UK: Franchise nation.

UK: Franchise nation. - 'You're in business for yourself but not by yourself' is the favoured franchising slogan. That is why 275,000 people are joining the crusade. But is it all too good to be true?

by Matthew Gwyther.
Last Updated: 31 Aug 2010

'You're in business for yourself but not by yourself' is the favoured franchising slogan. That is why 275,000 people are joining the crusade. But is it all too good to be true?

For someone who has just spent all morning in Weybridge up to his ankles in heavy-metal contaminated mud, Richard Seeckts seems a reasonably happy individual. Seeckts, 32, is a StumpBuster. With his purpose-built, diesel-powered stump-grinding machine loaded on to a trailer behind his four-wheel drive, he travels the length and breadth of Hampshire and West Sussex grinding up old and unwanted tree stumps.

Oaks, poplars, beech, pine, even chewy and stringy willows - which rapidly blunt the tungsten-coated teeth of his grinding wheel - he will shred them all to mulch chips at a rate of £1.50 for each inch of the stump's diameter, and he'll sweep up the mess afterwards.

Seeckts is a franchisee and a perfect example of the fast-growing world of franchising in the UK. He's now grinding stumps because, in characteristic franchisee fashion, he was fed up with his existing job and wanted something completely different. 'Two years ago I was in shipping containers,' he says. 'I lived in a two-up, two-down in Earlsfield and had to undergo the hell of the Northern Line (the worst of London Underground's arteries) every day. I took redundancy and did what most people do - attended the franchise shows to have a look at what was on offer. I was open to ideas, but frankly the vast majority were pretty unattractive businesses. I didn't, for example, want to supervise will writing for the rest of my life. Neither did I want to get into colossal debt by paying a huge entry fee or taking on large retail premises.'

He ended up in the big outdoors of Sussex having taken up with Alastair Broom of the Maidenhead-based StumpBusters. Broom is an ex-Hamptons estate agent who also gave up desk-bound life for a 'breath of fresh air'. After hearing of the machines from a friend who had seen them in the US, Broom ground away on his own for a couple of years before deciding to franchise out the idea.

The package offered by StumpBusters works as follows. Each franchisee comes up with £19,000 as an entry fee. That buys the machine and the trailer.

An annual fee of £2,600 is paid for a Yellow Pages listing, a joint 0800 number and ongoing support with training and marketing. Broom does not take a percentage of turnover, as is common with other franchisors.

StumpBusters now has 21 franchisees and about 19 areas remaining across the country before it is deemed 'mature', or full. Only around 15% of British tree surgeons have their own grinding machine, so although business growth is normally slow to build up, the action is out there for those with some initiative. It is not yet big enough to have made Broom a rich man so he still goes out grinding himself to keep his eye in, and he has already started another franchised business selling fresh filled baguettes in Maidenhead.

Whether it's grinding stumps, selling women's clothes through the Kookai fashion chain, grilling McDonald's hamburgers, running cheque-cashing pawnbrokers, or even driving around to caterers to filter the cooking oil used in deep fryers, there is no arguing that franchising as a method of doing business has expanded vastly in the UK over the past 10 years. The British Franchise Association (BFA) is as vigorously evangelical about its subject as one would expect and has employed the pugnacious Sir Bernard Ingham, former press spokesman for Margaret Thatcher, as its president.

The BFA claims that franchising, by any measure a multi-billion pound activity, now accounts for 20% of all retail trade in Britain, employs around 275,000 people with 92% of the outlets trading profitably. There have even been suggestions from the US that independent small businesses are five times as likely to go bust as franchised outlets.

It is not difficult to see why it has caught on: shared risk. If an entrepreneur has a good idea and wants to expand an injection of capital is needed.

Few, however, are going to be thrilled about handing over equity to other investors or getting in hock big-time to the banks. Getting others to buy into the idea by renting sectors in which to operate the scheme looks like a win-win situation compared with putting your house up to secure a bank loan.

From a franchisee's point of view the best systems offer entry into a ready-proved formula. Many want 'to be their own boss' albeit within an existing commercial family with the benefits and restrictions on behaviour that this implies. (Moving in on another franchisee's patch and poaching their customers is indeed a cardinal sin on a par with venturing into your sister's bedroom to borrow her yo-yo without asking.) One of the favoured franchise slogans is, 'You are in business for yourself but not by yourself'. Banks look on franchised ideas more kindly than stand-alone start-ups with no track record, so most of those on the high street will lend up to 70% of the initial costs.

