Should I franchise?

The success of any franchised business lies in the foundation of the parent company, and my advice to any would-be franchisee is to ensure that the parent company is well established, profitable and well capitalised, with a well-known trademark and reputation.

Another key to successful franchising is to ensure the franchisor has proven the concept by establishing and operating several company-owned locations, so that any operational issues can be addressed prior to franchising.

Rod Young of DC Strategy explains the steps taken by well-established Sydney seafood specialists De Costi Seafoods, who are launching into franchising after 28 years in the business.

De Costi Seafoods operates both retail and wholesale operations, distributing quality seafoods sourced from waters throughout Australia and New Zealand. Customers include supermarkets, hotels, restaurants, clubs, catering companies and other wholesalers, plus the retail trade.

The company’s retail activities were launched in 1974 when George and Andrea Costi set up a stand at Sydney’s famous Paddy’s Market, armed with 10 boxes of fish to satisfy the weekend trade. In 1975 they started a retail business in the southern Sydney suburb of Kingsford, again selling fresh quality seafood. Next came De Costi Seafoods, established in 1981 at the Sydney Fish Markets at Pyrmont. It soon became recognised in the industry as of the largest seafood retail outlets in Australia.

Selling a combination of fresh and cooked fish, the De Costi retail outlets have shown impressive development, with stores in the network showing strong growth. The organisation is now focused on further expansion into the retail sector via a combination of company-owned and franchised outlets. Forming the foundation for this new phase of growth are the company-owned retail concept stores in Westfield Shopping Centre at North Rocks and Macquarie Shopping Centre at North Ryde (both NSW).

The De Costi retail business is strongly supported by its wholesale operations, which earned the company the title of “Best Wholesaler (NSW)” at the 2001 Sydney Fish Market Awards. George Costi was also recognised as “Seafood Industry Ambassador”.

A franchising refresher

Franchising is not a new concept and has grown rapidly over the past 50 years across industries and continents alike. It is now the dominant business system in the retail sector, with more than 20 percent of every retail dollar being spent in a franchised outlet. It is even more established in the food sector, with a substantial number of the well-known food service retailers involved in some form of franchising relationship.

However, the success of any franchised business lies in the foundation of the parent company and my advice to any would-be franchisee is to ensure that the parent company is well-established, profitable and well-capitalised, with a well-known trademark and reputation. It should also have a well-demonstrated track record of success in the arena in which it operates.

The concept behind franchising is simple. For a one-only, up-front fee (franchise fee) franchisees buy the right to use the franchisor’s business system and trademark so they can establish and operate their own business. Typically the franchisor will:

• find the location
• plan the layout of the store
• train the franchisee 
• help hire staff
• plan an opening promotion
• arrange for someone to assist the new franchisee for the first weeks of operation

This will help to ensure that the franchise business starts smoothly and that there is a transference of expertise via a combination of initial and ongoing training and ongoing store visits by the franchisor.

The real test of franchising comes once the store is opened. This is where the franchisor’s expertise in both sourcing/supplying product and marketing/promoting the brand become critical success factors.

Firm foundations are paramount

 De Costi Seafoods is an excellent example of the right foundation for franchising. The company has a well-established retail heritage with a brand that is widely-recognised across Sydney. The opening of each location benefits from the 28 years of goodwill established by the brand in the marketplace. This is of substantial benefit to franchisees as they do not have to struggle to established a new brand in an environment where brand equals trust equals customers.

Other strong elements for De Costi are the ability to source directly from the sea (often bypassing wholesale markets) and having the product processed, filleted and packed ready for retail sale well before the franchisee is even out of bed. These strategies address the two most expensive parts of any retail operation, the costs of the goods themselves and the cost of labour (which, in a typical food-service business run to 25-30 percent of retails sales). By managing the source of supply and taking the labour and skill intensive task of seafood preparation away from franchisees, De Costi Seafoods:

• lowers the cost of product for franchisees, and
• leaves the owner/operator free to concentrate on the customer without having to operate a small, inefficient processing facility at the back of the shop

Location

Successful franchising relies on the business reputation of the franchisor not only in terms of the relationships with suppliers but also in their ability to source quality retail locations in major retail shopping centres. As shopping centres are now major assets controlled by property trusts, fund managers are looking for quality income streams from quality tenants.

