This important topic was debated by a panel made up of leading property developers and franchisors and was, to the best of our knowledge, the first such forum ever presented in South Africa.
Landlords were represented by:
- Hildegarde Riphagen, Divisional Director, Retail Leasing: Zenprop Property Holdings.
- Louis van der Walt, Group CEO: Atterbury Property Holdings
- Jeff Zidel, Chairman: Fortress Income Fund Ltd
Franchisors were represented by:
- Wilma Lombard-Maree, Development Director: McDonald’s South Africa.
- Carlo Gonzaga, CEO: Taste Holdings
So close yet so far apart
On the upside, members of the panel were in agreement that the two sides need each other. They see the relationship between the franchisor, the franchisee and the landlord as a triangle, with each partner having a role to play. Unfortunately, they differ sharply when it comes to defining these responsibilities.
On franchisee involvement
Landlords feel that in far too many instances, franchisees are not properly prepared for their role as business owners. They neither have a meaningful business plan nor have they done their homework regarding the real potential of the local market for their product or service.
Some of these hopefuls even lack the most rudimentary understanding of basic issues like gross profit margins, break-even point or how much they can afford to pay as rental. When they get into financial difficulties, they expect the landlord to help them revive their failing businesses. This is not the landlord’s role – landlords cannot and will not play godfather to failing businesses.
On franchisor involvement
Many concepts have lost their glitter. Branding aside, they are more or less identical and do no longer attract feet through the centre’s doors. As one panel member put it, “a small operator with a good concept and a passion for its implementation is more attractive to me than a multi-brand concern where excitement is lacking.”
Other concepts are simply not franchiseable but it isn’t the landlord’s responsibility to determine that. Rather, the franchisor should determine that.
Overall, landlords feel that franchisors are neither sufficiently involved with their franchisees’ businesses nor do they care enough about sustainability and financial viability. They accept individuals as franchisees who do not have what it takes to become successful then fail to give them meaningful assistance. And when a franchisee experiences financial difficulties, the franchisor expects the landlord to reduce the rental but is not prepared to waive royalty payments.
Another issue of concern to landlords is that franchisors fail to communicate with the landlord concerned if they become aware that a franchisee is struggling. This allows the franchisee to continue trading for a few more months during which period rental and utility bills remain unpaid. The landlord has to settle the utility bill which, especially in case of a fast food operation, can be high.
On the positive side, the panel singled out McDonald’s as a shining example of a franchisor who is a model tenant. The company signs the head lease and sub-lets to its franchisees. This means that the franchisor carries full responsibility for rental and utility payments. A panel member representing franchisors added that because in his sector, good operators are in short supply, his company is increasingly moving towards joint ventures, thus accepting responsibility for each units financial obligations.
From where franchisors sit, it appears that landlords are ruthless. As long as the collateral they hold is sufficient to shield them from financial losses, they do not seem to care about the viability of a tenant’s business. To them, this manifests itself in various ways. Examples are:
- Over-saturation of one trading venue with identical or very similar concepts;
- The forced move of a store to an inferior trading location;
- Continuing to charge full rentals during periods when renovations are in progress;
- Unwillingness to reduce rentals when a business is struggling;
- Insufficient promotional activities to drive feet to the centre.
The members of the panel agreed that the discussion was a step in the right direction and long overdue. Consensus was also reached that franchisors and their respective brands’ landlords should interact more closely in future. This could take the form of periodic meetings during which issues of mutual concern are discussed and win/win outcomes explored. Laudable intentions – here’s hoping that implementation follows.
ãKurt Illetschko 2013. Published with permission.