For companies considering franchising, the decision to franchise can be a daunting one. We often liken this decision to choosing a mode of transportation. When choosing a vehicle to get from one place to the next, we first consider how far we need to go, how fast we have to get there and what obstacles are in our way. The closer we are to our goal, the more choices we have for transportation.
If your growth goal is just down the block, you could drive your car, ride a bicycle or walk. But if you’re trying to get to the moon, only a rocket ship will do.
But once the decision to franchise is made, the new franchisor faces some basic ‘design’ considerations. As most franchisors soon find out, franchising itself comes in many flavours.
Franchisors can expand aggressively with more risk and more expense – or they can expand more conservatively and with less risk and less expense.
Put simply, the question you need to address is, ‘Should you build a Corvette or a Volvo?’
1. Starting with the End in Mind: Goal-Oriented Planning
When counselling new franchisors on their development options, my first question is always the same: “Where do you want to be in five years?” It is vitally important to start with the end in mind.
But when asked about their growth plans, many new franchisors tell me their goal is to “grow as fast as possible,” and sometimes the more thoughtful among them will add, “as long as we maintain quality.” But they’re all, unfortunately, missing the point. Growth does not come without a cost. And faster growth comes at a greater cost. That cost is measured in rands, commitment, time and risk.
More important, success in franchising, like any other business endeavour, rarely comes about by accident. It is the result of carefully drawn out plans that start with goals systematically reduced to tactics. So we encourage our clients to be specific about their goals, and to design their tactics around achieving very specific objectives.
Let’s say, for example, that a new franchisor decided they wanted to sell their business in five years for R40 million. We would typically want to start by translating that goal into actionable tactics. As a first step in this particular case, we would divide that R40 million by an assumed selling price. If, for example, we believed the franchisor could sell the business for seven times earnings before interest and taxes, dividing that R40 million by seven would indicate the company needs to achieve an EBIT of approximately R5,6 million by the time they are ready to sell. In order to make this actionable, however, we need to determine how many franchises the franchisor needs to sell.
Going further, if the franchisor anticipates average unit volumes of R2 million we might then look at comparable franchisors and do some financial analysis to determine that this franchisor should charge a 6% royalty. If, after conducting our financial analysis, we determine this franchisor can then bring 35% to the bottom line, we could estimate that the net contribution per franchise might be about R40 000. Thus, to achieve their goal, this franchisor would need to open about 140 franchises in the next five years.
Of course, this is a gross over-simplification. It does not account for franchise fees, product sales or other sources of revenues, such as
profits from company-owned locations. And we have not determined the service and staffing needs required to make these franchisees successful. But it provides us with a starting point.
Assuming the franchisor wants to achieve the ‘hockey stick’ growth curve that leads to maximum valuation, this franchisor might attempt to sell 10 franchises in year one, 20 in year two, 30 in year three, 50 in year four, and 75 in year five (assuming not all the year five stores will open in year five). This ‘game plan’ can now be used to develop specific tactics designed to meet these goals.
Based on industry averages, this franchisor should now be able to calculate a specific budget for franchise marketing activities and know precisely whom he needs to hire and when he needs to hire them. In fact, every step of this process can be mapped out so the franchisor can develop a series of specific tactics and budgets to attain each year’s specific objectives.
But what if this franchisor does not have the resources to achieve the year-one plan? What then?
In that case, our budding franchisor has four basic choices:
- Revise his goal downward
- Extend his timeframe for achieving that goal
- Bring in outside capital (and simultaneously increase goals to offset equity dilution)
- Implement more aggressive franchise structures in order to accelerate growth
2. Strategies for Speeding Growth
One strategy that is increasingly favoured by new franchisors looking for accelerated growth is the use of alternative franchise structures. In most franchise systems, franchises are awarded for a single location. While the franchisee may later be granted the right to one or more additional locations, the process of continued growth is controlled solely by the franchisor.
3. Conversion Franchising
Closely related to a start-up franchise, some franchisors in highly fragmented markets choose conversion franchising as a means of accelerating growth. A conversion franchise is granted when a franchisor awards a franchise on different (usually preferable) terms than an individual franchise, based on the fact that the franchise prospect has an established business, established clientele and/or requires less training.
Franchisors who go the conversion route find their prospects are generally easily identified, reducing marketing costs substantially. And since these franchise prospects generally have established business relationships, they begin paying royalties sooner (and early royalties tend to be larger). Moreover, these franchisees require less in the way of training and initial support.
