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Franchising gaining in popularity as driver of growth
Archived article dated Tuesday August 28th 2007
Such is the rapid growth rate of sales at the franchised stores of Mothercare that their turnover could soon eclipse that derived from its UK outlets.
by Glynn Davis
Although they currently represent only a third of group sales their growth rate of 30 per cent per year and an aggressive opening programme of 50 stores per year is quickly changing this split.It highlights just how powerful franchising can be for retailers looking to expand - both internationally and domestically - but it is often overlooked because the perceived view is that it is only suited to fast foot outlets such as McDonald's and Subway.
Ben Gordon, chief executive at Mothercare, disagrees with this view: “We've been doing franchising for 25 years and have been very successful. It's a nice
This is a growth story that Gordon is undoubtedly keen to tell to the City as it highlights just how progressive Mothercare is with using franchising to rapidly grow its business around the world. “We're at the forefront as there are no other brands with our spread. We're way ahead of the curve and lots of retailers are trying to catch up,” he suggests.
Gordon knows that to have achieved last year's impressive 62 store openings in 20 countries would have been “very difficult” to achieve from its UK corporate base with company-owned stores but with franchising it has been possible.
Because of success stories like Mothercare Chris Wormald, head of franchising at Eversheds, says: “I've seen an acceleration of brands going international as there is an awareness of the success of others so more companies are now looking at it. There have been few people in the past doing it but now more people are talking to retailers who've experience with franchising.”
Evidence of how it is rapidly gaining in popularity can be seen from the fact that in only the past few months there has been a flurry of news stories. These include Fat Face going into Asia with retail partner Robinson, which also manages stores for Marks & Spencer and River Island.
Fashion chain New Look announced plans to open 40 stores in the Middle East with franchise partner Landmark and stated that it was also looking to use the franchise model to open units in emerging markets including China and India.
Mamas & Papas revealed that it was in the process of selecting franchise partners in various Asian countries and other emerging markets as it seeks to add franchise stores to those it already has in the Middle East. And Debenhams is to shortly open its first store in India with partner Planet Retail Holdings, which already operates stores in that country for M&S and Next.
One of the factors driving the growing interest in franchising overseas is the poor experience of UK retailers opening company-owned stores outside the domestic market. “Our retail management skills are as good as anywhere in the world, real leading edge stuff, but we've less successful international experience,” suggests Wormald.
Retailers have typically opened stores overseas by sending their UK property expert along with a British management team to set up the business but this has inevitably led to failure as they have known little about the local market.
But with franchising there is an opportunity to enter new markets with a local franchise partner who knows those markets intimately, thereby substantially reducing the level of risk involved in expanding overseas.
“It's not difficult as long as you lock into a relationship with a very experienced local retailer in those markets who knows how to buy real estate, understands how to do local marketing, and can handle permits to trade,” explains Wormald.
Such franchising agreements typically involve the franchisor taking a split of the revenue from the franchise stores but in some cases it can be on the margin of the products supplied to the franchisee. Some agreements involve a combination of the two especially in cases where the franchisee is allowed to source products from suppliers other than the franchisor.
It is often the case that joint venture arrangements are created whereby both parties have a stake in the franchised business. “Joint ventures are a form of franchising as the retailer licenses a partner to use its business systems and products and to operate under the brand. And they both invest in it,” says Wormald.
This is the route Mothercare is to take with its first stores in India as it has created a joint-venture business with the country's largest manufacturer of childcare products, which will initially involve opening three trial stores next spring.
But don't think that the major benefits of franchising are restricted to overseas expansion because there are a myriad of exciting developments taking place in the domestic market that highlight the opportunities franchising can bring to retailers looking to grow their businesses in the UK.
Although franchising in the UK market is overlooked by many established retailers Wormald believes this is a mistake. But he reckons things are changing fast: “There is a growing awareness of franchising domestically but it is relatively under-explored because the high street is so dominated by company-owned stores
He suggests it is particularly suited to retailers that have hit saturation level in their markets. Large retailers not surprisingly disregard setting up shop in smaller towns where the volumes would be lower, and the outlet would probably fail to hit the required returns, but with franchising such openings are made possible. “O2 and Costa are aware of this but there is an inadequate understanding
Simon Raggett, head of franchise at O2 Retail, says that in the case of O2 it had amassed 400 company-owned outlets around the UK and was then looking to open stores in smaller towns and in-fill units and recognised that this next level of openings required franchising because “the model is driven by a return for the franchisee but on lower volumes”.
So whereas O2 is able to operate a store on Oxford Street, with its enormous volumes, it might be more difficult to do so in places like Marlow or St. Albans where it often proves too expensive to operate company-owned outlets with the large corporate overheads that are involved.
