Larry Hodes | CEO | Grow Franchising | Board Member | Franchise Association of South Africa (FASA) | mail me |
If you run a franchise network long enough, you learn that the problem sitting in front of you is rarely the only problem you have.
A franchisee tells you that margins are under pressure. Dig a little deeper, and you may discover that they have stopped replacing staff. Training has slipped, and service standards are beginning to suffer. Sales then start softening, which puts further pressure on the numbers. The franchisee becomes frustrated with head office, while head office becomes frustrated with the franchisee. Suddenly, a cost problem has become a people problem, a relationship problem and a brand problem. I see versions of this far too often.
The 2023 survey shows just how concentrated the pressure has become. Six in ten franchisors identified costs as a major challenge. Meanwhile, 45% pointed to franchisee-related issues and 42% to staff. These are not three unrelated problems sitting in separate boxes. They often represent the same problem moving through the business in different forms.
Franchisors get into trouble when they respond to whichever problem happens to shout the loudest. If costs are hurting, they look for savings. If a franchisee is struggling, they send in support. Furthermore, if staff turnover is high, they organise more training. All three responses may be necessary, but they only address what is visible. Unless the franchisor understands the underlying cause, the same issue is likely to surface again in another form. The real cause may involve weak unit economics, poor franchisee capability, management problems or pressure elsewhere in the system. That is expensive in any business. In franchising, however, it can spread like wildfire.
You cannot cost-cut your way out of a weak model
Costs emerged as the biggest challenge in the FASA research, accounting for 60% of responses. Beneath that figure lie the realities franchisors and franchisees face every day. These include inflation, expensive rentals, a slow economy, escalating costs and lower margins.
Most franchisors know their costs have increased. However, what concerns me is how many still assess their franchise model’s economics using outdated assumptions. They act as though assumptions made three, five or ten years ago remain valid. Realistically, they may no longer reflect current business conditions.
If rent, labour, electricity, stock, finance and logistics have all changed materially, the outlet’s economics have changed too. Addressing this requires more than an annual price increase. Another instruction telling franchisees to watch expenses will not solve the underlying problem.
Franchisors should know exactly where the network loses margin. They should understand which outlets face pressure and why. They should also examine supplier arrangements, product mix, labour models and rental exposure. Furthermore, they need to establish whether certain formats have simply become too expensive to operate in particular locations.
The FASA report identifies smaller-footprint models and more flexible investment options as possible ways to contain overhead and labour costs. This thinking matters because asking franchisees to squeeze another percentage point from an already stretched business is not always the answer. Sometimes, the model itself needs attention.
I would also caution franchisors against using expansion to disguise weak unit economics. Opening ten new outlets does not make five struggling ones healthier. Growth may look impressive initially. However, the support burden, closures or franchisee disputes may emerge later. A franchise network is only as commercially sound as the businesses operating within it.
This is also an important consideration when assessing franchising vs starting from scratch. A franchise offers an established operating model, but that advantage only holds when the underlying economics remain viable. Prospective franchisees must understand that buying into an existing system does not eliminate commercial risk.
Be far more selective about who you allow into the system
The second pressure point involves franchisees themselves. Some 45% of respondents cited franchisee-related issues. The FASA research goes further, identifying difficulties in finding franchisees with sufficient capital and experience. It also highlights instances where franchisees fail to operate according to required standards.
Some franchisee problems can be solved through better support. However, others originate during recruitment. Franchisors often underestimate how costly the wrong franchisee can become.
There is a temptation, particularly when growth targets are involved, to focus heavily on whether a prospective franchisee can afford the investment. Capital matters, of course. However, having the money to buy a franchise and having the ability to run one successfully are two completely different things.
You are looking for someone who can manage people, read the numbers, follow a proven system and make sound decisions under pressure. They must also accept accountability when things go wrong. Equally important, they need the judgement to know when to ask for help.
The extremes are equally dangerous. You do not want a franchisee who believes every rule is optional and constantly wants to reinvent the business. Equally, you do not want someone who expects head office to run the outlet for them.
Franchisors must become comfortable with saying no to prospective franchisees who are wrong for the network, even when the cheque is ready. Once franchisees join the system, support must not become a substitute for accountability. A healthy franchisor-franchisee relationship should be strong enough to accommodate difficult conversations early. These may involve standards, profitability, staffing, debt or performance.
If head office only intervenes when a franchisee faces serious financial trouble, good options have usually disappeared.
This distinction also matters when considering franchising vs starting from scratch. Buying into an established brand does not automatically guarantee business success. The franchisee still needs the financial discipline, management capability and commitment to operate the business effectively.
Stop treating people problems as somebody else’s problem
Staff emerged as another significant challenge in the survey, accounting for 42% of responses. Franchisors raised concerns about staff training, turnover and retention. They also highlighted difficulties attracting qualified employees and the need for retrenchments.
This is one area where I believe franchisors need to take a broader view of their responsibility. The franchisee may employ the staff, but customers experience the brand. If someone receives poor service, they do not walk away thinking, “That individual franchisee clearly has a recruitment problem”. Instead, they think the brand gave them poor service.
Consequently, franchisors cannot treat recruitment, training and management capability as outlet-level issues. Head office should not only hear about these matters when something goes badly wrong.
Franchisors should provide franchisees with practical recruitment and onboarding tools. They should also offer clear job profiles and proper management training. Furthermore, they should pay attention to patterns across the network.
If one outlet experiences exceptionally high staff turnover, find out why. If several franchisees struggle to recruit for the same position, investigate what has changed. In addition, if managers keep leaving, establish whether remuneration, workload or the franchisee’s management style contributes to the problem. The operating model itself may also need attention. These business indicators can expose wider problems within the franchise system.
One of the most useful things a franchisor can do is become better at spotting trouble before it appears in the profit-and-loss statement. A franchisee who suddenly stops engaging with head office should get your attention. Deferred maintenance should raise concerns too. So should repeated discounting, unusually aggressive cost-cutting, declining standards or persistent staff churn.
Any one of these issues may be manageable. However, several appearing together should tell you that something is happening beneath the surface. This is where good franchisors earn their keep.
Franchise networks rely on replication, but running one successfully requires far more than ensuring everyone follows the same manual. You need to understand how financial pressure changes franchisee behaviour. You must also recognise how franchisee behaviour affects staff and standards. Ultimately, you need to understand how those changes reach the customer.
Costs will remain a challenge. Some franchisees will struggle, and good people will leave. You cannot remove these pressures from franchising. However, you can prevent them from becoming a chain reaction that weakens the network.
The franchisors who manage these challenges effectively are usually those who identify problems while they remain small enough to fix.