That said, conversion franchising presents some significant challenges. As entrepreneurs, conversion franchisees can be more difficult to control than start-up operators. And since the best operators are already successful, they tend to be difficult to convert, while the worst operators, who may be desperate to convert, still need to be avoided by the astute franchisor. Finally, post-term restrictive covenants (eg. incompete agreements) are more difficult to enforce if the conversion franchisee is operating within the franchisor’s industry prior to joining the franchise programme.
4. Development Franchising
Another structure used to accelerate growth is area development franchising. An area development franchise is similar to an option agreement in which the area developer is granted an exclusive option to open a pre-established number of franchises in a defined geographical territory according to a predefined opening schedule.
From the franchisor’s perspective, an area development strategy is often attractive, because it enables the franchisor to work more efficiently with a limited number of area developers in larger markets that would otherwise be dominated by multiple start-up franchisees. Area developers are often better capitalised than start-up franchisees, and more experienced in terms of business ownership.
On the negative side, however, a franchisor often assumes greater risk by awarding large markets to area developers in advance of their demonstrating to the franchisor that they will be strong operators and contributors within the franchise system.
Moreover, while area development contracts can be responsible for large numbers of franchise sales, the need for each area developer to open sites according to a development schedule that allows them some time between unit openings (combined with the fact that many area development contracts go unfulfilled), can mean the franchisor’s market penetration is, in fact, slower – not faster.
5. Area representative franchising
Lastly, some franchisors have adopted an area representative strategy to supercharge franchise sales and growth. Area representative franchising involves the grant of a territory in which the area representative is subsequently allowed to sell individual franchises. In essence, the sub-franchisee becomes a smaller version of the franchisor, selling franchises and providing a predetermined set of services (training, support, etc.) in return for a fee-splitting arrangement relative to franchise fees and royalties.
While providing the franchisor with the fastest form of growth, sub-franchising done improperly can lower the level of quality in a system (since a third party is involved in quality control) and is generally responsible for lower levels of profits on a per franchisee basis (because the sub-franchisee is a ‘middle man’ who requires additional ‘compensation’). Adding this extra layer between the franchisor and individual franchisee can also result in less control within the franchise system.
6. The Risk of Slow Growth
I typically encourage my clients to start conservatively. It is my belief that new franchisors are more likely to fail from over-aggressive expansion than from a more conservative approach. It’s much easier to expand more aggressively once a franchisor has established and proven its basic systems for supporting the initial group of franchised locations.
In my experience, the key to success in franchising is not franchise sales. Franchise sales are not the hard part. In fact, generally speaking, franchise sales are simply a function of franchise marketing.
The key to success in franchising is successful franchisees. If your early franchisees are successful, you are on your way. But if early franchises fail, it is almost impossible to recover. So while franchises can be sold as fast as we can line up qualified prospects, the real question to be addressed is whether or not we can adequately support this influx of franchisees.
That said, there are times when a company may judge the risk of aggressive growth to be less than the risk of losing its market leadership position. And when that is the case, there is an argument to be made for more aggressive growth strategies.
Growing A Successful Trappers Franchise Into A R300 Million Business
When Grant Ponting took over the Trappers franchise in 2003, he faced one overriding challenge: 16 franchisees who were used to doing things their own way. To build a strong, cohesive group geared for growth, he needed to win their trust and prove that business is better when you work together. Today, Trappers has 34 stores and a turnover of R300 million. Here’s how.
- Players: Grant Ponting (MD) and John Black (Head of Retail)
- Company: Trappers
- What they do: Lifestyle and outdoor retail franchise
- Turnover: R300 million
- Number of stores: 34
- Visit: www.trappers.co.za
Every business has strengths and weaknesses. Successful companies learn to recognise and mitigate their weaknesses, while building on their strengths.
When Grant Ponting and his brother Mark bought the Trappers franchise group in 2003, their first priority was to determine the business’s strengths and weaknesses, and what it would take to build a strong cohesive franchise group.
At the time, Trappers’ turnover was R25 million with 16 franchised stores. Today, it has 34 stores and a turnover of R300 million. Not only has the number of stores doubled, but average store turnover has quadrupled.
This didn’t happen overnight. It took careful planning, patience, building up trust and delivering on promises — and above all it required clear and focused goals.
Finding the strength in weaknesses
Both Grant and Mark were familiar with the Trappers brand before they invested in it. Having grown up in Nelspruit and attended university in Kwa-Zulu Natal, they knew the Pietermaritzburg and Nelspruit stores, and their owners. It was a strong brand that filled a niche in farming communities, but it didn’t have a retail footprint in larger South African cities.
