Trends in Franchising
This article appears in the September/October 2013 issue of Business Franchise Australia & New Zealand
Change is a constant and franchise businesses are not exempt. The economic climate, global financial crunch, changes in legislation, competition, technology and taxation, amongst many other factors, can shape how franchises will operate in the future.
Successfully responding to change is critical to ensuring a franchise is sustainable, viable and profitable. Picking the trends on a timely basis is vital to maintaining a competitive advantage.
Astute franchisors navigate their businesses like a captain sails a yacht. They know where they are heading and are looking for favourable wind shifts to get there, tacking and trimming the sails to get maximum performance. Early identification of wind shifts and capitalising on them can be the difference between leading or being left behind. Team work can also be a defining factor - successful execution of strategies is often down to how well the franchisees work with the franchisor. Creating high performing teams within a franchise network can be the difference between a market leading franchise and a follower.
Whilst different industries are impacted in different ways there are some emerging trends facing franchisors today. These trends are based on our observations of clients we work with on a consulting basis.
Worldwide Credit Crunch
The ripples from the 2008 world wide credit crunch continue to have significant bearing on the economy. Things seem more fragile with the latest rounds of bail outs in the EU preventing a financial domino effect. The economic contraction has seen increased competition for the customer’s dollar, fighting to maintain market share of a smaller pie. This is evident in almost all industry sectors from food and beverage to retail sectors. This has seen trends towards deep cut discounting and corresponding reduced margins. This has conditioned customers to expect 30 per cent off margins as normal and to wait for regular promotions.
With some sectors having a 10-20 per cent contraction, this has seen highly geared franchise businesses collapse. This has contributed to franchise business default rates increasing in some cases. It has also impacted on recruiting franchisee’s with
sufficient capital to purchase a franchise.
Internet Based Trading
The trend towards internet based sales has been increasing. This low cost business model has seen pressure being put on landlords to adjust rents or face empty premises. This competition has seen franchises increase focus on retaining their
existing customer base by building brand loyalty using programs with added value incentives. Accordingly, franchisors have had to accommodate this trend by building a hybrid internet model blending into the existing franchise model.
Franchise Sales, Re-sales & Recruitment
The knock on effect from this is that due diligence for purchasing franchise businesses is taking longer with new franchisees proceeding with caution. Mirroring this is the price paid for existing franchise businesses. Franchise owners have seen a contraction of the earnings multiplier being applied for franchise businesses. So overall there has been a slowing in new franchisee sales. To counter this there has been a trend from many franchisors to increase their franchise size by offering existing
franchisees the opportunity to become multi site owners. This has worked with various degrees of success. The transition from working in your franchise to working on your franchises has seen mixed results. It has seen pressure put on franchisors to
upgrade systems and up-skill franchisees to make this change.
Securing Franchise Finance
Accordingly banks focus more on cash flow projections and are taking a more conservative lending policy. This is evident with new franchise systems which do not have critical mass or a proven track record. Franchisors of new or emerging franchise
systems have been required to profile franchisees with strong asset backed lending to secure finance, whereas proven mature systems can secure cash flow lending finance.
Reformatting Franchise Business Models
Accordingly the pressure on franchise owners to tune their business model to viable and profitable has seen a trend for some franchise owners to buy back franchises and operate them as company owned and managed stores to bolster cash-flows. In
some cases, where the business model is no longer competitive, this has seen the retrenchment of some franchise systems.
This has resulted in some franchisors reformatting the franchise model to maintain a competitive advantage.
Improved Financial Management
The pressure on franchise businesses to perform and provide satisfactory returns has seen trends in franchisors seeking to provide improved benchmarking systems to work with the franchise owners to drive KPI’s. This has seen franchise systems lose the frills and focus on doing the basics well. Building business dashboards for franchise systems is an emerging trend. This has been made possible by using web based technology which enables franchisors to deliver low cost real time accurate information that focuses on the main drivers in the business. This in turn provides tools to improve the profit generation of the franchise. The power of the franchise network can be leveraged with peer to peer comparison versus an independent business owner.
Web Based Application
Franchise support team members are now being armed with iPad tablets. The webbased applications are being used for various applications such as compliance of processes and procedures.
