By Eric Parker

It has been widely reported that the world economy is in a recession. The overall consensus is that we will not see an improvement in the immediate future. So how will this affect franchising and how should franchisors adapt to these new circumstances not experienced to date?

Embrace change or else you will be left behind and may even fail to survive the recession. The big question is “What changes must I make to survive?” Here are our suggested changes that franchisors will need to make;

1. Perfect the concept

Make sure your concept is up-to-date and operating at optimum efficiency. You owe it to current and potential franchisees. Is your product offering still meeting the consumer’s ever increasing need for value? Is it relevant to changing times? For example, book stores are suffering due to the increasing popularity of e-readers and may have to add to their product range to retain customers and boost sales.

2. Be very careful in site and franchisee selection

You cannot afford to make mistakes. A poor franchisee in a poorly selected site will result in the business failing. In the past when the economy was more buoyant, marginal sites still yielded average returns. In the current economy, these sites will fail. It’s becoming more important to use scientific methods to select sites and franchisees, such as Geographic Information Systems (GIS) and psychometric assessments such as the Franchising Plus E test.

3. You may have to consider a merger to reduce costs

Many smaller franchisors should seriously consider mergers and acquisitions to share the franchisor costs e.g. head office infrastructure, site selection, store build, field service consultants etc. Franchised groups owning multiple brands such as Taste Holdings are reaping the rewards of economies of scale. Larger groups are also in a position to negotiate better deals with suppliers and landlords.

4. Franchisees will be impeded by high rentals

Don’t be tempted to allow a franchisee to sign a lease where the rental is out of line with the financial model. High rentals together with high escalations and increasing operational costs will put a franchisee out of business. It’s more important than ever to negotiate the best possible rate with landlords. Consider foregoing the landlord’s contribution to store build in favour of a lower rent. Taking into account annual escalations, this could have a marked effect on long term sustainability.

5. Request greater co-operation and involvement from suppliers

Suppliers are also having difficult times and will consider ways of assisting franchisees e.g. extended credit, rental of equipment, special out of season prices etc. You will be forced to reduce set-up costs. Now more than ever, franchisors should not profiteer from the set-up cost of new franchises. Not only is it contrary to the Consumer Protection Act as it pertains to franchising, it detracts from the economic sustainability of franchised outlets.

6. Explore creative ways of financing the franchisee

You will have to consider ways to help the franchisee self-finance if they have a lack of collateral or not enough unencumbered funds to obtain bank finance. The Franchisor will probably need to take greater risk by for example staggering the payment of upfront fees. However, this should only be done in exceptional cases where the franchisee is an extremely good candidate and a viable site is available.

7. New franchisees and ICU franchisees may require additional service from the Franchisor

You may need to consider disproportionate management service fees so that franchisees requiring additional help can pay higher fees and get additional help such as The ‘A Team’ to visit and assist franchisees that are in intensive care. If they are unable to afford these fees, consider applying their marketing contribution to additional localised marketing that may increase sales.

8. Increase marketing

In difficult times consumers will move towards tried and tested brands. You will have to ensure that you continue to build your brand and give consumers confidence. Never stop charging the monthly marketing contribution. It has been proven time and again that brands who stop marketing risk failure of the brand.

9. The importance of training

In order to compete in these difficult times franchisees will need to be trained in all aspects of the business e.g. financial management, customer care, local marketing etc. Franchisees also need training on cash flow management to ensure that they keep the business liquid. From a personal development view, franchisees may need coaching on resilience to survive these trying times.

10. Multi-unit franchisees

As marginal franchisees continue to battle, you will need to facilitate established, successful franchisees to take over the marginal stores. They will be able to save these outlets as stores with lower performances are subsidised by the more successful stores in their portfolio.

We welcome your input to the Franchisor of the future. One thing is certain, we will experience change. We are more than happy to meet you to discuss how you can change for the better.

Don’t put if off – it needs immediate action

Contact us by emailing or call 011 454 2235