“My family were consulting for the Nelspruit store,” explains Grant. “The business had three separate shareholders. The franchised stores were loosely affiliated, with no strong head office system guiding the brand’s strategy or overall positioning.
“We believed that the brand had legs, and that we could leverage its strong heritage and grow it beyond 16 stores through a franchise model,” he says. “We realised that we may lose stores who did not buy into our vision at the time, but we also knew that making these necessary changes at that time was critical for the business to grow.”
“One of the strengths of the brand was how well each store owner knew and engaged with their community,” says John Black, who bought shares in the business in 2011. “These were community stores run by entrepreneurially-minded people. But they were not used to being told what to do by a brand head office.
“All 16 stores operated independently. Our goal was to centralise the company, create a clear strategy and disseminate it to our franchisees, bringing all the benefits of a franchise with it, including economies of scale.”
Developing relationships with your franchisees
The idea seemed simple. The reality was not. “There was pushback,” says Grant. The store owners Grant and John were attempting to woo to their way of thinking hadn’t joined a fully formed franchise. “They were there because they were good entrepreneurs. We needed to use that, not fight it; that’s what had brought the brand to where it was, and we liked the brand. But we also knew that any real growth would only come if we were able to forge a strong, unified franchise business.”
The very thing that gave Trappers its strength was also the biggest barrier to its growth as a brand. “We knew we needed to win them over. They had to trust us if this was going to work. If we could harness their entrepreneurial spirit and also create a consistency in the brand and its offering, we’d build an incredibly strong business.”
Grant and John’s mission was simple: Find a way to create a balance that encouraged individual store owners to take guidance, input and leverage what head office put in place but still maintain their individual, entrepreneurial spirits, running competitively in their towns, understanding their markets, and responding to local needs.
“We lost a few at the beginning. Some because the model was never going to work for them. Others because we recommended they de-franchise their stores. We were too far away from them, and didn’t believe we could give them proper support while we were consolidating the business. It was in both of our best interests to part ways,” says Grant. “We also knew that those remaining would have our full support.”
They needed to convince their franchisees that their strategy and credibility would change each store owner’s business for the better.
“We started by providing them with exclusive product ranges via a head office-owned wholesale business, in addition to exclusive deals and product ranges in partnership with key suppliers to the group,” says John. Today, John heads up the retail operations of the business.
“As the business grew, the group was not only achieving better pricing, but opportunities to expand into exclusive ranges presented themselves more regularly, which in turn resulted in the development of a centralised merchandising and IT model,” explains Grant.
“We also needed to create a consistent marketing message. There had been no consistent strategy or brand identity. Everything was localised. While that’s good — you want strong, focused localised marketing — you also need a unified brand message. The key is to be consistent and centralised.”
As these started to improve, there were economies of scale, which brought with them cost savings, service enhancements, banking benefits and gift vouchers. “We could do cost-effective group SMS campaigns, packaging, staff uniforms — these are all costs that add up,” explains Grant. “They’re also small brand touchpoints that don’t massively shift brand experience alone, but together create a consistent and recognisable brand experience.”
“Once you get everyone swimming in the same direction, you enter a safe haven,” adds John. “There’s comfort and support that a franchise brings its members. As a group we are far more powerful together, which is critical in this economy.”
“In a competitive market, the more leadership we can provide, the better,” says Grant. “Retail 20 years ago was simple: You just had to be a good retailer. Now you need a social media expert, legal experts, marketing — all of these are specialised services. It’s tough for a single store operator. Then, if you bought well and delivered good customer service, you did well. Now, there are so many complexities. You might be a good retailer, but you’ll still have gaps. A strong head office can fill these, either internally or with service providers, and costs and learnings are shared.
“There’s a lot of information that can be shared between franchisees through workshops and conferences. We also play a key role when it comes to third parties — landlords and suppliers are more accommodating and trusting of a store that’s part of a group.”
Fostering trust and transparency in your value chain
Trappers’ success has been based on trust and transparency throughout the value chain. “In the beginning, we gave more than we took,” says Grant. “Sometimes this was to our detriment, but it empowered our franchisees. We wouldn’t be where we are today if we hadn’t. We couldn’t afford to lose franchisees, and so we took our time building their trust. We listened to them, and slowly put what we needed in place.
“We ended up compromising a lot, but it was necessary. As we proved ourselves and earned our franchisees’ trust, we were able to put more wide-reaching systems and processes in place, working with their knowledge of their communities and shoppers. Our compromises cemented a culture of working together. We’ve centralised the business, and costs and efficiencies are streamlined, but we’ve also got an empowered group of franchisees.”
