By Eric Parker

Franchising in South Africa is way behind the rest of the world.  In the USA over 50% of retail sales go through a franchise whereas in South Africa it is only 12%.  The mentality amongst Corporate South Africa seems to be:

  • “We need to own it to control it”
  • Franchising only works in food

Franchises are actually well-controlled as very stringent control mechanisms are put in place to manage quality and standardisation McDonalds outlets around the world provide a good example of standardised service and quality in a franchise.

It does not help that franchising is virtually non-existent in the university syllabus in South Africa.  There is limited education on franchising at school and university level.

Evidence from practice show that an owner operator with “skin in the game” will outperform an employee by at least 30%.  Franchising is not the only mechanism that can be used to implement the owner operator mechanism, we have developed a number of joint venture systems to enable current good performing staff to acquire equity.  One such system is “Tandem Franchising” enabling staff to acquire equity in tranches over a well-defined period.

5 reasons a business fails to utilise franchising more

  1. They are aware of failures caused by unethical franchisors abusing the mechanism.
  2. They do not fully understand franchising and are reluctant to make the changes needed to implement a franchise system
  3. They are afraid of losing control.
  4. Middle management feel that if they have less staff reporting directly to them, it well de-value their position.
  5. In the past corporates had sufficient capital to roll out a branch network.  They believed branches were more profitable.  However, it takes a lot to beat the Return on Investment (ROI) generated by franchising, since expansion through franchising doesn’t require capital. Instead, you receive a positive capital injection in the form of an upfront fee.

The current downturn in the economy lends itself to franchising because:

  • On the one hand, we have highly competent people being retrenched, with a package, looking for good opportunities.
  • On the other hand, we have corporates looking at downsizing and closing marginal outlets.

Marginal outlets will become profitable as a franchise because:

  • They do not need to cover the high head office overhead costs
  • An owner operator will increase turnover and ultimately, profits by ± 30%.
  • An owner operator will work harder and increase customer satisfaction.
  • The corporate will really benefit because it will sell the outlet and generate capital and then receive a positive royalty contribution instead of a possible loss :

We believe all corporates should consider all methods of owner-operator mechanisms to optimise their business and we would welcome the opportunity to discuss this with you!