has been kicked from pillar to post with all the examples shown in the media correct and horrific. How did we get there?
There are three (3) layers of Franchising in Retail and the Elephant in the room.
- Good Franchise systems
- Once Good Franchise systems
- Marginal Franchise systems
- The Elephant
A Franchise system is essentially a system that is a great brand and proven business model that allows partners to levy off the platform created by its originator. It diminishes risk and provides for collective growth. The fact that it can work goes without saying, many people from Franchisors to Franchisees have made lots of money over many years using the system. Why is the Industry getting a spanking in the media now? Let’s start from the bottom and work our way up and finish on a positive note.
Marginal Franchise systems – I am constantly amazed at how many people I’ve met in retail who start one business and even before they understand it, they think ‘I will Franchise this and make lots of money’. This usually results in disaster for all involved. When a founder does not develop the business and create a solid system that makes it almost fool proof it cannot be replicated. There have been and still are some inferior systems out there that have an offer so narrow it cannot be sustained. We have seen systems based on popcorn, yoghurt, cupcakes, jerky, first aid kits, Japanese tarts etc. When the offer is so narrow it’s a fad.
Once Good Franchise Systems – Lets use some of the RFG Brands, they all had good histories and were solid systems, what happened? Simply put the owners stopped being Retailers supporting their Franchise partners. They became investment managers wringing as much return out of each brand without any consideration for their Retail Partners. Product suffered, education suffered, service suffered and the first people to lose out are the poor Franchisees who are at the bottom of the food chain. Donut King, Michel’s, Crust etc were once great brands and business, they just don’t become crap. They do become crap when the parent company acquires them for the sake of numbers only, no other plan. Expertise across the very different businesses dilutes, culture evaporates and then the business sinks.
Good Franchise Systems – I have had the privilege to work with and continue to work with some reliable Franchisee systems. When they maintain their core values and continue to invest in their business and their Franchise partners, I see wealth created. At the risk of sounding biased I won’t name them, they continue to be working partners and the success of continued stores openings in a market distracted by doom and gloom is refreshing.
The Elephant in the room – Typically predatory Shopping Centres. When some of the poor Franchisees we have seen on TV lately are in a tough neglected Franchise system to start with, the double whammy comes from the shopping centre industry. In many cases you will have a struggling Franchisee paying a rent that is already unsustainable. Then comes the lease renewal with an absurd rent increase. The leasing Agent knows the Franchisee is struggling, the centre has the sales figures and, in some cases, it’s not the centre’s fault. It’s a marginal Franchise system losing market share every year. The Franchisee has no voice to the new rent negotiation, the Franchisor employs some person who is expected to be an expert on leasing and is usually not. The Franchiser in a crap system only wants the Franchise fees and the business unit to operate. They don’t really care about the debt the Franchisee is carrying or the fact that logic suggests this business will crash and burn within a year or two. The Leasing Agent also has a job to do, get as much rent return as possible and not worry about the what is probably going to happen down the track. The Franchisee is so far in debt and can make no objective decision. Like a losing player at a Casino they accept the new lease with the new rent increase and wait for Black Jack. Surely somebody will buy their business and somehow fix their deepening financial woes. The spiral continues and unfortunately people lose businesses, lose houses and lose families.
The Elephant in the Room is that it’s is a collective problem within the Retail Industry and the result of the bad outcomes are the systems we have discussed.
Written by Ange Kondos