In contrast, it works well with franchising: “Franchisees drive down shop costs and are very efficient with stockholding - there is a different mentality. We've got great managers that do all this but it's not their own money invested in the store.”
This investment is crucial to the franchise model and ensures that the franchisee has “skin in the game”. In the case of O2 the initial investment is £100,000 (although this varies depending on the size of the store and the rental involved), which also helps to weed out those people who are not truly serious about running an O2 franchised store.
There is also a franchise fee and the cost of buying-in the initial stock (typically £40,000 for an O2 store). In addition the franchisee pays the franchisor a split of the store's turnover (the same arrangement as for overseas franchised stores) although in the case of O2 this is different as the company pays the franchisee a commission on each new customer they sign-up to the O2 network.
One of the main challenges of franchising for retailers such as O2 is protecting their valuable brands since they effectively hand them over to a third-party to manage. “You have to make sure your systems and agreements are really tight, although there can be the same level of risk to a brand with company-employed managers. And franchisees do have an interest in your brand because it is this that they have invested in.”
However, Raggett says it would be a failure to make the agreements so tight as to leave insufficient room for the franchisee's entrepreneurialism to bloom because this is what frequently makes franchise stores such a success. Ideally what is needed is a mix of corporate franchisor control and entrepreneurial franchisee flair.
Such an arrangement should create the right platform for the franchisee to use their local expertise and contacts to develop the business. “We look for people who are local because they've a relationship with the community and get out to local businesses and involve themselves in local charities. They are the 'local O2 person' who can look at growing opportunities that pay off further down the road, whereas a manager would be more restricted in doing this,” suggests Raggett.
What helps O2 with this selection process is the mass of applications that it receives from potential franchisees - 4,000 so far. This has helped the company to accelerate its opening programme to one store per week. At the end of September 2006 it had only eight franchise stores but it now has 48 outlets and expects to hit 70 by the end of the year.
“We have the momentum now and we've made sure the structure is right. Although we have not got a final number for total franchise stores our view is that there is a lot more to do - and we could also develop new concepts such as smaller stores,” says Raggett.
Another major high street name enjoying great success with franchising is off licence chain Thresher, which has a target for 600 such stores and is halfway through this process.
Although the company had been franchising for eight years Fyl Newington, head of franchise development at Thresher, says the proposition was “dusted down and enlivened” in January 2006 with the company initially offering franchises to its existing store mangers before recently launching it on the open market.
Where Thresher differs from most other retailers with its franchising is that it already operates the stores as company-owned outlets and is looking to spin them out to franchisees.
The reason for this move is that the company has found they perform better as franchised outlets: “They outperformed on a like-for-like basis because it is difficult for a centralised operation to maximise
Newington says they are able to achieve this through strong tailoring to the local market, which can include: “massaging” prices up or down according to demand; altering the range by “decoupling” their store from the centralised Thresher product allocation process, which means they can order goods from suppliers other than Thresher; and they are able to opt-in or out of the group's centralised marketing and promotional activity.
For Thresher not only has franchising given it better performing stores but it has also enabled it to offload the day-to-day management of stores such as hiring, firing and bill paying etcetera.
Clearly the price to pay for all this is that like other franchisors Thresher is missing out on some of the gains being made at these outlets as it only takes a small cut of sales - five per cent in Thresher's case. But this is more than acceptable to Newington because the alternative would be to have an underperforming store under corporate management.
Being the owner of the stores prior to franchising them out provides Thresher with a number of benefits. Most obvious is that it does not have to search for sites for its franchisees - instead it merely has to transfer the leases over. It is also able to show a potential franchisee the sales and margins that the store has achieved in the past.
This trading record is also used to set various key performance indicators, which can then act as an early warning system for its franchisees. This might indicate that the franchisee needs some help in certain areas of the business.
Another key element in ensuring a successful franchising programme is the rigorous selection process. At Thresher, Newington says: “The most important thing we want is business acumen because running a franchise store is a business not a job.”
A further important undertaking is to initially run pilot schemes to ensure that the franchising model stacks up. Dan Archer, head of marketing at the British Franchise Association (BFA), says this is one of the most frequent mistakes made by franchisors: “You've got to have a proven business model to duplicate and show that you can franchise the business so arms-length piloting is needed. This is one of the conditions of membership of the BFA.”
Clearly there are many safeguards and practices to be put in place in order to ensure franchising is successful - on both a domestic and international basis - but if these are implemented rigorously then it can be a highly advantageous way for retailers to develop and grow their businesses.
Tagged as: franchising | mothercare |
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