A question of choice

• A question of choice.pdf

A question of choice.pdf

The range of franchise opportunities that are available to prospective franchisees looking to go into business has never been greater. With thousands of alternatives, how does your franchise system catch the attention and bear the scrutiny of a potential franchisee? Rod Young, Executive Director of DC Strategy, discusses what makes a franchisor, a “franchisor of choice”. 

The Australian franchise industry is booming. There are currently over 55,000 individual franchises operating across the country, representing over 700 franchise systems. 

New franchise offerings are arriving on the market virtually every week and potential franchisees are faced with a more and more daunting question: “How do I choose the best opportunity?’ This is not just confined to comparing the offerings of the 700 franchisors that are offering “new and better” greenfield franchise opportunities, but also includes the growing number of existing franchise systems, whose franchisees wish to offer their existing franchise for sale. A look at the numbers may surprise you. 

The mathematical average number of franchises currently granted by those 700 franchisors is 78. Lets assume that each of those 700 franchisors is offering just 5 franchise opportunities across Australia over the next 12 months, a conservative estimate. That implies that in the next year there will be 3,500 new franchise opportunities put on the market in Australia. 

Research and anecdotal evidence indicates the average period that a franchisee remains in a franchise is somewhere between 3 and 7 years. If we assume the average franchisee remains in their business for 5 years, 20% of the more than 55,000 existing franchisees will offer their businesses for sale in the coming year. This means the 3,500 new green field franchises that will be offered next year will not only be competing with each other, but also with 11,000 existing franchise opportunities that will come on the market. 

Faced with the competition of 14,500 other franchise offers next year, it is obvious that a serious franchisor must strive to be a franchisor of choice. 

The reality is that franchising is being segmented into the “haves” and “have-nots”. Clearly, each franchisor does not have 78 franchisees. An examination of the spread of franchisees within networks clearly indicates that the vast bulk of franchisees belong to a small minority of franchisors who dominate the franchise environment. 

How do you become one of the dominant players? How do you become one of the “haves”? 

You will need to build a network and brand strategy built on expert advice to maximise company profitability and attract the best franchisees to your opportunity, you will need to stand above the competition in the recruitment process and you will need to prove the value you can offer franchisees to retain them. Having done this, the best franchisees will take you a long way to building a strong and successful franchise system.There are 10 key points that franchise systems need to be able to deliver in order to become a franchisor of choice and thereby compete in an increasingly competitive environment:

1. Look good

The number of franchise systems who launch themselves and refuse to upgrade their look and feel every 3-5 years is breathtaking. It is critical that you are seen as the best looking store in your category or, if you are a mobile franchise, your vehicles make the competition look like they’re driving beat-up, down-market vans. There is no substitute for first impressions and not just for your prospective franchisees. To be a franchisor of choice, you need to be more profitable than any other franchise system in your sector. Your presentation therefore can not only influence the choice of a franchisee from a prestige perspective, but your financial performance will be better because you attract more customers.

2. Procure prominent premises

There is no doubt that the best retail sites are seen by more people and as a result, trade at higher turnover levels. If you go into shopping centre locations, it is critical that you secure the best sites. We have always known that the best sites produce the best revenues and with the rider that rents need to be managed (see my article in the January/February issue “The Great Shopping Centre Heist”). High traffic locations generate excellent numbers to attract potential franchisees as well as creating a presence in the marketplace. If you have a mobile operation, ensure the vehicles are seen as often as possible and are a mobile billboard.

3. Ensure franchisees are profitable

One of the big discriminators of choice by potential franchisees is naturally a comparison of return on invested capital. There is little point in looking good but being only marginally profitable. Be sure that your business system is maximising the profit that falls to the bottom line in both your company-owned and franchised locations. Money talks, and the better franchise owners are looking for above average returns on their capital and time.

4. Be seen

Invest money to develop a profile in the media. Every franchise system should have a unique selling proposition and a public face to sell it. Be prepared to diligently promote every aspect of the life of the business. You may focus on customer experiences, expertise in the segment, a particular characteristic of your staff or plans for future national or international expansion.

5. Make your franchisees smile

The advocacy of your franchise owners is one of the most powerful indicators that you are a franchisor of choice. What makes a franchisee smile? Good returns and a positive working relationship. A franchisor that is focussed on ensuring that their franchisees are not only complying with the franchising system, but are maximising the performance and profitability of their outlets, is a best practice franchisor. It is critical that franchisors treat their franchisees fairly and recognise good performance. Focus on the innate as well as monetary rewards for your franchisees. Happy franchisees also drive growth by acquiring second and third locations. Their financial performance and attitude towards the company are excellent tools when discussing new franchise opportunities with prospective franchisees.

6. Advertise, advertise, advertise

Plan to spend more on advertising as a percentage of sales than your competitors. Many of the best franchisors are seen in the marketplace by their advertising and promotional activities. This is not a coincidence! You only have to look at the outdoor campaign of the Fernwood Women’s Health Club network, with their “No Toms, No Harrys and No Dicks” billboard campaign to understand how a profile can be created. The affect is not only on the consumer, but on suppliers, prospective employees and prospective franchisees as well.

Advertising also drives retail and service business sales and this flows to the bottom line to produce a more profitable business. The franchisor of choice has an ongoing and well-developed marketing campaign with constant reminders to the total marketplace that the organisation is alive and well. Advertising may be in the form of product sampling, catalogue distribution, local area marketing, event sponsorship, radio or television advertising, or a combination of these. Retail businesses should not rely simply on the foot traffic generated by shopping centres, but also understand that they are competing against the hundreds of other tenancies in the centre for the attention and dollars of the 200,000 people that might walk through the shopping centre doors.

