Are you a business owner looking to scale your business through franchising? Are you a newbie franchisor concerned about your franchisee network delivering sub-par results in accelerating growth? Well, take heart, this article will throw some light for you to course-correct and fast-track your franchisee network in a four-step action plan.
Franchising business models have worked wonders for many brands across the world when it came to rapid scaling and achieving accelerated growth. In India, well-known brands, such as McDonalds, Subway, DTDC, Inxpress, Lenskart, The British Institute, Sanjeevani and Thomas Cook to name a few, have gained significant success in growth, especially in building visibility and establishing territorial market development.
A caveat: Prima facie franchising looks easy; however, it requires a careful strategy, intelligent tactics and flawless execution to achieve growth on a fast-track.
Before we delve into ‘fast-tracking’ let us cover some foundational ground and key concepts associated with ‘franchising’.
Franchise Model: The Basics
A franchise model works well for businesses that have tasted significant early success in establishing the brand by offering real value for customers in a given market. Once a business has grown past this stage the entrepreneur might explore franchising as a growth multiplier.
In a franchise business model, there are two sides, a franchisor and a franchisee. The franchisor is the business which owns the brand, the product and/or the business format. A franchisee is an individual who takes the rights over using the brand, product and/or the business format of the franchisor in a select location within a defined territory.
In this transaction, the franchisee pays the franchisor an initial royalty (ranging from a couple of lakhs to a few crores) as well as a share of the revenue from operating the business periodically. On the other hand, the franchisor shares the right to using the brand, trademark, products, business knowledge, processes as well as training and marketing assistance. However, marketing support might as well cost an additional 1-3% of revenue generated from the unit depending on the agreement.
A franchise model works well for businesses that have tasted significant early success in establishing the brand by offering real value for customers in a given market.
Fast-track franchising to fast-track growth
Step1: Evaluate Your Business: Qualify your product and business model for franchising model
This is especially true for businesses adapting franchising for the first time. Please consider the following prompts to evaluate whether your product and/or business model suit the franchising model.
1. Have you achieved significant early success (e.g., revenue, customer base) with your product or service at least in a local market?
2. Can you establish with verifiable data that your customers recognise your brand as valuable?
3. Are you clear on what you want to franchise? Is it a product, a service, or a business format?
4. Have you standardised your product or service experience creating an identifiable, idiosyncratic experience for your customers?
5. Are your business operations & processes such as sourcing, packaging, after-sales, hiring, training & development etc standardised for repeatability and optimised for efficiency?
If your answers to any of the above is a weak ‘no’, rather not an emphatic ‘yes’ then you have more grounds to cover before you should consider franchising. A business which can be franchised requires a strong foothold in the five areas mentioned above.
Step2: Educate Yourself: Understand popular franchising business models
It’s time to take a deep dive into the underlying business models of various franchising models.
Let’s imagine we are a company owning a brand B, selling product P through our store S. We have some early success in a few locations in our town. People love our product and we are making a decent profit thanks to our efforts in standardising and optimizing our key processes. Now we want to accelerate growth. We now examine the options in front of us.
If we want to own and operate our new stores we have put in the investment into leasing or buying the stores as well as bear the cost of operating the store which includes inventory, salary, maintenance etc. In such a case the resource asks for expansion and therefore the financial risk is entirely on us. Is there an alternative, we may ask? Is there a way to fuel growth without requiring a lot of investment on our part?
Say, our business advisor recommended that we consider franchising. He also pointed out that there are three options we can explore.
Let’s take a dip into those with two key questions in mind: a) who owns the stores? and b) who operates the stores? We plot the ownership on the horizontal axis and operations on the vertical axis and the following 2X2 emerges.
If the store is owned (or leased) and operated by the franchisee we have a FOFO model. This model is suitable if we have completely standardised and optimised our products and business processes ensuring predictable product quality and customer experience. Also, the reliance on the franchisee to maintain quality and process compliance is paramount because of limited controls on operations and direct contact with the end customer. It follows that we need a strong franchisee audit and compliance process to minimise our risk of reputation. The investment risk is borne by the franchisee. As a franchisor, we still have to do marketing for the store and the cost may be shared with the franchisee.
In this model, the company owns (or leases) the store but the operation is managed by the franchisee. Therefore, the risk of investment into the store is borne by the company. The requirement of product quality and process compliance still lies with the company.
Finally, we have the FOCO model wherein the franchisee invests into the store real estate but the operations are performed by the company. In such a model the exposure of the franchisee is limited only to the investment part with no access to the operations of the store. It allows the company to have complete control over the quality of offerings. Many international service brands such as Thomas Cook use this model to expand to new countries and territories.
