Franchise tips from the advisors
With franchising becoming a crucial business model for the F&B industry, Imad Charaf Eddine, chairman of Francorp, a franchise development firm, reveals several key industry issues 1. What’s your assessment of the franchising industry in the MENA?
Within North Africa, the Egyptian franchise sector grew from 25 international brands in 1999 to 360 in 2010 and had reached 430 by 2012. In terms of the GCC countries, fast food is expected to account for 40 percent of the franchising market, as eating out is part of the region’s culture and tourism practices. In addition, the popularity of US quick-service restaurants (QSR) has further helped drive the entry and growth of international fast food joints in the region, such as the established Mcdonald’s, Burger King, Subway, Starbucks and Espresso, and the more recent Five guys and Shake Shack, alongside others. Small and medium-sized enterprises (SMES) are a big part of franchising, and the development of governmental services and laws in the region has ensured their continuous growth over the past decade. Compared to the global market, the MENA region is still falling behind North America, Europe and the UK, not only in terms of the size of the franchise economy, but more importantly, franchising services and regulations. In terms of financial services, we have only recently begun seeing governmental incentives given to SMES and regulations being developed to better protect the local franchisee and franchisor.
2. What are franchisors doing wrong?
Under-capitalization: Asking the right question: How do I launch a franchise system and what does it cost? What does it take to sustain an organization on royalties and advertising fees? Poor operations, training and support: Underdeveloped training and operating systems
and lack of support from the franchisor will lead to breakdowns and low profit margins for franchisees, rendering the business unsustainable. Choosing the right franchisees: Not setting a proper franchisee profile which leads to poor recruiting choices, accepting unsound franchisees, leading to the disruption of the brand image and diminishing the success of the franchisor. A ‘Get rich quick’ mindset: When a franchisor isn’t concerned about the franchisee’s profitability or about the long-term viability of the brand. This will only lead to the failure of the brand. Relying on bad, outdated or incomplete legal advice: A common issue we see is clients who believe any lawyer could develop a franchise, agreement only for the loopholes to be exposed at a later stage, which leads to a costly rectification. Having a scattered and unclear brand identity, franchising without well-developed
operational manuals (OM): A lack of a fully developed OM will lead to chaos and inconsistency in the franchisee’s offering, hence negatively affecting the brand and potentially leading to its demise.
Franchise fee: Inexperienced franchisors are using the perceived value approach to decide the franchise fee, which has no basis in its calculation. It will be reflected as a barrier when selling franchises. Legal company structure: Another common mistake when people begin franchising without proper consultation. The franchisor owning the trademark is required to establish a separate entity that will sign the legal agreement with all franchisees. This has numerous advantages, mainly to create a legal barrier with the trademark owner along with tax benefits and others.
3. How can businesses improve their franchise offering?
They should understand and build the partnership between the franchisor and franchisee, and obtain the right counseling for their business, depending on their needs, to minimize potential mistakes which could prove costly. Franchisors should also select the right franchisees. Setting the right franchisee profile for your business will have a big impact on the performance of these franchises and your relationship with them. Select a bad profile as a franchisee and you are sure to encounter countless issues. Document your business experience, transferring your know-how in running your operations to a fully developed and integrated OM. It’s also important to be flexible to franchisees’ insight, suggestions and improvements.
4. What do you advise homegrown concept creators?
My advice would be to look further than the local market and think global. Once your goals exceed the capacity of your local market, you will naturally look to franchising, as it is the fastest, least costly and most effective way to grow your brand exponentially and stay ahead of the competition. However, that does not mean that franchising is a guaranteed road to success. A lot of concepts have attempted that before, setting themselves up, and that will only lead to a chaotic and inconsistent franchise. We at Francorp stress on that, and require that our clients go through a lengthy consulting process (six months) that covers all aspects of the business (strategic and financial, legal, operations and marketing). Only once we’ve developed these for our clients do we declare them ready to franchise.