A Darwinist look at the future of franchising

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The world has changed. We are not talking summer to winter, we are talking ice age. In fact, I would suggest that while we have witnessed the impact on human health, we have not even glimpsed the tip of the economic and social iceberg that is coming over the horizon.

I have previously discussed the counter-cyclical relationship between the economy and franchising and why the unique traits of this economic iceberg will lead to a new growth of franchising. It should be noted, not all are going to benefit, and we are already seeing glimpses of what successful will look like as we move into this new economic and social environment.

As always, those that change and adapt will prosper, those that do not, will not survive.

Franchise models that were able to continue to trade online during shut-down or by being an essential service benefitted from the initial environmental change, but moving forward, genetic sequencing of the successful franchise species will have similar characteristics.

Best systems likely to be more successful

Having the best burgers, coffee or retail offering will not equate to survival or dominance of the species.

Unquestionably, as unemployment increases, an increased number of people will look towards franchising as their Plan B.

Many would have spent considerable time as employees learning fantastic skill sets, suited to performing a role or job function. They will not be looking at a franchise to learn a task, they’ll be looking at a franchise to buy and develop a business. However, their ability to run or manage a business may be non-existent.

Over time, the truly successful franchise brands will be those that have the best systems. Everything from how they manage a recruitment process, how they take someone with no business experience and train, to how they support and develop franchisees to grow their businesses. Better systems also include protecting the brand, and looking forward at the challenges and opportunities.

Capital is a critical component and generally, the more capital intensive a franchise model, the more challenging it is to grow that system. We are seeing a rise in interest in lower investment level franchising. But it is not only the absolute numbers involved, it is the ability to borrow, fund and produce a return on investment.

Franchise systems that can accommodate different funding and capital arrangements and/or produce super returns on investment levels will be more successful.

These could involve any combination of mixed capital models, the rise of the traditional co-operative structure, preferred funding arrangements with banks, through to crowd funding and social capital investment schemes.

New rental and property models

We have seen an immediate swing away from bricks and mortar businesses towards mobile and work from home. Suddenly having premises and a lease has become a potential and significant burden. Conversely, those without premises, and associated cost, have fared reasonably well.

Capital is a critical component and generally, the more capital intensive a franchise model, the more challenging it is to grow that system.

However, there will always be businesses that require a physical presence. Models that do not tie a franchisee to a traditional extended period lease, and or models that are able to provide a flexible rental or property model for franchisees, will unquestionably be favoured in the short-term and benefit from growth. And these will potentially be more robust and successful over time.

Hamburger chains selling bread and milk and high-end restaurants delivering cook your own food boxes are perhaps extreme examples of the now almost cliched “pivot” approach to diversifying income streams and even the concept of the business.

I would suggest the need for franchisors to protect income will encompass both the aforementioned change in product or delivery model at a unit level and perhaps more importantly, their need to insulate and diversify income. This will often be intrinsically linked to the franchisees income. This may involve multi-brand and multi-concept ownership, or vertical integration including distribution outside the franchise system.

It might be cold outside. But do not worry, the franchise business model won’t just survive the cold, some will adapt and thrive in it.

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Nathan Bonney
Nathan Bonney
Director of Iridium Partners. He can be reached at nathan@iridium.net.nz or 0275-393-022

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