Monday, June 27, 2016

Franchising in Britain - A Success Story

Earlier this year, the British Franchise Association (bfa) together with NatWest published a long term franchise survey. It covers decades of franchise performance in the UK and includes impressive figures.
Similar to the US, the contribution of franchising to the British economy has been rising consistently with only one dip in 2008. That year, the recession hit, but at £11.4 billion, it was still above the £10.6 billion recorded in 2006. Additionally, franchising generated record profits in 2015 with an all-time high of full time employment figures.
Much to its credit, the bfa also had NatWest analyse the success rate of franchising.  
According to the survey, 4.6% of franchised businesses were involved in some kind of turnover.
Let’s see how that number stacks up. Of the total 1,998 incidents of turnover, 766 ended in a closed down business, less than 40%. That means 60% of franchised businesses that had something impacting their operations stayed in business.
The beauty of franchising is that the franchisor and other franchisees within the same system can chip in to rescue an operation. Case in point, the 91 businesses classified as commercial failure. Of those, less than 50% actually closed down. The remaining 50 were either transferred to another franchisee or the respective franchisor bought them back. Experience shows that these reacquired businesses are often re-franchised again. Similarly, a retiring franchisee does not mean a closed business. Of the 582 franchised businesses that are included in the turnover, 163 — just over a quarter — were indeed closed down. But the others were either bought by existing franchisees or the franchisor stepped in.
For that reason, a franchised unit continuity rate can do British franchising more justice. This rate is traditionally used in the US and does exclude only units that left the franchise system. After all, the lights are still on in a transferred unit. Applying that to the bfa/NatWest calculations, we can remove 1,089 incidents of turnover which means over a fifth of the turnover had no effect on the continuity rate.
Keep in mind that we haven’t even touched on a real failure rate yet. The franchised continuity rate excludes transfers but still counts reacquisitions by the franchisor because these businesses leave the franchise system by becoming a company unit. However, they’re still operating, employing people and generating revenue. That’s what reacquisitions and transfers are for.
That sign “under new management” in franchising often just means a new franchisee has taken over, because let’s face it, not every franchisee will succeed. However, that is often a reflection of the previous franchisee’s lack of skill rather than a weakness of the franchise system. That’s why franchisors will mostly prefer the transfer of a struggling business to an experienced franchisee in their system who can turn it around.
There is one additional factor that’s important for understanding the failure rate. The bfa/NatWest’s data on unit turnover include one mystery bucket referred to as “other”. That category captures various things that can happen to a franchised business. This “other” does not necessarily mean “failure” either. It can include incidents that forced a business to close but that had nothing to do with the franchisee’s skills or the system’s strength. Think flooding, a lease that’s up, road construction right in front of your shop, etc. Such occurrences need to be excluded from the calculation of a true failure rate.
In summary, the bfa/NatWest survey reports a 4.6% turnover. From the numbers, we know that 1,242 of the examined incidents affected operations that actually stayed in business. Given that only 766 closed down and not always for reasons that would qualify as a business failure, British franchised businesses included in the survey can reasonably claim a success rate north of 97%.

Friday, June 24, 2016

Brexit - We Had Plenty of Time to Avoid this

When you ask people to vote you may end up with a result you don’t like. I am not British, so I didn’t have say in the referendum but the outcome will affect me as a fellow European. That’s what I still am, like it or not Boris, Farage and co.
Before EU supporters get too smug about any perceived political stupidity on the island, consider this: we had plenty of warnings from other countries. Go back to 2005: France’s Jacques Chirac smugly held a referendum about the European Constitution convinced of an easy victory he could use for political gains. The French electorate failed to cooperate, with 55% rejecting the constitution. So did the Dutch. The Dutch! Only Spain and Luxembourg supported the constitution.
Remember any results from other EU countries? Don’t worry if you don’t. The French No and the Dutch Nee, scared the wits out of the governments of the Czech Republic, Denmark, Ireland, Poland, Portugal and the UK. They decided to postpone their own referendums were either postponed or cancelled altogether. The Germans don’t like referendums apparently believing that close to 60 years of post-war democratic education is too short a time to give the people more of a say in between elections.
The EU member states had more than 10 years to figure out how to fix something that failed to appeal to EU citizens. Instead, they politely held the same referendum again asking the people to vote differently. That worked, unfortunately but in the end it showed what politicians really thought of their people. And people aren’t stupid. They usually can sense when they are being played for fools. And so the EU muddled through without real reforms, without engaging the public and with national governments blaming Brussels. The refugee crisis brought it to light. Too many governments focused on national interests, or their own political interests, rather than sticking to European ideals.
It was only last year when we were concerned about a GRexit. Now the BRexit is a reality. I don’t take any comfort in experts who say that the UK will suffer more than the EU. Economically that may be true. However, politically and, yes, morally, we remain stuck in the boat. The EU’s reputation is in tatters for now. The British government is falling apart. Farage’s friends in France, Hungary, Germany and Austria are on the march.
France and Germany used to epitomise everything great the EU stands for. Between 1870 and 1945, within a normal life span, the two countries fought three bitter wars. They could have stayed enemies for generations. Instead, they realised that something like the EU would be stronger than any national interests or party politics. 
They lost the moral high ground in 2003, when they became the first countries to break euro-related deficit rules, they themselves had created. The 2005 referendum was a second warning shot. People aren’t stupid. We had plenty of warnings.

