Bendeta Gordon | Founder and Franchise Industry Specialist | Franchize Directions | mail me |
The weaknesses inherent in franchised businesses and the health of relationships between franchisor and franchisees are being revealed as the COVID-19 pandemic unfolds.
Excessive reliance on retail infrastructure, insufficient investment in digitisation and poor delivery capability is severely impacting franchised networks.
In contrast, more agile franchised businesses are riding the crest of the COVID-19 wave by providing services that drive changed consumer behaviour.
Franchising is a human endeavour. The franchisor develops a brand and business model, and grows by sharing intellectual property, with willing franchisees. The franchisee rightfully expects direction and support from the franchisor.
Digitisation and online ordering capability
The COVID-19 situation has demanded franchisees receive intensive care from franchisors. The pre-COVID-19 business model needs nimble changes to ensure market share is retained.
Market responsiveness must be balanced with panicked franchisees and staff to navigate all parties involved through the crisis.
Digitisation and online ordering capability was required by Restaurant and Fast Food franchises, allowed trade in May 2020.
Food lovers placed orders on the progressive online applications of Mr D and UberEATS whereas Nando’s, Andiccios, Debonairs, Steers and others have delivery capacity, consumers continued to order through Mr D and UberEATS, as opposed to brand-specific websites and applications.
The unintended reliance by well-known brands on distribution intermediaries may lead to loss of brand value.
The balance of power has always rested with the bigger Fast food and Restaurant brands when negotiating with delivery businesses. The tables have now turned. Mr D franchisees and owner-drivers have responded nimbly to growing their respective businesses.
Restaurant and fast food operators have exposed their weak digital presence. Traditionally retail-focused businesses franchises should be concerned about sustainability for franchisees in the wake of the pandemic.
The largest franchise group Famous Brands prepares an impressive Integrated Report wherein it assesses business risks facing the group. The report for the year ended February 2020 includes a risk that the group has ‘an inability to respond appropriately to business disruption’.
COVID-19 has turned this moderate risk into reality with Famous Brands being caught with its pants down. Famous Brands reported a swing of nearly R500 million for the 6 months ending 31 August 2020 from operational profit to a loss of R110 million before non-operational items.
A major impact on franchised businesses
The losses are attributed to the pandemic and its poorly considered investment in Great Burger Kitchen in the United Kingdom.
The poor performance of GBK and the inability of Famous Brands to steer the UK business back to profitability, has been a worrying factor for investors. Once the doyen of the franchise sector, Famous Brands has much to do to regain its reputation.
A major impact on franchised businesses is consumers who fear of loss of income due to retrenchments and salary decreases. Customers have become sharply attuned to reducing household expenses. Franchises may see revenue reducing.
For example franchised OEM workshops charge a premium for vehicle services and repairs. Consumers will gravitate in greater numbers to franchises such as Car Service City. This franchise and other non-OEM workshops offer greatly reduced vehicle servicing and repairs and should see a well-earned increase in business.
Second-hand goods businesses including Cash Converters and Cash Crusaders should also be increasing business in both their buy and sell shops.
The extensive franchised Building, hardware and paint retailers should benefit from home-owners investing in home maintenance and improvements as they spend more time at home as a result of no longer working at the office.
Evaluating the future
Business to business franchises should be aggressively scouting for businesses keen to outsource certain functions.
Accounting, taxation, human resource management and bookkeeping service providers should benefit from the pandemic. Management will be evaluating the future and budget with clean sheets.
Pre-CODIV-19 overhead structures will not always be relevant for the future. However, the larger the business the more difficult it will be to adjust overhead structures. We have witnessed this inability to adapt in the extreme in the airline industry.
Safair has responded admirably to the demand for domestic travel whilst the Comair British Airways franchise and Kulula remain grounded. Strategists should consider franchising as an option to unlock capital and reduce gearing.
The health and beauty category has not responded at all well to the restrictions placed on its services. Franchisees and franchisee staff ‘are the most vulnerable’ people as Brian Joffe describes the situation in its poorest performing business Sorbet.
In conclusion
Technicians and therapists should have been allowed to travel to customers offering customers protection from any exposure to COVID-19.
COVID-19 testing, working outside people’s homes, perspex screens and sanitising would have sufficed to ensure safe provision of services.
Leaders in many business categories have floundered as the pandemic unfolds in South Africa and the world. The best leaders have failed to listen and connect with their customers.
Some will try hoodwink franchisees that COVID-19 is responsible for poor performance. In some cases poor customer retention can be attributed to COVD-19.
In other cases, the weaknesses were inherent and overlooked, masked by a better albeit subdued market in South Africa. As the pandemic changes the consumer tide, be sure businesses which have been swimming naked will be exposed.
