Who Is Killing The Restaurant Industry – Part 6 (The Franchisor)

“Franchising in NOT a democracy” boomed the deep voice across the room. “This is my brand and I will protect it at all costs!”

300SquareThe statement above could conceivably have been heard at any one of hundreds of franchise meetings held each year around the country. Only names and places have been changed to protect innocent people involved. The precarious relationship between the Franchisor and the Franchisee is one that has been and will surely be debated for years. Is the franchisee to be treated as a partner? Well definitely, without him/her there would be no income for the franchisor, they are dependent on each other for both growth and survival. Should he be treated as an employee? Well, they are expected to toe the line, to work within the constraints of the franchise agreement and are subject to certain penalties if they step out of line. Should they be treated as a customer? Well they do pay the franchisor a fee every month and in return expect certain deliverables and they did after all, for a hefty fee in some cases, buy the rights to trade under a name or brand.

If at this stage you are feeling a little confused or unsure… welcome to the wonderful world of franchising. Wikipedia defines franchising as ‘Franchising is the practice of using another firm’s successful business model.’ Most franchisors would describe it as ‘the practice of using another firm’s successful business model just so that you can try and do it completely differently and then blame us when it doesn’t work!”

To sum up the relationship in one short sentence… “A happy franchisee is one who is making money and there are not many happy franchisees out there at the moment!”

The relationship hasn’t suddenly gone bad and franchisors haven’t suddenly become money grabbing lowlifes that prey on the innocent… Some might say they have been that way for years, and franchisees haven’t suddenly become independent, lazy, brand-destroying, reprobates with absolutely no foresight or ability to understand the value of the brand… they too have been described that way since time began. Of course I am being facetious and inappropriate but now that we have that out of the way we can try to discover where things are falling short and what can be done about it.

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In order for ANY business, regardless of type, size or years in operation to be successful you need the following departments in some form or another. (Realising that in a one man business you are probably trying to do all of it!)

You need a Finance and an Accounting division. Finance plans for future growth and long term stability and Accounting takes care of day to day expenses and bookkeeping duties.

You need an Engineering and a Production division. Engineering will plan ahead, develop new products and models and Production will produce these today.

You need a HR and a Personnel division with HR responsible for the future development of your workforce, ensuring there is adequate manpower and skills for the company to build on and Personnel will look after the day to day welfare and attendance of the workforce.

And finally you need a Marketing and a Sales division and they are NOT the same thing! The marketing department will develop the strategy and the medium with which to take your company or product to market and your Sales team will go out there today and sell it to them.

The common thread is that Finance, Engineering, HR and Marketing all take care of the FUTURE of the company and Accounting, Production, Personnel and Sales take care of the NOW side of the business. The other common thread is that the FRANCHISOR usually assumes the responsibility for the first four and the FRANCHISEE the responsibility of the latter. The problems in franchising arise when either one or both of the parties are NOT delivering on their side of the bargain.

Let’s face it, to hire a Finance, Engineering, HR and Marketing department or external consultants would cost you CONSIDERABLY MORE than the 5-7% you are paying in royalty or management fees and on paper this looks like the deal of a lifetime and you should ‘shut up’ and get on with doing your side of things. If on the other hand you are not getting the input and the support you were either promised or were expecting, then it is time to speak up and speak up loudly. The ‘one day to be published’ consumer protection act will certainly shift the burden further onto the franchisor and I believe if you own a franchise company and have not yet started planning for this, NOW would be a great time.

So what role is the Franchisor playing in the Death of the Restaurant Industry in South Africa? Well the role is multifaceted and I will start at the very beginning… There is little or no doubt that a number of the concepts being offered as Franchises should not be operating on their own, let alone as a franchise and stricter laws need to be in force before you can take money from an unsuspecting public. FASA (Franchise Association of South Africa) is doing a fantastic job of setting controls and monitoring in place BUT it is not illegal to start a franchise company without joining them first. Here the onus rests on the potential franchisee to do his homework BEFORE signing.