7. Be your banker’s best buddy

Regardless of your need for capital, a franchisor with aspirations for significant growth should have a strong and robust relationship with not only one but preferably two bankers. These bankers should fully understand your business plan, objectives and future growth profile. They should be willing to offer funding packages for your franchisees and to facilitate your funding needs as a franchisor. Many bankers bemoan the fact that there is not enough communication between the franchisor and their bankers in the periods when funding is not necessary, only to find urgent demands for funding when it is necessary. These urgent demands take more time if the relationship is not already established. A good policy in developing relationships with your bankers is to invite them to your national conferences so they can not only meet your current franchisees, but understand your marketing and development plans. They will feel the pulse of your organisation and want to contribute to its success.

8. Own your own operations

Company operated locations provide a valuable core of cash flow and profitability, which should be the foundation of any business. Company operations also provide a valuable source of new management talent that is experienced in the day-to-day running of the retail or service operations, which is vital in the training and development of franchise owners. A controlled environment for induction and training of new and existing franchise owners is also created. This benchmark of operational performance gives an example to franchise owners of how operations should be run. Significantly, it also creates an empathy in the franchisor for the challenges and day-to-day experiences being endured by franchise owners at the coalface of their business. The effectiveness of advertising and marketing programs implemented by the franchisor can also be directly monitored via company-owned operations, rather than filtered through the impressions of the franchise network.

Many franchisors have failed to grow their businesses because they cannot acquire sites until they find franchise owners. A capability in operating company-owned stores, coupled with a strong relationship with a banker and the ability to turn invested capital into profit via good operating systems, mean that sustained growth rates can out-perform competitors. Franchisors of choice do not solely rely on recruiting franchisees to grow a network.

9. Listen and learn

One of the advantages of a franchise network is that the people at the coalface of the business have their skin in the game. By nature, franchisees are entrepreneurs and want to optimise the success of their business ““ in operations and in profitability. As a result, the franchisor has a wealth of knowledge and information at their fingertips. How can processes become more efficient? How can you create more value for your customer? How can you reduce labour costs? What do your customers want? What merchandising works?

By listening to franchisees, franchisors are able to continually improve the standards and performance of the entire network. Keep your ears and mind open”¦

10. Have a clear vision, an aggressive growth plan and share it with your team

The franchisor of choice is continually articulating not only the progress of the business to their whole community, but in one on one discussions, also communicating the direction and goals of the organisation together with the timeframes for these objectives. 

 This creates an understanding of the behaviours expected of each member of the team in order to be part of the vision. It also provides inspiration and focus for the individual ambitions of every member of the franchisor’s organisation. 

Human endeavour is driven by hopes, dreams and aspirations, and a franchisor of choice encourages every stakeholder in their network to consider the opportunity and aspire to be part of the future prosperity of their business. 

Hairhouse Warehouse: A franchisor of choice? 

Jacqui Walker, BRW journalist specialising in franchising, identified Hairhouse Warehouse as one of 8 franchisors to watch. 

How does Hairhouse Warehouse measure up as a franchisor choice? 

Tony and Joseph Lattouf established Hairhouse Warehouse in 1994 with a vision of building a 120-store hair and beauty business, retailing consumer and professional products in high profile locations. 

From the beginning the Lattouf’s understood the hairdressing business, having been hairdressers to the stars while operating the Lattouf International hairdressing salons. Their immediate focus when they moved into retail was to have eye-catching stores and to evolve its retail offer to draw traffic in from the passing parade in high traffic shopping centres and other locations. 

Their hairdressing industry background allowed them to leverage from their enormous contact network and to secure a substantial range of market leading brands at prices individual owner/operators would be unable to achieve alone. This has put the franchise owners on a profit footing that has resulted in happy franchisees, several owning second, third and even fifth locations. Multiple franchise ownership is a sure sign that people within the organisation understand how attractive and profitable that business can be. This is certainly one indicator of a franchisor of choiceJoseph Lattouf, responsible for the store presentation and brand marketing and promotion, spends much of his time with the marketing team, ensuring that point of sale, promotions and broader catalogue marketing keeps the store profile stores in front of consumers. Even spruiking is used in the stores as an old fashioned but very effective technique to continue to drive traffic into locations, especially during quieter periods. This focus on the basics of retailing and techniques that appeal to their target market is producing many high turnover locations. The vision of the business as a national organisation is being achieved by both consolidating its current 30 stores in the Melbourne market and driving growth in the South Australian, New South Wales and Queensland markets. A beachhead for growth will be established in each of these markets to drive growth on a national basis. 

Hairhouse Warehouse operates five company-owned locations in a unique management arrangement with one of its senior franchise operators. This structure provides them with a valuable insight into their customer base and is part of the philosophy of sharing the bigger picture opportunities with franchise owners. Franchisee selection has become significantly more rigorous over the past 12 months and with the hair and beauty business being one of the largest segments in retail, the outlook for its franchise owners is very bright. 

Tony Lattouf, who drives the selection of retail locations, has an aggressive plan to open 20 more Hairhouse Warehouse stores by June 2005. He has a very clear vision and has conveyed that to his current franchise network and their friends, family and contacts, who are looking to scoop up new franchise opportunities created by this network going forward. 

You be the judge. Is Hairhouse Warehouse a franchisor of choice? 

Being a franchisor of choice is integral to the long-term success of your business. As David Buck of the franchise network Happy House says, “Stand by your Fran”. The franchise business model creates value by taking advantage of the personal energy, capital and entrepreneurial spirit of its franchisees. To optimise its advantages requires interdependence between the franchisor and franchisees. In order to sustain strong growth and successful operations, the franchisor must be a franchisor of choice. Are you? 

Rod Young 
Executive Director
rod.young@dcstrategy.com
02 8220 8711