Franchising 401 – Culprits of Franchising

The last installment in a series on franchising. Having discussed the nature of franchising, the readiness to franchise from both franchisor and franchisee perspectives, this article covers what could go wrong within the franchising setup.

Franchising gets people excited about quick gains: business expansion and monetary rewards. Yet, it is due to this excitement that business leaders tend to overlook a few issues that could deem the arrangement unfruitful for either or both of the parties. Below is a brief discussion of some of the culprits of franchising that you should be on the lookout for, or work to amend in existing set-ups, to maximize the benefits of franchising to your business:

1.    Franchising agreement

The foundational rock to any franchising relationship is the franchising agreement dictating the: commencement, term, renewal, region, breadth of services/products covered, use of trademarks, payments (upfront franchising fees & ongoing royalties), schedule, training, operating manual, business plan, marketing & promotion, binding laws, governing laws & jurisdiction) social media policies, termination terms, transfer of ownership (both on franchisor and franchisee fronts), and obligations on both franchisor and franchisee ends

If the franchise agreement does not cover all (or as per applicability, most) of the above, then you could be set up for failure at the start of the relationship

2.    Expectations

One of the most important elements in the success of the franchisor/franchisee relationship is managing expectations. The franchisor expects to have expanded their brand reach, diversified their distribution channels, and that the money will start rolling in ASAP. The franchisee expects to have bought in to a winning formula and that the ROI is speedy as they sing to the melodies of cash flying in. Both are wrong – setting up a successful franchised business in a new market needs to be structured and steady to ensure prosperity & longevity

Depending on the establishment of the franchised brand, the business needs to be set up in the new markets requiring both franchisor and franchisee to work diligently together, to develop a learning curve to allow for altered/amended approaches, to endure, and to be patient before reeling in the success of the franchised units

3.    Localization (or lack of)

Localization has been identified as a key ingredient in the success of franchised businesses. That being said, some businesses allow the franchisee free reign on localizing efforts, and others halt any efforts related to altering the offerings to suit the franchised market. Once again, both approaches yield negative results.

Too much localization dilutes the franchised brands and could ultimately result in a lost identity, and too little localization could reflect a rigid business that is non-accommodating of its host market resulting in negative perceptions by the customers/stakeholders. Case in point: a giant such as McDonald’s fell flat on their faces trying to over-accommodate local markets such as offering McFalafel in Egypt which was overpriced and unrealistic in terms of the local market’s expectations – Egyptians sought McDonald’s for burgers, and chicken or fish filet sandwiches, and not falafel which is available at any corner at a fraction of the McDonald’s then-selling price and with many other variations.

Localization could be as simple as celebrating local festivities through communication material, altering packaging colors to suit local tastes, or adding region-specific services as per market requirements. Franchisor needs to be lenient to cater for the new market, and franchisee needs to be proactive in addressing local requirements to facilitate the franchised business’ success

4.    Pricing

Customers aware of the franchised business usually have a price-point awareness of what the product/service sells for in the home market. Accordingly, they tend to expect to pay the same in the local market. That, of course, might not be viable for the franchisee as they need to provision for the extra costs incurred in delivering the product/service in the local market which could include shipping, customs, logistics, etc. This is where the two-way communication and market research comes into play – the franchisee needs to be feed the franchisor information regarding the pricing of competing business within the local market, and the franchisor needs to work with the franchisee in setting a competitive selling price that does not jeopardize the brand’s positioning (since in many cases price and positioning are connected in the customers’ perception), nor does it challenge the franchisee’s financial success in the local market. The franchisor should also have been ready from their end with the pricing structure of the franchised products/services that  allows for appropriate profit margins to be maintained for both the franchisor and the franchisee

5.    Speedy internationalization – and lack of readiness (for both parties involved)

Going back to the articles on the readiness to franchise, both franchisor and franchisee need to have established the basic success factors before embarking on franchising. At times, going too fast simply spreads the available resources out too thin, deeming the support and product/service offerings unavailable equally to all franchised units. For a product manufacturer, your production facilities could be unable to cope with the sudden surge in demand meaning that products will not be available across all the franchised units which risks losing acquired customers in the new markets due to product shortage. For a service provider, not being able to support the servicing teams in the franchised markets who are responsible to respond to new customers sheds a negative light on the business as a whole – not only the franchised units.

Research has favored steady and gradual business expansion to new markets, allowing for both human, financial, and tangible resources to be acquired and disseminated efficiently across new markets, and also more importantly for accrued learnings to be processed, and applied across the new markets for higher success rates

6.    Location, location, location

The staple saying is self-explanatory, yet, in this context it applies not only to the real estate location for setting up the franchised unit (which is of course extremely crucial for the success of the franchised business) but also to the region/country where it is being set up. The appropriateness and applicability of the product/service offerings dictates the markets that a franchisor should be targeting. Going to markets where the brand could be relatively recognized, or where the product/service are demanded is a first step to the success ladder of the franchised business. Trying to create demand requires a completely different strategy than satisfying an existing demand, and thus offering a differentiated product within a market that has been identified as already requiring the product/service could yield more successful and sustainable franchising efforts (especially for SMEs with limited resources).

In summation, it is worth noting that franchising is a two-way relationship, the main ingredient of it being communication. Franchising cannot work one-sided, and it cannot efficiently function without feedback since the bottom-line of this business set-up is the mutual benefit of both parties: transfer of know-how, expanding the geographic reach of a business, and financial returns on both ends.

Happy Franchising! 😊