Next is “the joining fee”! This is the upfront money being paid for the right to use the brand and for the training and preparation that a potential franchisee will go through, unfortunately this is often not forthcoming and new entrants are left to sink or swim on their own and it is often the former. Of course the company has a right to charge for this training and entry fee to their organisation but if there is no support structure, the manuals and documentation are either nonexistent or outdated and the value of the brand has been overstated, then surely somebody must be responsible for this. BUT please remember the Latin Phrase “Caveat emptor” – Let the Buyer Beware!

Now if charging an upfront fee when you are offering little to no support seems unreasonable then charging it a second time is surely bordering on CRIMINAL. All too often the first poorly vetted, hardly trained, badly prepared and over matched franchisee fails miserably and is left to pick up the pieces of a failed venture and financial ruin and left wondering why they were able to fail when ‘anyone else’ would have succeeded. Now the franchisor goes out in search of another ‘victim’ sorry I mean franchisee… and the cycle is started all over again. No vetting, no training, no support… no chance! The problem stems from the fact that the Franchisor does not have a sustainable business model for himself, let alone the stores and then relies entirely on repeat joining fees to sustain his business. Your failure is his success!

I need to state for the record that this is NOT indicative of all franchisors and there are plenty of excellent companies out there delivering much more than they promise. They offer excellent support, top notch training and ongoing guidance; it is up to the buyer to ensure they are dealing with such a company. If you are thinking of entering the market, do your homework; speak to existing and EX franchisees and contact FASA.

So you have signed for a store, put down a hefty deposit and now what? Well you wait for a location… and this too is often in the hands of a franchisor who is desperate to get the store opened so he can collect on another joining fee, demonstrate how well his brand is growing and collect on the ‘rebates’ on the set up costs. If you have been reading my ramblings for the past few months, you should be familiar with the simple concept that a RAND SPENT is not the same as a RAND EARNED! An extra R100 000 in setup costs means you need to earn an extra R1 000 000 in turnover to pay it off. So work it out, is it worth the aggravation of bringing down the setup costs? Of course it is.

All too often the franchisor has no grasp of this simple concept and believes the cost is what it is… BULLSHIT. Times are tough and every Rand saved is like TEN Rand earned. The problem is that quite a number of franchisors are getting a rebate on every piece of specified equipment and shop fitting that is going into the store; adding at least another 10% to the setup costs, often running into hundreds of thousands of your Rands. Bring on the Consumer Protection Bill and bring it on fast! Insist on FULL DISCLOSURE on rebates before you sign, at least you will be entering with your eyes wide open.

A friend of mine worked for a major franchise for a number of years and made it his mission; to not only bring down the setup costs but to improve the quality of the goods supplied and the functionality of the store… He was highly successful and I think Bok van Blerk even made a song about him! (One day I will post the video). That is exactly what you should expect from your franchisor.

Poor site selection, lack of upfront and ongoing training, total lack of respect for the fact that the franchisee is a bottom line company as opposed to their top-line business model, no ongoing training, no innovation, no sustainable marketing strategy, no vision for the future, no systems and procedures… No, this is not the state of the entire industry, but if you own a franchise and are guilty of any or all of these, it is time to shape up or ship out. The industry has enough challenges without your help.

There are many other areas just as relevant as those above and I shall list a few here…

  • Undisclosed rebates on specified products
  • Substandard specified products
  • Increase in fees without increase in deliverable
  • Hindering the sale of businesses
  • Lack of understanding of the challenges
  • No solution to current problems

The list goes on and on and the casualties are mounting just as fast! I could write for hours on Percentage or Fixed royalties/management fees, disclosure of rebates, price fixing, collusion, unscrupulous business practices and the such, but I think I shall save all that for a separate posting.

Once again I will stress that there are PLENTY of ethical, honest and highly sustainable franchisors out there doing a fantastic job of empowering people, creating wealth and opportunity for many. I can only hope they will come out in favour of this article and help work together with FASA to reverse the image the industry is slowly gaining from a few rotten eggs.

We have covered a number of EXTERNAL forces at work in Killing the South African Restaurant Industry and in the next two chapters we move a little closer to home by looking at the role of the staff and the owners themselves. As always your comments and suggestions are most welcome.

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