Can franchisors be expected to guarantee their franchisees’ profitability?

Although franchising has been around for more than six decades, confusion about its workings remain rife. One question newcomers to franchising often ask is, “If I invest in a franchise, will the franchisor guarantee the profitability of the venture?” We asked seasoned franchisor Tony da Fonseca to explain why this can’t be done.

Q: Tony da Fonseca, welcome to FW. You are the Managing Director of the OBC Group and a multi-award-winning franchisor. Your brand is highly successful so you should be better placed than most other franchisors to guarantee your franchisees’ success. Are you prepared to do that?
A: Absolutely not. We give our franchisees the tools they need to operate their own stores successfully. We also train them in the use of these tools and provide them with extensive initial and ongoing support. This notwithstanding, to guarantee a franchisee’s business success would be sheer folly.

Q: Why do you say that?
A: Because whether one of our stores is highly successful or just chugs along depends on many factors, some of which are beyond our control. Every business venture carries an element of risk and a franchise is no exception. Franchisees need to work hard to mitigate this risk.

Q: By investing into one of your stores, an entrepreneur incurs extra costs in the form of initial and ongoing franchise fees. Going it alone would save them that, so why should they go the franchise route?
A: Because it makes economic sense. Accurate statistics are hard to come by but consensus exists that franchisees enjoy significantly better success rates than their independent counterparts. Even the banks, better known for conservatism rather than entrepreneurial risk-taking, accept that and factor it into their lending decisions.

Q: Why do you think this is so?
A: There are several reasons, with the following standing out:
Our franchisees have:

• Access to our experience, know-how and tried and tested systems and procedures.
  
• Access to bulk purchasing opportunities we negotiate on the OBC Group’s behalf.
  
• Access to initial and ongoing training, support and mentoring activities. Simply put, we care about the profitability of our franchisees.
  
• There is one additional advantage that possibly eclipses them all. I am referring to brand recognition. The moment the signage goes up outside one of our new stores, members of our target market population know that they can look forward to a new and improved shopping experience. Add to this the fact that our powerful marketing machine and word-of-mouth combine to spread the word and it should not surprise anyone that on opening day, consumers are literally queuing outside the store. They want to get hold of some of the opening specials on offer. This creates a pattern of demand which we at OBC Head Office are working hard to maintain.

Q: Opening promotions are quite common. What would stop an independent start-up from attracting attention by offering opening specials?
A: That’s certainly possible but how effective would it be? Precisely because we purchase goods in large volumes, our suppliers are willing to support store openings with very special deals.

Q: Fair enough, but does this really compensate for paying franchise fees?
A: Let’s compare going it alone to starting out as a franchisee. Although an independent operator will save on franchise fees, their start-up costs are likely to be higher. There is the cost of developing a corporate image, store design, the cost of furnishing, equipping and stocking the store, and so on. We have the experience, trade connections and purchasing muscle to negotiate the best possible deals on behalf of our franchisees. An independent operator can’t match that. More importantly, due to lack of experience, they are bound to make mistakes along the way which we protect our franchisees against.

Q: You say that the OBC Group cares about franchisee profitability. Forgive me for being blunt, but, seeing that franchise fees are calculated as a percentage of sales, why should you care about franchisee profitability?
A: Because the OBC Group is in this for the long haul. We know that our network will not grow unless the bulk of our franchisees operate profitable businesses.

Q: OK, it’s easy to see that becoming an OBC franchisee has its merits, especially for a newcomer. However, the typical franchise agreement runs over five to seven years. Surely, the franchisee will have mastered the ins and outs of the business by then so why should they even consider renewing the agreement?
A: The advantages of investing in a franchise which I have listed previously are only the tip of the iceberg. Experienced franchisees will agree that there is so much more to the franchise relationship. Let me mention some examples:

• Our franchisees have full access to the results of ongoing product and systems development, especially but not only in the all-important realm of IT. After testing a new POS system at company-owned stores, we could confirm that it would give our franchisees unprecedented levels of control. We secured our franchisees’ buy-in and the new system will be rolled out to all our stores within the next few months.
  
• We have just developed a new concept to be known as OBC Take-out. It is designed as an add-on to existing stores, either as a dedicated counter or, space permitting, as a separate store. This is more than an additional sales spinner. Because the OBC Take-out division draws its inputs from the main store and shares key resources, including refrigeration, profitability is improved.
• We continuously build the brand at a national level. Our franchisees can tap into this by linking their local marketing initiatives to national campaigns.
  
• No matter what type of problem crops up at store level, our franchisees have access to a team of experts at Head Office who can help solve it.
  
• Periodic store visits by experienced area managers provide franchisees with access to training and mentoring initiatives. This helps them to grow into the best they can be.
  
• Because our area managers have access to other franchisees’ performance figures, meaningful benchmarking becomes possible. Areas of concern will be uncovered and ways found to address them. This impacts greatly on franchisee profitability.
  
• For an independent operator, operating a small business can be a lonely occupation, overwhelming even. In most instances, the only individual who would really understand their concerns and frustrations would be their competitors. For obvious reasons, this is not an option. Our franchisees don’t have this problem. In addition to having access to members of the head office team, we encourage them to talk to each other. We also arrange regional and annual national meetings. During these events, issues of mutual concern are discussed and optimal solutions sought.

Q: Sounds convincing, but did you ever have a franchisee in your midst who grew tired of the same routine and needed a change?
A: Yes, of course. Should this happen, and subject only to performance excellence all round, we offer franchisees several growth options.
The most attractive and potentially profitable option is to become multi-store owners. This creates a new set of challenges because the franchisee needs to evolve from single-store operator to the person responsible for a cluster of stores. We assist our franchisees every step of the way.

Should franchisees seek intellectual challenges without necessarily making an additional investment, they have the opportunity to represent their own interests and those of fellow-franchisees in their region by serving as office bearers of the OBC Advertising Club.
Acting as a mentor to new franchisees is another challenge some experienced franchisees relish.

Q: What happens if a franchisee doesn’t want any further involvement with OBC and/or food retailing but simply wants out? Do you provide assistance?
A: We certainly do. Franchisees wishing to sell their businesses are contractually obliged to offer it to us first. Should we decline the offer, the franchisee wishing to sell can put it on the market. In keeping with internationally accepted best franchise practice, we assess potential buyers just as we would assess prospective franchisees.

Should the proposed individual meet our criteria, we’ll do everything we can to ensure a smooth hand-over. It is worth noting that in our experience, franchisees wishing to sell achieve better selling prices than independents. The reasons for this are not hard to find; I believe I have covered them adequately in course of this interview.

Tony da Fonseca, it has been great talking to you once again. Thank you for sharing your insights with our readers.
Readers wishing to find out more about the award-winning OBC Chicken and Meat franchise opportunityshould visit the OBC Group’s website – www.obcgroup.co.za. Alternatively, contact OBC’s business development manager Robbie Capazorio by writing to robbie@obcgroup.co.za.