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%.


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