So it's clearly on the up-and-up, but franchising is not in itself an industry, it's a business system. There is nothing intrinsically homogeneous about repairing car bonnets chipped by stones and setting up dining clubs for singles. And it's a system which has now started to attract some rather more sceptical attention.

Stuart Price is a brewing and restaurant analyst at Credit Suisse First Boston and the author of a weighty, but highly authoritative, 614-page book called The Franchise Paradox. No one thinking of getting into franchising should be without it, although some of his more arcane mathematical equations might stretch even the most numerate. 'I went to a franchise exhibition last April and started to point out a few things and was on the receiving end of a very rough time,' says Price. 'One of the big problems is that franchising is perceived as self-employment, but it's no such thing. What it is is renting a name and system from a parent company.' He got right up the noses of many by pointing out that franchising has its origins in feudalism with all the master-serf connotations which that implies.

The paradox referred to in the title of Price's book is a vital one.

Franchising is about uniformity and conforming to a rigid, repeatable pattern of doing things, whereas continued success in competitive markets is dependent on innovation and responding to change. The McDonald's franchisee who unilaterally experiments with the composition of a Big Mac is heading for serious trouble from head office. The whole point is that a Big Mac remains absolutely the same in Wigan and Watford. That is precisely why customers trust McDonald's in the first place - they know what they are in for and don't want any odd or even nasty surprises. (That is not to say that franchisees do not come up with new ideas that become accepted across the network - the Filet O' Fish, for example, came to a McDonald's franchisee in a dream.)

'I think in among all the never-ending success rhetoric an awful lot of bullshit gets wheeled out,' says Price. His own research suggested that rather than a 1:5 ratio of success compared with stand-alone start-ups, during the first four years franchised operations were more likely to fail than conventional small businesses. It's not that he's down on it as a system, just that he has the analyst's in-built suspicion of something that looks too good to be true.

And there have been nightmares. Notable franchise failures include: Athena poster shops, the three-courses-for-a-fiver Pierre Victoire restaurant chain, Barlow Clowes, and The Tanning Shop, which went into receivership in March of this year with debts of £6 million only to be bought back by its managers from the joint receiver.

All came a cropper for different reasons, but when things go wrong a trail of highly disgruntled franchisees is commonly left in the wake, many of whom will have staked large proportions of their savings in the enterprise.

Franchises are often the franchisee's nest egg to be broken into when he or she wishes to retire.

What is clear is that nobody should ever go into franchising without doing considerable research on the business. This would include talking to large numbers of existing franchisees in that business and getting an experienced lawyer. 'Average', 'typical' or even 'projected' earnings figures are no good as a guide - the horse's mouth of the franchisee is the best source of hard facts. This is advice fully endorsed by the BFA.

Of an estimated 570 franchise operations operating in the UK, a mere 200 are members of the BFA. What potential franchisees need to avoid at all costs is one of the dodgy operators out there who are trying to off-load worthless franchisees for a mint of money.

A pair who have seen franchising from both sides of the fence are the Halpern brothers who own the master franchise for Domino's Pizza in the UK. Born in the East End of London to an American father, Colin and Gerry emigrated to the US and graduated as engineers. Gerry worked in the space business and as a systems engineer on the Explorer 20 programme. Then they got into hire cars.

'In the mid-'70s we took the Budget franchise for New York City,' says Gerry. 'Nobody wanted the New York franchise because you couldn't make money out of it - the potholes, the weather, the salt ... Before long new cars look like they've been attacked with machine guns. And New Yorkers want everything but don't want to pay for it. The first two years we lost a ton of money.'

But eventually they made several tons of money and in 1985 they sold up for a handsome profit. Gerry's son went down to Miami to open a pizza and Chinese food delivery business, and his father followed. 'I learned the business. I made them, I delivered them and I got some pretty good tips,' says Gerry. 'So, for example I know for a fact you cannot put broccoli on a pizza. It burns.'

It is unquestionably in the realm of fast food that franchising has really shone. Franchising suits food's industrial revolution perfectly, with standardisation the key. So, in 1993, when Colin, the true entrepreneur of the pair, heard that the master franchise for Domino's in the UK and Ireland was up for grabs, he bought it for £1 million - a total of 73 outlets of which 35 were run by franchisees. Soon he was on a Virgin one-way ticket back to the land of his birth to meet his new franchisees.

'They were very unhappy campers,' says Gerry. They were close to open rebellion,' says Colin. Domino's UK had got itself into a bit of a mess and had tried running the business from the HQ in Michigan since 1989.