According to Grant, if a franchisor is providing more than franchisees are paying the franchisor, you’re in a good position. “If it reverses, that’s incredibly short-sighted — especially if you’re trying to maximise something in the short-term, to the detriment of your future relationships with your franchisees.
“At the end of the day, we won our franchisees over with an increasingly trusting relationship; this has been the critical success factor in our relationship with our franchisees.”
Refocusing on what matters
Alongside the franchising growth strategy was a retail strategy. From the beginning, Grant focused on building franchisee trust while shifting from a wholesale to a retail model.
When the business was acquired in 2003, it had no head office-owned stores. Under Grant and John, this has grown to ten head office stores and 24 franchised stores.
When Mark exited the business in 2012, John’s role was to focus on the growth and management of the retail side of the business, having come from a major corporate retail background. “This has always been an important element of the strategy,” explains Grant. “Head office stores are necessary for scale. You need both. Corporate stores allow you to influence the overall direction of the business, experience what your franchisees are experiencing daily, and they are revenue generators.
Finding the balance when dealing with franchisees
“You also need to secure products at competitive prices, and for this you need scale. We needed to expand corporate store space to strengthen our buying power, which was essential when we were winning the trust of our franchisees and proving the benefits of a strong franchise model.”
But there’s a balance too. “In this, as in everything else, transparency is key,” says John. “We don’t dictate to our franchisees. We encourage them to test products within predetermined boundaries, and we do the same in our corporate stores. When they test a product that works they let us know, and vice versa. Not all tests are successful. Retail is a mix of art and science. We don’t want to do anything that negatively impacts all 34 stores, which is why tests are important. This is a benefit of a franchise system — you can learn from each other.”
True to the Trappers ethos, the brand follows a mixed system of autonomy and franchisor support. “It’s not a cookie-cutter template,” explains Grant. “What works in Joburg’s northern suburbs doesn’t necessarily work in Upington. We cater to local communities.”
Slowly but surely, Trappers developed into a strong, successful franchise group, but another hurdle loomed. “In the early 2000s retail in South Africa was easy,” says Grant. “Our focus was on building the franchise, but the retailing side was slightly easier. Loads of trends (like hand held GPS units and wearables) were taking hold at the time, and with a lack of focus our range assortments and the company’s reliance on a few very successful brands became a concern.”
And then the world changed. The 2008 recession reached local shores, impacting retailers. “Some of these trends slowed down or dried up completely, and we realised that we needed to refocus. We had to ask: What are we not doing, that we were doing ten years ago?
The importance of brand heritage
As a business, Trappers needed to refocus on its original and core customer profile, understanding that a brand’s heritage is often imperative to its success.
“We had followed trends and forgotten our customer base, which left us exposed,” says Grant. “You need to know who your customer is, and focus on that niche first.
“We don’t follow competitors. We focus instead on the true Trappers customer. That’s our north star. Who is our customer and what do they want? That’s the question at the heart of our retail strategy, and we ask it daily. Our core customers don’t change, but their needs do, and so it’s important to stay abreast of those changes and check in with them; listen to them.”
“This requires communication between us and the franchisees. “The more we share about our customers, the stronger we are as a brand.”
Where to next?
Trappers is currently in eight of the nine provinces. “We initially focused on areas close to our base, but once we strengthened the franchise and corporate store base, we branched out,” says Grant.
“We’re now looking to grow in the Eastern and Western Cape, and as far afield as Namibia. We’ve consolidated our base. The next phase is to continue to identify geographical and financially sensible pockets of our market that we are not currently located in and place either a franchise or a company owned store in these areas that best satisfy our core customer needs.”
Use strengths to your advantage
Every business has unique strengths — are you using yours? For Trappers, the entrepreneurial nature of its franchisees means store owners who really understand their local communities. Individual stores who cater to their communities isn’t the usual franchise model, but Trappers is making it work to their advantage.
Don’t lose your north star
Every brand needs a guiding principle and an ideal customer profile. If you lose sight of this, it’s easy for your products and services to stray away from your core. In today’s competitive environment, knowing your core is a key differentiator.
Compromises earn trust
Whether you’re working with clients, employees or franchisees, trust and transparency are the building blocks of a good relationship. Sometimes you have to give more than you get to build that trust, and prove that you’re willing to put the relationship and others needs ahead of your own.
How Strong Is Your Franchise’s Quality Control?
Your key objective as a franchisor is ensuring every one of your locations maintain the same quality standards. Why?
If you’re concerned about brand consistency as your footprint grows and you acquire more franchisees, listen up. While growth is good, keeping tabs on the quality franchisees are providing versus your company-owned locations’ efforts is difficult, but not impossible.
