The mid-September 2019 edition of the FASA newsletter carried an article headed “Are franchisors undermining their franchisees with unreasonable demands?” It stated that franchisors place their franchisees into a precarious financial position by forcing them to carry out store revamps during these difficult economic times. There are of course franchisors who enforce contractual requirements without taking commercial realities into account. Fortunately for franchising, they are in the minority but the article in question ignored this.
To restore a balanced view on franchisor/ franchisee relations, Tony da Fonseca, MD of OBC Group (Pty) Ltd and immediate past chairman of FASA, drafted a response. It was published by FASA under the heading, “How store revamps can boost a franchise brand – setting the record straight.” For those of you who might have missed it, we print an extract below.
Tony da Fonseca wrote:
As a franchisor who takes his role seriously, I was slightly taken aback when reading an article that appeared in a recent edition of the FASA newsletter. Flighted under the heading, “Are franchisors undermining their franchisees with unreasonable demands?” it implies that franchisors force their franchisees to incur expenditure they can ill afford.
The obligation to undertake periodic store upgrades is given as an example, suggesting that some franchisors form alliances with landlords so that they can apply added pressure on their hapless franchisees. They do this although, due to the current economic slump, many franchisees find themselves in a precarious financial position.
Problems do exist. It would be naive of me to deny that instances of this nature do occur. Unscrupulous operators exist in every sector, so why should franchising be different? What concerns me is the overall tone of the article which could easily be interpreted as a warning to prospective entrepreneurs not to invest in a franchise.
I want to acknowledge that FASA’s chief reason for being is to promote the highest ethical standards in franchising. To expose errant franchisors forms part of this. I also believe, however, that the article has painted a somewhat one-sided picture that placed all franchisors in the same category.
The franchise sector remains sound. According to the latest research published by FASA, 865 franchisors operated over 45,000outlets, most of them franchised. The sector employed almost 370,000 people and achieved a credible R721 billion in sales, equal to 15.7% of South Africa’s GDP. The same research tells us that 36%
of franchisees have been representing their brands for more than 10 years and 72% said that they are very likely or extremely likely to invest in additional units of the same brand in the future.
What’s more, an overwhelming 84% of respondents rated the relationship with their franchisor as good or very good. These findings imply that overall, the situation cannot be as dire as the previously published article suggests. In my view, franchising continues to be the safest route towards small business ownership; rogue franchisors are the exception rather than the rule.
How it’s done by most
It’s not my intention to use this forum to promote my own franchise, but I can’t speak on behalf of other brands despite knowing many that also share the highest ethical approach to franchising. I also consider it useful to bring the above-quoted statistics to life. To achieve that, I will present two real-life examples of how we at OBC work with our franchisees.
Some years ago, our brand had become a little tired and a major store revamp was called for. We set the process in motion by remodelling our company-owned stores. This was done over an extended period, one store at a time. The lessons we learned during each revamp were applied to the next one until we were satisfied that we had developed a near-perfect store image.
Only then did we encourage our franchisees to follow our lead. Some franchisees were eager to implement the upgrade whilst others were initially reluctant to do so. We expected this and although our franchise agreement would have given us the right to insist on a revamp we opted for a different approach. Franchisees who had implemented the revamp recorded sustained increases in sales ranging from 25% to 50%, increasing the profitability of their stores significantly. We communicated these findings to those franchisees who had been taking a wait-and-see approach. We also encouraged them to talk to fellow franchisees that had done the upgrade and reaped the benefits.
In response, the upgrade programme was completed within a period of less than three years. Store upgrades continue to be a collaborative effort, the continued reputation of the franchise and those that invest in it being of utmost importance.
At times it’s a much-needed systems upgrade that is going to make the difference in the future success of that business unit. More recently, we realised that our business management system was in urgent need of an upgrade. We started the process by investigating what would suit our franchisees’ needs without breaking the bank.
Next, we tested the preferred option at our corporate stores. During the test period, we worked closely with the vendor to optimise the program further. Once we were satisfied that everything worked as it should we introduced the program to our franchisees. They were quick to see the benefits and welcomed it with open arms. The network-wide roll-out is a massive undertaking that puts stress on our IT department. However, more than half of our stores have been upgraded by now and we expect the process to be completed by mid-2020.
What are the lessons prospective entrepreneurs can take away from this?
- Theentirefranchisesectorshouldnotbe judged by the actions of an irresponsible few. As we know from FASA’s research, there are more than 800 franchisors out there. Most of them take their responsibilities as franchisors seriously and deal with their franchisees in an ethical and compassionate fashion.
- Investing in a franchise remains one of the safest routes to business success currently available. 3. Prospective franchisees would be well advised to undertake a proper due diligence exercise, seek professional advice and choose wisely before they invest their money.
It would exceed the framework of this article to give detailed advice on how to select a franchise.
Suffice it to say that prospects should:
- Choose an industry sector they can be passionate about;
- Select a franchise with a proven track record of delivering on the promises its representatives make;
- Ensure that they can comfortably support the required investment;
- Be prepared to embrace the culture of the franchise in the widest sense of the word as their own;
- Be willing to work hard, probably harder than they have ever worked before, towards making their businesses successful.
- FASA has a publication that provides detailed guidance on the do’s and don’ts of selecting a franchise. Visit FASA’s website to find out more.