With this in mind, it is not surprising that the major shopping centres are populated by the major brands and trusted retail names throughout Australia, many of which are franchises. Taking this a step further, it is little wonder that many people seeking an improved standard of living that can only come from owning your own business are choosing franchising as a low risk and proven method of entering new business markets.

Pilot operations

Another key to successful franchising is to ensure the franchisor has proven the concept by establishing and operating several company-owned locations, so that any operational issues can be addressed prior to franchising. With 28 years of retailing behind them and the new stores at North Rocks and North Ryde reflecting state-of-the-art retailing techniques, this is another pre-franchising test easily passed by De Costi.

Support manuals

All good business systems are supported by operations and procedure manuals and De Costi have taken no shortcuts in this aspect of preparation for franchising. We were engaged in 2002 to assist George and Andrea and their team with the development of the franchise program and associated manuals, underlining the importance of obtaining advice from consultants, lawyers and accountants with specialised expertise and experience in the franchise sector for anyone thinking of franchising their business.

Vision and values

De Costi was greatly assisted in the franchising process by having pre-existing and clearly articulated company objectives and values.

The company’s objectives are to:

• provide excellent quality product to all customers, wholesale and retail
• maintain high quality food safety standards through ongoing vigilance
• ensure all product is supplied in the peak of condition
• educate and train staff

To achieve these goals, they have documented their food safety system to meet both the international standard ISO 9002 and the Hazards Analysis Critical Control Point (HACC) system of identification of critical control points in food hygiene requirements – another bonus for franchisees.

“As far as values are concerned, Andrea Costi says that the company’s business success has been built on three key strategies, customer service, the quality of the product and product knowledge. Together these result in what she describes as “adding value to the retail experience for customers, which is a key element that will continue our success”.

Other priorities include selling products at competitive prices, providing a vibrant and positive environment for employees, and establishing performance goals and providing incentives for stores and employees to achieve results above expectations.

The future

According to Andrea Costi, who is the director heading up the retail side of the De Costi empire, the business is applying the tried-and-true maxim “hasten slowly’ as it embarks on franchising.

 ”We are very pleased with the performance of our company-owned operations and will only consider granting a franchise to those who we feel has got what it takes to be successful,” she says. “We want people who can run a De Costi Seafood store better than our paid managers, so if we wouldn’t hire a person as a manager, we certainly wouldn’t grant a franchise to them.”

De Costi Seafoods has engaged a specialist franchise recruitment company to assist them in making the right choice of franchisees.

“The qualities we look for do not include seafood or food service expertise - we can teach them these,” says Andrea Costi. “The key qualities we will be looking for revolve around a past track record of success either as an employee or a small businessperson, their outlook and attitude, family support, ability to accept responsibility and capability as a team player.

“Financial considerations will only come into play after the prospective franchisee has demonstrated these qualities during the franchise recruitment process.”

She sums up the De Costi vision of the future thus: “Our aim is to build a major seafood retail operation offering high quality, friendly, knowledgeable service from well-located, well-stocked premises.

 ”We believe the combination of the De Costi name, our experience in seafood and the motivation a franchise owner/operator will bring to the brand provide the foundations for a bright future.”

Rod Young

Rod Young is Executive Director at DC Strategy.

DC Strategy is the region’s leading specialist consulting and legal firm. Our specialist teams in Strategy, Franchising, International and Legal have developed the networks and brands of many of the region’s most successful businesses. Contact Rod Young at rod.young@dcstrategy.com