“McDonald’s is among the world’s most quality-oriented brands, but the value proposition and price point aren’t appropriate for steak and lobster,” says Mark Siebert CEO and Senior Franchise Consultant at iFranchise Group, an author of Franchise Your Business, The Guide to Employing the Greatest Growth Strategy Ever.
“There are, however, high-end franchise brands known for detailed attention to quality. Quality is not about what’s on the menu; it’s about consistency of the operation.”
Inconsistency ruins things
Many franchise brands risk failure by not establishing and maintaining quality for each outlet under the network’s guidelines. Regardless of whether a store is run by your company or a franchisee, if there’s glaring inconsistency in service and product quality between different locations, it’s likely to harm your brand’s reputation.
To establish the strength of your quality control standard, ask yourself the following questions:
1. Is your operational training procedure customisable?
Acquiring new franchisees is a chance to cement your training and quality processes and establish if these can be standardised, or if customisation is necessary.
“Training is equally as important as franchisee selection when it comes to maintaining the brand. The best franchisors routinely provide the most – and the most comprehensive – training to their franchisees,” says Siebert. “If standards aren’t rigorously enforced from day one, chances are these standards will continue to slip, and in the process, they’ll become more and more difficult to maintain.”
Because different locations present varying climates and market preferences, remember to customise your training materials based on respective franchisees’ markets, keeping in mind to remain consistent with your brand’s core identity.
2. Have you provided the right tools in the franchisee manual?
Duplicating your franchise’s success relies heavily on mapping out the roadmap for your franchisees and their employees to follow. The right tools will most likely yield the same results you have achieved.
“Documenting systems of operation lend a big hand in a quality control,” says Siebert. “A robust manual has multi-fold benefits and not only serves as a blueprint for operation, but as an ongoing piece of reference for even the most established franchisee, becoming the default go-to in most every scenario.”
3. Do you understand the role of supporting each franchisee?
Whether you choose to conduct on-site field visits, offer master classes like Nando’s, or check in via email or phone monthly, the ultimate goal should be aiming for higher-quality and more profitable franchisees through ongoing support and reinforcement of brand standards.
Quality control is all about commitment. For a good franchisee, that commitment comes naturally. For the franchisor, it comes at a price. But franchisors who are willing to pay that price will find their ability to build a quality brand greatly enhanced,” says Siebert.
Could Semi-Absentee Franchise Ownership Be For You?
Ready to become your own boss…for only 15 hours a week? Yes, you can become a franchisee while still clocking into work. Here’s how.
If you want to keep your current job while owning your own franchise, you may want to look into semi-absentee franchising.
“A semi-absentee model allows you to work on the franchise for ten to 15 hours per week while continuing full-time employment. Then when the time is right, you can exit your day job to focus entirely on your business,” explains Jim Judy, a consultant at Franchoice.
When you have a capable manager to oversee the daily operations of the business, you have the flexibility to work your full-time job and ownership of a fully-fledged business. But first, the following considerations need to be made:
How will the decision affect your finances?
While being a semi-absentee franchise owner may require less from you in terms of time, the financial commitment is the same as investing in a franchise as an owner-operator. The decision to become a semi-absentee franchisee should not be made before examining your needs, goals and expectations of the business. Asking yourself the following:
- Do I want to become a franchise empire builder?
- Would I like to build numerous concepts?
- How much capital do I have to invest?
Keep in mind that semi-absentee models may take longer to turn a stable profit if you’re not giving it your full attention due to spending less time working on the business.
“Semi-absentee business models are also expensive,” says Heather Rosen, president of FranNet of Virginia, a franchise advisory firm. “Because the owner must not only rent the space but hire a competent manager.”
Do you have the necessary skillset?
The key to managing a franchise while at you have a full-time corporate job is having impeccable people management skills. This is because having a manager run your business while you oversee them requires you to be comfortable with delegating and trusting that they will handle the day-to-day operations of your business.
In addition to people skills, you may think certain talents are required before calling yourself a business owner, but each franchise is different.
“Some franchisees find that the available training and the business concept allows them to use their particular talents and skills to enter semi-absentee franchising without management or business ownership experience,” say experts at Franchise Direct.
Can you balance your schedule adequately?
Even if your plan is to one day leave your job and become an owner-operator of your franchise, while you’re still on your employer’s payroll, you will need to work out ways to handle your nine-to-five tasks with your business’ success. This is an important aspect of choosing the kind of franchise to purchase. While most semi-franchisee suitable options are in retail or the service industry, ensure you’re able to keep track of the business remotely and can periodically check in on how things are going.
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