Few more models
A franchisee might take franchise for one single unit to begin with. This kind of franchising is called a single unit franchise. Once the first unit is successful, the same franchisee might take a second and third unit and thus becomes a multi-unit franchise. It might as well be for multiple locations within a city, multiple cities, even countries depending on the nature and market potential of the business.
All these various models are based on a) risk appetite, b) access to capital and c) confidence in deliberating control. Depending on the stage & maturity of the business the company chooses an appropriate one.
A franchisee might take franchise for one single unit to begin with. This kind of franchising is called a single unit franchise. Once the first unit is successful, the same franchisee might take a second and third unit and thus becomes a multi-unit franchise.
Step3: Build Your Story: Create a strong narrative for ‘why’ your business requires franchising.
There may be several reasons why you might want to explore franchising. Here are a few key ones.
Access funds for growth
Growing a business requires resources. We may use funds raised through equity, a business loan or a network of franchise investors. Deploying equity or debt funds in expansion may not be the best route if we do not have assured flow of capital through successive equity rounds. We might as well decide to fund growth by a combination of equity capital and franchise investments reducing the ask to raise more funds through equity. This might be a cheaper way to fund growth.
Rapid scaling and territorial acquisition
Franchising allows for rapid scaling to multiple locations. The local entrepreneur who is taking your franchise knows the local market better than you do. Moreover, a franchisee will also do the heavy lifting (e.g., daily operations) for you for a particular market freeing up your bandwidth for focussing on product development and marketing.
A franchise model is essentially a mechanism to share and/or transfer financial and market risk to participants. This way risk is decentralized and fragmented. Performance of one unit may not affect others. You can always close/shift a non-performing unit to other potential location without attracting a full share of the cost of failure.
Build a lean organisation & reduce cost
Franchising essentially means a transfer of risk through outsourcing a major chunk of ground operation through a mutual risk-reward structure. Because in most common franchising model’s unit operation is managed by the franchisee you don’t have to engage your resources in hiring and managing employees. This means you can create a lean organisational structure saving you costs and management bandwidth.
Two stories: Two categorically different whys
We need to build up one story that you tell yourself defining “your whys” as a franchisor, another for a potential franchisee defining “their whys”. Remember we all want to believe in a story. If we do this right, the acquisition of franchisees becomes easier.
Step 4: Design a replicable system: Ensure appropriate structural change in the organisation to fit rapid scaling, make it modular
In step 1 we had a list of qualifiers for suitability to the franchising model. Here we discuss organisational structure & operational procedures that facilitate deploying a franchising model.
Standardise brand identity, product, pricing & processes
If we scale a system that is not standardised, we end up with unpredictable business outcomes. Therefore, before we initiate franchising, we must standardise the brand identity, designs, brand communication, product offerings, pricing, and all the key processes from sourcing, inventory management, manufacturing, packaging, distribution etc.
Standardise quality management
Clearly define acceptable variations for all consumer-facing process outcomes along with OKRs. Then deploy an independent quality audit & compliance team empowered to ensure the desired customer experience. If we fail in this aspect, we become vulnerable to reputation risk. It is also prudent to have a central Online Reputation Management (ORM) measure in place.
Document key aspects of running a franchised unit
Have a brand manual defining brand identity, and communication, dos and don’ts for a franchisee. Have an Ops manual to elaborate on the key processes we have mapped for ensuring expected quality.
Onboarding, training, & development
Deploying a well-defined onboarding process with clearly defined KPIs and OKRs will set the right expectations from the get-go. This should include assistance on hiring and periodic training for employees of the franchisee. By being orderly we obviate possibilities of failure of a unit besides delivering a consistent customer experience across units.
Design an organisation clearly defining Centralised and De-centralised functions
To run a successful franchise network, we have to have some centralised functions such as branding, design, marketing, sourcing and distribution, product, customer relationship management, and quality assurance under the direct control of the company. Other functions like store operations, local BTL marketing, unit payroll etc could be decentralised and delegated to the franchisee. However, for every outsourced and decentralised process, we must have clearly defined OKRs and monitor those appropriately.
Have a financial model and strategy blueprint for each unit
A financial model must be defined with parameters for investments, fixed and variable costs, local market size, existing competitions etc. to evaluate the viability of the opportunity in the selected territory. It should define expected cash flows over years, payback period, overall profitability in medium to long term.
A strategy blueprint is overall planning from launch to exit (if desired) for the franchisee. It addresses key questions related to the launch, demand generation, and fulfilment.
If we closely observe successful franchising businesses across the world, we will see that careful planning, a well-defined strategic blueprint and effective execution are common themes.
In this article, we have laid down four phases of franchising journey from the franchisor’s perspective. We start with evaluating our business for fitment to the franchising model. Then, we educate ourselves with all relevant franchising models to design an appropriate model for our business realities. Next, we build a story each for the franchisor and a potential franchisee. Finally, we design a replicable system for fast and reliable scaling.