The trend towards web-based applications allows franchisors to deploy software solutions quickly and cost effectively. For example no hardware requirements except an internet connection and email address, software updated in one place so everyone is using the same system, online back-ups of data allowing data security and integrity.
Natural disasters such as floods, power spikes, hardware failures that cause business disruption are things of the past. There is a trend towards subscription based software, away from large upfront costs to purchase the software.
There is a greater focus on measuring customer experience. Reaching and retaining customers has seen increased surveying and building touch points. The trend towards using social media to interact with the client base has seen a transformation on how franchise businesses connect with customers. We are in a Facebook and Twitter generation with customers becoming product evangelists and followers or fans of a franchise brand. Those franchise businesses that have adopted this strategy have retooled how they interact with customers to build brand loyalty by providing added value to customers. There has been a shift from using the traditional printed media sources of advertising to online advertising. In particular to channelling more of the marketing spend directly to clients in the form of coupons, vouchers and price offs.
Smart Phone Apps
Franchisors are now placing more importance on building and profiling their client databases. Increased analysis of customer buying patterns has seen more targeted marketing initiatives, such as the need to capture mobile numbers and providing targeted campaigns to reach customers through the use of SMS/text campaigns and smart phones for redeeming coupons. This, along with the use of email addresses, has seen franchisors looking to cut through the bombardment of traditional sales and marketing methods. There has been an emerging trend of targeted personalised sales strategies hitting your smart phone - offering buy now advertising for loyal customers. There is a growing trend towards utilising social media to reach customers via platforms like Facebook and Twitter.
Legislation Creep & Litigation
There are increased layers of compliance costs with each new tax ruling the ATO or IRD pass. Whilst in New Zealand there is no franchise legislation, there is in Australia with both federal and state legislation to comply with. This legislative creep places more and more costs onto the franchisor.
Another consequence of tightening economic times is a corresponding increase in franchisee/franchisor litigation. Underperforming sites, breaching, turf wars, the use of internet based sales channels and the impact on existing franchises are becoming more commonplace. There has been a trend to establishing Franchise Advisory Councils (FACs). This allows franchisees to have a voice and be heard and provides a channel of communication between franchisors and franchisees. Where this has been successfully employed we see group pressure from franchise owners bringing rogue franchisees into line and autocratic franchisors becoming more collaborative in their leadership style.
One bad apple can spoil the barrow of apples. Protecting the investment of franchise owners as a whole has seen a continued trend of enforcement of compliance by issuing breach notices and in some cases revoking franchise licenses.
The trend towards reinvesting in the brand has been evidenced by a large number of franchisors refreshing their franchise brand. We have seen mature brands that have had nothing done to them for a decade re-position themselves by re-imaging. The importance of brand management from top down has taken on increased importance.
Back to the Future
Change is something we all deal with. How we adapt to the challenge of change is question. Are we leaders or followers in our franchise businesses? The well documented illustration of industry leaders who failed to pick the trends in the business they dominated were the early railway barons. They had not recognised the business they were in. They thought they were in the business of railways not transportation. History tells us how they lost their market to other modes of transportation and are no longer the force they were.
Knowing what business you are in and maintaining a competitive advantage within a franchise network is as vital as it ever was.
So in summary looking into the future, what are the emerging and growing trends that franchisors will need to work through? Here are some of the things I see:
• More collaboration between franchisor and franchisees – communication, feed forward, a culture of we not just me.
• Strategic investment in maintaining competitive advantage – technology, fit outs.
• Reinvestment in brand management – refreshing image and re-positioning.
• Increased spend on social media to retain and attract customers.
• Leveraging technology to gain competitive edge, reach and target customers.
The challenges of picking the trends in a changing market place remain unchanged. The pace of change remains relentless. Identifying the strategic shifts and responding to these will often fall and rise on the leadership of you, the franchisor.
Philip Morrison is the Director of Franchise Accountants. With over 25 years of accounting, business and financial management experience, his passion is to empower people to succeed in their franchise business.
Franchise Accountants are the only chartered accounting practice in New Zealand that exclusively focuses on the franchising industry, and provides both accounting and consulting services.