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When it rains its good to have an umbrella

FRANCHISING

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Back in October 2022 I discussed the merits or considerations of buying into or starting a franchise business whilst we were looking at the potential of a recession – Recession storm clouds looming: is now a good time to purchase a franchise?

The reality is economies do go through cycles and unless you operate a business for a very limited period, and are very lucky, you will at some stage be operating in a recession or economic downturn, a period of high inflation, tight labour markets or a combination of these factors.

Back to weather cliches, it’s not just raining, for many it’s pouring.

If you own an SME in New Zealand, it probably feels like it has both been raining for several months, both figuratively and literally. Yes, it’s official, the New Zealand economy is in recession.

Add this to an already tight labour market, high inflation and supply chain challenges and you may ask, “who would want to be in an SME business or a franchise?”

If it was a choice of independent SME or franchise, on rainy days there are three reasons why I would choose to be under the umbrella of a franchise every time.

Marketing power

Individually owned and operated franchises have significant advantage over similar independent businesses when it comes to marketing which can help them outperform their non-branded cousins.

Firstly, they benefit from having a brand, and market awareness. A group of 20 retail stores will inevitably have a larger market presence than 20 individually named businesses. This can lead to greater foot or web traffic, more enquiry, and this can flow through to sales.
The second and significant benefit of being in a franchise is the power created by collective marketing.

The first thing that many businesses are inclined to do when times get tough is to cut their marketing spend. Unfortunately, as revenues drop, this is exactly the time that businesses need to be increasing their efforts to increase sales.

If a system of 20 franchises are contributing 5% of revenue to group marketing, each of the 20 franchised businesses are effectively benefiting from having spent 100% of their revenue on marketing.

Purchasing power and supply chain

The same principles apply to purchasing and supply chains, the collective power of a franchise system is significant. It can be in areas other than just pricing based on volume. Franchise systems can leverage their collective purchasing power by reducing transport costs, preferential supply arrangements (including access to limited stock) through to payments and terms of trade.

You are not alone

For many franchisees, during challenging economic times, as beneficial as brand awareness and marketing will be in driving sales through the door, and limiting costs of doing business and improving supply chain as part of group may be, it’s not these factors that top their list.

Good franchise systems may have best in class products, processes, and business practices, but they also harness the collective knowledge, experience and sense of community from being part of a group. And it’s often this ‘being in business for yourself, but not by yourself’ that get’s franchisees through rainy days.

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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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