It had not worked. Property values had gone sky-high during the late '80s, expansion plans were cut back, people weren't ordering enough pizzas.

Grief all round.

With Gerry as hands-on managing director, the Halperns have sorted things out and the cheese is bubbling along nicely for everyone. Home delivery is growing in acceptance in the UK despite dragging way behind the US.

The BSE crisis has done them a favour. They've bought into a Bart Simpson promotion deal and they're convinced they've got Pizza Hut on the ropes.

Their 200th store is due to open next year and they deliver around 10 million pizzas annually in the UK. (Even Stuart Price, a hard man to impress at the best of times, concedes that Domino's is 'very, very good indeed'.) When the stock market settles down it is likely they will try to take Domino's UK public.

'I'm telling you, things have not even started yet in the UK,' says Halpern.

'Who over the age of 45 eats pizza? Nobody. But our 18-35 core market is going to get older. We give each franchisee an area of around 20,000 households at the moment but I can see the time when they'll do as well on 10,000. They'll make a lotta money, we'll make a lotta money. For an old guy like me this is an exciting time.'

When he's up to 500 units in that relentlessly bright future, though, Colin Halpern sees that Domino's will own half the outlets itself, rather than the handful they run as 'corporate' stores at the moment. This is an interesting point. There is one school of thought that franchising is only worth pursuing up to a certain critical mass. PizzaExpress, another big player in the dough and mozzarella game, has been highly successful but decided back in 1995 that it was going to buy back as many of the franchises as it could. It now has all but half a dozen. The implication must be that once the risk is diminished and you're on to a sure-fire, runaway winner in the form of a nationally recognised brand, then why not keep more of the money the overall business makes. Why make 4% on turnover when your franchisee is making 20%?

There is even a complex franchise ownership redemption theory developed by analysts in the US to explain this phenomenon. (Price, naturally, has his own model derived from biology and involving the equilibrium between predators and their prey.) Either way, you only have to talk to franchisors off the record to hear all sorts of nightmare stories about how franchisees can be far more of a pain in the neck than in-house managers. How they blame HQ when things cut up rough rather than doing something about it themselves. How you just can't fire a franchisee as you can an employee.

How they just want a free ride and are never prepared to put in the long hours that many ideas demand.

Because even in a successful operation like Domino's, it's hard work.

Just ask Gerry Austin, who has two stores in south London (one in Battersea and one in Welling). Gerry does a 50-hour week but is still glad he got out of freight forwarding. The Domino's system and the product is fine but Austin's worst problem is the fast-food classic - staff. They can make £5-plus per hour, including tips, but you just cannot get a reliable moped driver in south London these days for love nor money.

His Honda 50s don't last much longer than New York hire cars with all the pounding they take on the capital's speed humps and potholes. Then there are the council estates where drivers risk getting their change, chicken dunkers and garlic bread ripped off them by muggers. (Some independents in inner city areas - not Domino's - have been known to encourage their bike drivers to remain in the saddle, take the tower block lift and then accelerate the moped along the decks for doorstep delivery.)

All these problems are now behind Tom Monaghan, Domino's founder, who recently announced he was throwing in the towel. The devout Roman Catholic, who has fallen under the spell of the writings of C S Lewis, has announced he will be donating virtually all the $1 billion he made from selling his 90% stake in Domino's to charities. 'I realise how bad a person I really am,' said Monaghan. 'It was exciting because it showed I really have got some room for improvement.' 'Yeah, Tom,' says Gerry Halpern.

'An interesting guy. They're like a cult over in the States and are known as Dominoids. You know - no facial hair, all that. They worship him.')

Which takes us back to Seeckts who, after his profanity-filled morning in Weybridge, looked as if he could have done with some instant salvation.

Weybridge was an unusually messy job, clearing some stumps from a building site. Then some clown fractured a water main just to make his life even more difficult ...

But things have got better since lunchtime. Now he's out near the chocolate-box pretty village of Shere on a balmy autumn afternoon doing some fairly simple stumps - relatively easy money. He manoeuvres his machine into place, puts on his helmet and face-shield and switches on. A deer bounces across a neighbouring field.

'Any job has its bad days, says Seeckts. 'I've been stuck in ditches with the rain pouring down, bogged down in forests. But I've recently taken on a second area and machine and I'm employing a guy to run that.

I mean I'm never going to get stinking rich doing this - in fact I'm making less than I did as an employee, but it's still delightful not to be in that corporate world any more.'.

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