Preparing your franchise for the pressure of January

Mark Hoppe | ANZ Managing Director | Atradius

Most franchises are similar to other retail outlets insofar as they can expect a spike in business in the lead up to Christmas, followed by big drop off in January, when most customers are still on holiday and are therefore not looking to engage their services or buy their goods. This creates a degree of pressure for franchises to generate significant additional income during the end-of-year period, to protect themselves against insolvency during the quiet period in the New Year.

Every January, there is a large increase in the number of insolvencies of franchisees who have failed to fully capitalise on that busy Christmas period; to give them enough of a buffer during the slow period that immediately follows it. Franchisees who forget to allow for late and  non-payment by customers and struggling to make sales after Christmas when consumer demand typically falls, can also find themselves in a pickle.

Christmas can be a difficult time for franchises. It can be a profitable period, but there are so many other demands on the customer wallet during that time that it is not a given that it will be a bumper period. Experience tells us that when franchisees need an exceptional seasonal sales period and then hit financial difficulty, we often see failures in the first quarter. It is not unusual in this sector to be loss-making during Q1 and, with the first payment of quarterly rent due in January, it can be difficult to survive after a poor Christmas period.

As franchisees approach the busiest time of the year, they should take a moment to think about what trading is going to be like in the lead up to Christmas, before rushing into increasing stock and staffing levels. This is an ideal time to review labour budgets and sales forecasts.

For example, with the continuing decline in consumer confidence, will the same levels of stock be required as in previous years? Having too little stock will result in loss of sales, but too much stock will necessitate heavier discounting post-Christmas. The franchise industry is under  enough pressure already. With a proportion of income generated by a franchisee to be paid to the parent company for marketing, commission and inventory, they should get ahead of the curve so they can avoid going out of business due to bad debt.

Recent franchise collapses, such as Pie Face and Eagle Boys, have highlighted how quickly franchises can become insolvent, and Christmas is a vulnerable time for this to happen.

Experts have already warned that these recent high-profile collapses may be just the start of a broader industry slowdown. The Australian Securities and Investment Commission’s September 2015 quarterly statistics revealed that insolvencies had increased by almost 10 per cent  compared to the previous quarter.

When consumers stop spending money, it’s a sign the economy is uncertain. Franchises may be vulnerable because it is a cost-intensive business. They must carry stock, maintain premises, and pay labour and marketing costs, amongst other overheads, so protecting cash flow is  essential. If, as expected, consumers spend less this Christmas, franchisees may feel the effects. It’s important that franchises seek ways to reduce their exposure to risk and decrease uncollectible account expenses in order to trade confidently. Buyers who cannot pay at the agreed time, or are unable to pay at all, can damage the organisation’s cash flow. This can cripple the business and damage relationships with other trading partners.

Credit insurance lets suppliers trade confidently, even when consumer demand falls and customers might struggle to meet payments, as it reduces suppliers’ exposure to risk and can significantly decrease uncollectible account expenses, regardless of whether it’s the customer’s fault  or not. It’s possible that tough times are ahead for franchises if the wider retail sector is anything to go by. These organisations should get ahead of the curve now so they can avoid going out of business due to bad debt. Securing their cash flow means franchises can innovate to stay ahead of the competition and remain viable even as the market tightens.

Atradius provides trade credit insurance, surety and collections services worldwide through a strategic presence in 50 countries. With access to credit information on 200 million companies worldwide, its credit insurance, bonding and collections products help protect companies throughout the world from payment risks associated with selling products and services on trade credit. Atradius forms part of Grupo Catalana Occidente (GCO.MC), one of the leading insurers in Spain and worldwide in credit insurance.

For more information contact:
02 9201 5222