Top 10 Challenges and Solutions in Franchising Businesses

Hey friends, last blog was focussed on the basic concepts of Franchise. In this blog, we will speak about the challenges that a franchising business faces from the Franchisor’s point of View

Capital:

A franchisor needs sufficient capital to sustain the business on its own until sufficient number of franchise (franchise stores) are generated. Thus, a franchisor needs to be self-funded till that time. This amount may vary from Rs. 30 lakh to Rs. 2 crores depending on the type of the product or service. Plan ahead for 3 phases – start-up/launch phase (6-18 months), growth phase (18 months to 5 years) and long term (5 years and beyond). The duration will depend on the product/service. This allows you to sustain setbacks when growing your Franchise.

Infrastructure: 

New Franchisors require proper infrastructure to be in place to support their franchisee. For example, operational support, training staff, technology, marketing and administrative support and so on. Presence of proper infrastructure will make the franchising operations hassle-free.

Internationally Increasing Competition:

International brands like Starbucks and Domino’s in fast food industry, H&M and Forever 21 (retail chain) in Clothing, Mac and Chambor in Cosmetics, Nike in Footwear, Remax in Reality, are giving competition to home-grown brands. These International Brands often come with a well-established brand image than Indigenous Brands. Identify what is it that creates brand awareness. Maybe a smart and targeted marketing campaign that is not necessarily the most expensive will help. Today there are multitudes of digital ways to reach your target customer.

Hiring Right People:

You alone cannot do everything. The people working in the franchisor company will be representing the company’s core values. They will interact with the franchisees at some level. Categorise the skill set that you require in your staff. Not everyone will be client facing, some may need operational, shipping and logistical expertise while others may need to be more adept at the latest marketing strategies. Hiring people should be done critically by matching their skill set. You don’t have to hire friends and relatives just because they are interested to work with you or maybe a cheaper option. Think long term.

Rising Expenditure:

Increasing electricity cost, maintenance cost, interest rates, staff salaries, transport will add up to the cost of the final product/service. Cost Control plays a significant role in this. But do not be “Penny wise, pound foolish” about how you do this. Simply paying staff rates below market rates may results in high turnover. Or using substandard materials, poor marketing strategies may collapse your franchise before it picks up.

Bad Debts and Servicing of Debt:

Very few franchisors provide credit to the franchise. Most of the supplies are on advance payment. But the franchisors in nascent stage which provide credit to the franchise face this challenge of bad debts from the low performing franchisee. Evaluate whether you will survive few such experiences as they may be unavoidable. With cash inflows being on lower side in initial stages, debt servicing is another challenge faced by the franchisor. 

Changing Consumer Demand:

We are living in a highly volatile digital world. Innovation in technology, has led to consumers demanding convenience. They need the product or service at their doorstep. May be it is some dress or phone or cosmetics purchased online to be delivered at their doorstep or it is a beauty or spa service booked online through Urban Clap. Everything is based on convenience. The upcoming franchisors have to think about all those factors. Identify the most appropriate channel for your product/service. Clothing Sector Franchisor should think about listing of the products on online selling portals (aggregators) like Amazon, etc. Food sector franchisor should be listing their products on Swiggy, Food Panda, etc.

Right Quality Candidate for Franchise:

It is a trend amongst start up franchising business to provide franchisee to friends and relatives in the initial stages. This may work sometimes but from long term vision, it becomes myopic expansion strategy, limited to few people and limited resources. Franchisors should make effort to find franchisees which are right candidates. The right candidate is the one who is interested and willing to invest money and time in becoming a franchise. The opinion, experiences and efforts of a qualified franchisee adds to the growth of the franchisor business.

Difference between Franchisor and businessman:

Franchisor is different than a business owner. A business owner focuses more on business profits and expenses control. Whereas, franchisor has to be focussed on his franchisee’s profits. If a franchisee is in profits, only then will the franchising business be profitable. Train Franchisee adequately so that they become successful and enhance the brand image of Franchisor.

Timing:

No business is immune to tough Economic Conditions, so is the franchise system. Success will depend on the concept, strength of the brand, quality of product or service, strength of management and type of Industry. Similarly, the time at which the Franchisor enters the market is also very important. Economic Cycles do affect the cash flows. Seasonal ups and downs too affect the sales. Entry at an appropriate time makes or mars the performance of the Franchisor. Initial failure may sometimes even kill the morale of the franchisor for the prospects of the Company. Be patient and smart. Rome wasn’t built in a day. You will achieve success with your hard work, perseverance and following some basic principles outlined here.

Concluding Statements:

Franchising Business is not everyone’s cup of tea. It requires strength in terms of Finance, knowledge, efforts, Team, Staff, Infrastructure, Research and Market Intelligence. 

McDonald also started at a low level and has a world-wide spread chain of franchise stores currently. Patanjali is one of those Indian Brands which had exponential growth in a small period of time as compared to any other brand. It also used the Franchise system for expansion.

We will cover more about these and other brands in case study format in further blogs. Similarly, we will highlight challenges faced by Franchisee and potential solutions in coming blogs. Do like and share!

Thanks

Nine2Five Team