Brexit - We Had Plenty Time to Avoid this

When you ask people to vote you may end up with a result you don’t like. I am not British, so I didn’t have say in the referendum but the outcome will affect me as a fellow European. That’s what I still am, like it or not Boris, Farage and co.
Before EU supporters get too smug about any perceived political stupidity on the island, consider this: we had plenty of warnings from other countries. Go back to 2005: France’s Jacques Chirac smugly held a referendum about the European Constitution convinced of an easy victory he could use for political gains. The French electorate failed to cooperate, with 55% rejecting the constitution. So did the Dutch. The Dutch! Only Spain and Luxembourg supported the constitution.
Remember any results from other EU countries? Don’t worry if you don’t because the French No and the Dutch Nee, scared the wits out of the governments of the Czech Republic, Denmark, Ireland, Poland, Portugal and the UK where the referendum was either postponed or cancelled altogether. The Germans don’t like referendums apparently believing that close to 60 years of post-war democratic education is too short a time to give the people more of a say in between elections.
The EU member states had more than 10 years to figure out how to fix something that failed to appeal to EU citizens. Instead, they politely held the same referendum again asking the people to vote differently. That worked, unfortunately but in the end it showed what politicians really thought of their people. And people aren’t stupid. They usually can sense when they are being played for fools. And so the EU muddled through without real reforms, without engaging the public and with national governments blaming Brussels. The refugee crisis brought it to light as the majority of governments focused on national interests, or their own political interests, rather than sticking to European ideals.
It was only last year when we were concerned about a GRexit. Now the BRexit is a reality. I don’t take any comfort in experts who say that the UK will suffer more than the EU. Economically that may be true. However, politically and, yes, morally, we remain stuck in the boat. The EU’s reputation is in tatters for now. The British government is falling apart. Farage’s friends in France, Hungary, Germany and Austria are on the march.
France and Germany used to epitomise everything great the EU stands for. Between 1870 and 1945, within a normal life span, these countries fought three bitter wars. They could have stayed enemies for generations. Instead, they realised that something like the EU would be stronger than any national interests or party politics. They lost the moral high ground in 2003, when they became the first countries to break euro-related deficit rules, they themselves had created. The 2005 referendum was a second warning shot. People aren’t stupid. We had plenty of warnings.

Thursday, June 16, 2016

A Possible BREXIT and Franchising

FASTSIGNS is one of the latest U.S. franchises which push for more growth in the UK. The company is planning to add four more franchisees in Britain by the end of 2016, hoping to reach about 50 by the end of 2018. 
Continental European based franchises are also eying the UK as a natural market for international expansion. It is an interesting strategy given that once operations manuals and training modules have been translated into English, franchise brands will be able to re-use them with minor adaptations in other countries as well.
However, there is the referendum next week on whether the UK should remain in the European Union or not. Current polls suggest that a Brexit might just be possible. Interestingly, there is little analysis on what a Brexit could mean for franchised businesses in Britain. One expert stated that a Brexit “could impact different franchise businesses in totally different ways and I don’t believe there is one right answer for everyone”.
With the help of some friendly people at Bird & Bird, a global law firm, I came across an article by Dr Mark Abell, one of the partners, which spells out some concrete steps any franchisor in the UK can take. Below is an excerpt:

What Should Franchisors be Doing about the Possibility of BREXIT?

It is recommended that each franchisor should consider establishing its own 'Brexit business risk'  working group to consider the internal implications of a Brexit for both themselves and their franchisees, particularly if they have franchisees in the EU member States.
The role of this working group could include:
    To consider whether he franchisor and its franchises are particularly exposed to the risks of a Brexit in comparison with its competitor businesses (e.g. number of franchisees in the UK and EU, relative size of the UK business to other EU member states , service charge and royalty payment  currency etc.).
    To consider the impact on customer demand  in the shorter, medium and longer terms
    To consider communication with franchisees in other EU member states to show that the franchisor is on top of the implications of the referendum and of a possible Brexit. 
    To communicate that (i) there is a real risk of a Brexit, and (ii) this is not just a UK issue – it may have wider implications for other EU franchisees.
    To consider communication with both franchisor and franchisee staff as regards the potential impact of Brexit.
    To consider possible export implications if the franchise involves the export of products to franchisees in other EU member states. even in non-EU jurisdictions where it has control over a local affiliate.
    To consider the practical implications of a Brexit – for example, will it affect the free movement of the franchisor's support staff and audit teams? 

Also, will it potentially also affect the free movement of the franchisor's cash or other assets or the pay, net of franchise fees by franchisees in other member states?
Whether the franchisor needs to make any change to the terms of the franchise agreements it has with its franchisees in other EU member states.
So, Brexit will inevitably have an impact upon franchisors in the UK that are doing business in other EU member states.  It may also have an impact on purely domestic franchisors.  What that impact will be and whether it is likely to be positive or negative is something that franchisors should now start to consider carefully.  They should ensure that their franchisees understand that they are actively considering the potential impact and be pulling together a strategy for how to deal with Brexit if it happens.