Jim Forward and Christina Fulop explore the complexities of franchising with the help of companies well-placed to observe its merits.
There are two divergent tendencies in business management. One pulls towards centralisation and control, the other heaves away steadily in the direction of decentralisation.The latter lays stress on motivation, enterprise and initiative. It favours empowerment. At first glance franchising belongs firmly in the latter category. However, the control aspects can never be ignored, and the looser the form of organisation - as in a franchise network - the more important these become. A uniform standard of service and a consistent public image are central to the whole concept of franchising and must be maintained at all costs, right across the network.
Of course you don't have to run a franchise to be neglectful of standards and public image. The difference is that failure to get the details of a franchised operation right not only hurts the company at the centre of things (the franchisor), its members and employees, but inflicts severe, and possibly crippling, damage on every single one of the franchisees, who may well have invested substantially in their businesses. The franchisor therefore bears a heavy additional responsibility, especially as a franchise is essentially a partnership - an unequal one, maybe, but a partnership nonetheless. Inability to appreciate the complexities of this relationship has been the undoing of more than one franchised operation.
Learning to cope with these complexities is the name of the game. But the "industry" could hardly have expanded at the rate it has had a large number of managements not mastered these skills. Since franchising first appeared in Britain (at least in its present form) in the mid-1950s, the combined turnover of franchise activities has grown to an estimated £4.8 billion, according to the latest (1991) survey by NatWest and the British Franchise Association. The same survey suggests that the number of franchised outlets increased by an annual average of 15% during the seven years to 1991. Towards a Single Market in Distribution, published by the European Commission, predicts that over the next few years franchise networks will represent a constantly increasing proportion of total business in the retail and service sectors.
The ability of franchising to support rapid growth is one of its most telling characteristics. Normally the franchisee provides the bulk of the capital investment at each outlet, which allows the franchisor to build up a substantial network at a far lower capital cost than would be needed to create a company-owned chain of similar size. Hence, of course, the attraction of franchising to thrusting young companies. You only have to look at the example of Anita Roddick and The Body Shop to realise the kind of growth that can be achieved via franchising.
There is no reason, however, why the franchise option should be confined to businesses in - or just out of - their infancy. Indeed, the last few years have seen a fair number of large and well established companies entering the field. These mature organisations are particularly well placed to consider the merits of franchising, as against alternative policies, and 13 of them have contributed to a study conducted by the NatWest Centre for Franchise Research at City University Business School (Large Firms and Franchising, available from City University Business School, price £25).
Naturally, the potential for sharing capital costs did not go unnoticed even by a group as well established as Pentos, which is involved in franchising through both Rymans, the stationers, and the Athena card and poster shops. At Circle K, the Hampshire-based convenience store chain, the importance of cost-sharing is bracketed with the ability to add new outlets at a satisfactory rate. Circle K's management knew it had a good business that could be spread across the country, claims executive director David Ellis-Jones. But franchising is helping the company to realise that potential.
All the businesses covered by the survey emphasise that franchising should never be regarded simply as a low-cost option. Chris Swan, chairman and MD of Autela Components, warns that prospective franchisors should always be careful not to underestimate the time and resources needed to set up a franchised operation - and demand on those resources doesn't stop once the network is up and running. It is one of the fundamentals of successful franchising that the franchisor must support the franchisee throughout the life of their relationship.
That support may encompass many different aspects of the operation: assistance provided by the franchisor's field staff, the laying on of training programmes for franchisees, product development, the updating of manuals, and so on. Certainly, as Peter Lowe, franchise and development director of Swinton Insurance, observes, "The real cost of supporting a franchise network should not be underestimated". If the support does not measure up to the expectations of franchisees, then serious conflicts are likely to arise between the parties.
Company outlets - which are owned by the franchisor and staffed by his or her direct employees - often represent an important aspect of the support given to franchisees. They act as test-beds for both new products and business systems, as a training facility for franchisees (as well as for the franchisor's own staff), and as a means of monitoring the market place. "We need probably 50% company-owned," comments one senior manager. "If you don't run it yourself you don't know what you're doing. You cannot do that, in our view, with five or six stores only."
However, pursuit of rapid expansion is almost always a high risk strategy at the best of times. When combined with franchising it holds special dangers. First and most obviously, a drive for growth may lead a company into errors over the selection of franchisees. Several of the franchisors interviewed for the survey report that it was their earliest franchisees who experienced most difficulties, and with whom they were most likely to have conflicts. Some managements admit that they were too eager, in the early stages, to recoup the initial outlay.
Naturally, getting the right person running each outlet is fundamental to successful franchising. Proponents of franchising argue not only that it offers an opportunity of rapid expansion for limited capital outlay, but also that it increases the chances of the outlets being operated well. After all, the franchisee has a stake in the business. The fact that his own money is invested in his outlet should make him highly motivated and committed to its success.
One of the basic reasons for taking on franchisees, argues Peter Maynard, formerly franchise manager of the Late Late Supershop network, is that they are best able to match the commitment shown by ethnic minority owners of competing convenience stores. Gary Anderton, franchise manager at Shell UK, maintains that motivation is the key to the level of service provided by Shell franchisees. Shell was at one time concerned about the variability of service standards at its outlets. Franchising is said to have been an effective solution.
Shell was one of the two companies covered by the survey - the other was Autela Components - to have converted licence arrangements into franchise agreements, in many cases turning the sitting licensee into a franchisee. Both organisations report that the individuals who made this switch are, almost without exception, operating their outlets more professionally than under the earlier regime. Some franchisors maintain that franchising promotes not only commitment but quality. At AlphaGraphics, a chain of print shops owned by GA Pindar of Scarborough, it's argued that the very existence of franchisees brings the company "a tremendous width of knowledge that you probably would not get if you trained in-house and put managers in."
Elsewhere quality needs are highly specific. The insurance company, Swinton, (in which Sun Alliance has a big stake) requires people whose background and training have been in that industry. Some years ago, wanting to expand nationally, it found itself unable to attract a sufficient number of qualified personnel to run company-owned outlets. Franchising helped to overcome this problem, since the franchise package confers certain benefits - such as being one's own boss, and the opportunity to acquire assets. On the other hand, it has been suggested that there are dangers in taking on talented people as franchisees. They are more likely to press their own ideas against those of the franchisor. Since the franchisee's business is legally separate from that of the franchisor, the latter has limited scope for issuing commands.
Several of the franchisors taking part in the study were actually involved in legal battles with their franchisees. Almost all of them had some experience of conflict within the network. Nevertheless, only one of the 13 companies considered lack of control to be a problem. The rest regarded minor conflict as an acceptable part of doing business. Some franchisors, indeed, regard conflict as necessary to success. Ellis-Jones of Circle K believes that, "If you don't have franchisees, you (the franchisor) can become extremely complacent. You can mislead yourself into thinking that everything out there is fine because nobody is complaining. A franchisee tells you quickly what the problems are, and forces you to take them seriously."
Despite the occasional hazards, the companies taking part in the study remain overwhelmingly committed to franchising as a mode of operation. Only one senior manager considered that it had not worked out well for his company. Three of the 13 organisations are currently developing franchise operations in other areas of their business activities. Eight of them are either thinking seriously about using franchising to spearhead their entry into markets of Continental Europe - or have already done just that.
For reprints of this article, contact Anne Oakley (071) 413 4336.