It’s not quite true that franchises are failure-proof. Here’s why some of them are not able to sustain their operations as envisioned.
Because franchising has proven to be a very popular way of getting into business or expanding an existing one, a myth has arisen that franchises can never fail. The reality is that franchising is not failure-proof. Just like any other business, it will have its own share of failures. The only difference is that the failure rate will be much, much smaller than starting your own independent business.
The US Department of Commerce has placed the failure rate of franchised businesses after 10 years at only 5 percent, versus 82 percent among independent businesses. In the Philippines, among the members of the Association of Filipino Franchisers Inc., the success rate is 98.6 percent and the average business lifespan of franchise systems is 14 years.
Exactly why do some franchises fail? Since Franchising is a personal and contractual relationship between two parties, it’s easy to see that no one party has a monopoly on possibly causing a franchise to fail. Normally, both parties will contribute their share of failure factors; it’s only the degree of responsibility that will differ.
Getting into Franchising for the wrong reasons.
Here are just a few of the wrong reasons for getting into franchising:
“…I will franchise because my competitor has expanded the number of its branches and I also want to expand.”
“…collecting franchise fees may be the best way to fatten my bank account and to enable me to travel wherever I want.”
“…I want to give my son or daughter a business, so I will get him or her a franchise.”
“…I better just get a franchise since I will automatically have a very good sale and profits.”
When franchisors and franchisees have these mindsets, the franchise is definitely on its way to failure at the very onset.
To avoid failures, both franchisors and franchisees should be very clear about their reasons for going into franchising. They should manage their expectations and realize that their respective franchising goals are complementary to each other. These goals should therefore be mutually inclusive rather than exclusive. Indeed, the franchisor’s success of the franchisees, and when both Franchisors and franchisees accept this philosophy, they build a strong foundation that reduces the chances of failure of their mutual enterprises.
An admirable example of a statement of this fundamental franchising objective was that made by Ray Kroc, the founder of McDonald’s. He said that his basic goal in franchising is to make his franchisees successful before him. His first successful franchisee, Sandy Agate, clearly understood this franchising goal and methodically followed the business system that Kroc had laid forth. Other McDonald’s franchisees did the same over the year, making McDonald’s the best franchisor the world has ever known.
UNMANAGED GROWTH
Forward planning is an absolute must when a franchisor decides to expand his or her business through franchising, and the same is required of anyone who goes into business as a franchisee. Franchisers must ensure that their level of commitment and support to each of their franchisees is the same and consistent whether the latter is the first or, say, the 50th franchisee. In like manner, franchisees must make sure that they are prepared and ready to meet the demands of increasing sales volumes. This is because customers can be very unforgiving when a franchised outlet fails to provide the standard service and quality products that a franchised product or service is known for.
Successful franchise systems provide built-in mechanisms to cope with such growth challenges. For sure, mistakes will be committed along the way, but great franchise systems build on these mistakes, then move on and become stronger as they wrestle with the challenges presented by their growth. In fact, franchising’s greatest competitive edge I that both the franchisor and its franchisees can work as a team to effectively address these growth challenges. This is the business synergy in franchising that other forms of doing business simply don’t have.
LOW SALES AND LOSSES
Most franchise failure result from low sales and operational losses, and the most common factors that lead to them are as follows:
1. Poor Location
This can result if one does not fully study the marker environment of the proposed franchised branch or outlet. Both franchisor and franchisee need to identify the success factors of the location, using as benchmarks the location of successful company-owned outlets and franchised outlets. Of course, since franchise concepts can differ widely, those benchmarks will likewise differ from one franchise system to another.
Other failure factors are beyond the control of both parties. Some of these are sudden declines in the market due to road constructions, closure or relocation of major traffic generators such as big business establishments and factories, entry of cutthroat competitors, and physical or economic deterioration of the franchise area.
2. Inability to control and manage finances
The most frequent complaint of franchisees is that they are not making enough profits from the business. This may in fact be true for some, but more than not, the low profitability of a franchised outlet results from inadequate financial management. In the food sector, in particular, franchisees should be extremely vigilant in controlling both food costs and operating costs. No amount of sale will generate profits if a franchisee is not properly managing the cash, inventory, purchases, and materials usage of the franchised outlet. It should always be kept in mind that people other than paying customers can consume food in a franchised outlet.
Indeed, when food is prepared but not served to paying customers, costs can escalate and earn profits.
It is likewise important for franchisors and franchisees to understand financial reports. The monthly financial report is a particularly important tool in making decisions on how to improve the financial performance of franchised branches.
3. Inadequate marketing and advertising
Both the Franchisor and franchisees must share responsibility for marketing the business. The former for system-wide marketing and the latter for local store marketing. Franchise failure can result if these marketing efforts are not done properly.
In these times of fierce competition, consumer choices are largely dictated by the to-of-mind recall. This can be effectively achieved through advertising and promotions, but tri-media advertising will rarely be affordable by most small and medium franchise systems. Franchisors and Franchisees therefore should always be on the lookout for creative but low-cost ways to market their products and services.
4. Breakdown in communications
As earlier pointed out, franchising is both a personal and a contractual relationship between the franchisor and the franchisee. In practice, however, the personal relationship becomes the more important success factor. In fact, failures in the business can often be traced to a poor relationship caused by communication problems between the franchisor and the franchisee.
This often happens when the franchisor gets easily hurt and becomes emotional when a franchisee raises complaints against a perceived lack of support from the franchiser, as a result of which he or she simply refuses to talk to the franchisee. On the other hand, the relationship can break down when a franchisee continually grumbles and grips about imagined inadequacies of the franchisor and the franchise system. When both parties are adamant and refuse to settle it down and thresh about their problems, franchise failure can result.
A successful franchising relationship is clearly the result of open communication lines between the franchisor and the franchisee. This is because regular communication breeds mutual understanding, which in turn opens up even more effective channels for working together that can further strengthen the franchise system and maximize its chances of success.
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You may contact Armando “Butz” Bartolome for questions and more information.
By email: aob@gmb.ph
FB Page: Armando Bartolome
Linkedin: https://www.linkedin.com/in/franguru/
Website: https://www.gmb.ph
