Challenging Times Demand New Approach

The current operating environment is making life difficult for network businesses, franchised and otherwise, large and small. Reports from many public retail businesses (like Briscoes, The Warehouse, Pumpkin Patch and Restaurant Brands) reflect how decreased demand coupled with increased operating and borrowing costs, provide a deadly mix ultimately reducing margins and profits.

In fact, times were already difficult for many franchise systems – including some of the world’s best known. There have been a number of external factors already in affect franchisors have little control over that also contribute to the current challenging operating environment. Competition continues to intensify in many sectors and technology is constantly creating new opportunities and threats. In addition there are regulatory amendments to consider and, finally, customer tastes continue to provide an ever-moving target.

The environment is tough for many franchisee and franchisor businesses and, as for other types of businesses, unfortunately, the imminent outlook remains challenging and uncertain. Those franchisees and franchisors who have been in a position to recognise and capitalise on the good times that have passed, and built a buffer, will be better placed. Yet, uncertainty still exists over just when things will turnaround.

Frankly, for a number of franchise systems in New Zealand, the recent and current environment has clearly exposed weaknesses not just in basic business planning, strategy, systems and execution but also, more important in the context of franchising, fundamental weaknesses in their underlying franchise structure.

Weaknesses in franchise structure are crucial because regardless of business strategy poor structure can variously limit available opportunity, margin, efficiencies, and profits (and equitability) and therefore value. Importantly also, weaknesses in franchise structure often limit franchisors (and therefore franchisees) from implementing the types of initiatives and changes required to compete and build value effectively into the future.

Business priorities in a challenging market

For many franchise systems the immediate priority is managing working capital and, in particular, managing cash flow. For retail systems the current environment makes this task more complex. Managing inventory and staffing levels (and therefore costs) become crucial, yet more challenging given demand uncertainty in the short to medium term.

Recent initiatives by well-known local and international (mainly) franchise companies provide further insights into possibilities for improvements. A number of franchise companies have sought to recapture margins and profits by focusing efforts on reducing costs and improving efficiencies. This has been achieved through initiatives such as, renegotiating supply agreements, improving delivery times allowing reduced in-store stock, increasing coordinated purchases (across multiple stores), co-operating with other companies on purchasing, cooperating with other franchisees on production, and redesigning store fit outs, implementing labour saving equipment, and, addressing staffing levels and turnover.

At the same some companies have sought to differentiate themselves from the competition, and build stronger relationships with customers. Examples of initiatives include improving quality and brand compliance, introducing innovative products/menus, and, redefining and focusing more on brand [than actual product] values.

These are just a small number of the vast array of initiatives implemented by companies seeking to compete into the future.

Time to review the franchise stucture

The current environment is highlights the need to review franchise system structure. As identified earlier, weaknesses in franchise structure are fundamental because they provide a framework that underpins the business model. Regardless of the business model, if the franchise structure contains weaknesses, the franchise network will lack the resources, power and control to build and protect the brand, operate and compete effectively, and, ultimately, build value for the franchisor and franchisees.

The time has never been better for reviewing your overall franchise structure to identify what weaknesses and opportunities for improvement exist. The reasons for a review are several:

1. It is good practice. An independent review should really be undertaken on a 3 to 5 year cycle to ensure you have the right franchise structure going forward
2. Markets and other environmental factors change necessitating changes to business and franchise strategy and structure
3. Franchise system management knowledge, expertise and best practice is continually evolving, and/or
4. Some franchise systems were simply not created well, often times because the full range of franchise advisory specialists were not engaged at the time of franchising. As a consequence, many poor decisions have been made on aspects of franchise structure, and commonly structural aspects have been overlooked or forgotten.

So what should a comprehensive franchise structure review encompass?

This depends on the situation. But broadly, the review must take into consideration the business model, franchisee and franchisor performance, and the franchise infrastructure. The franchise infrastructure encompasses many elements ranging from structural decisions, restrictions, protocols, processes and tools, and cultural elements contained within recruitment systems and documents, the franchise agreement, franchise manuals and training systems, franchisee support tools and programmes and the franchise support office.

All these areas must be considered within the context of the business and where it needs to head in order to compete most effectively and maximize value for both franchisor and franchisee stakeholders.