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WHEN IS A FRANCHISE NOT A FRANCHISE?

by Simon Lord,
last updated 30/08/2010

August 2010 - Can a business be a franchise without knowing it? The answer may surprise.

‘The word “franchising” is pretty loaded for quite a lot of people,’ a prominent franchising lawyer said to me over lunch recently. ‘Go to a BNI or local Chamber of Commerce meeting and you’ll find many business people equate franchising with pyramid selling and all that sort of thing. Yet so many businesses are franchises without knowing it.’ His remark got me thinking about another conversation I’d had while on a day’s bush walk. I had got chatting to the man walking next to me and I told him that I worked in franchising. ‘Oh yes,’ he said, almost dismissively, ‘franchising. Of course, our company doesn’t work like that – we have partnerships with our people.’

As it happened, I knew a bit about the company he worked for. It operates its retail outlets via a joint venture arrangement, but many of the provisions will be very familiar to any franchisor. There is an imbalance of power between the partners that gives my new friend’s employer ultimate control, the junior ‘partner’ makes initial and ongoing payments to the senior one, and the business operates under a common brand and undertakes common marketing activities. In almost any country where there is franchise legislation, these would be enough to define it fairly and squarely as a franchise – yet the company would never describe itself as a franchisor.

Another recent conversation: a colleague told me about a new client who had a similar reaction. In every respect his company fitted the definition of a franchise, but the last thing he is going to do is demean his business by calling it one. In his mind, franchising is all about lawnmowing and fast food, and he doesn’t want to be lumped in with ‘those sorts of people.’ Yes, franchises include lawnmowing and fast food operations but they also cover business coaching, retail, health & safety services, motor dealers, elderly care, education, hydraulic maintenance, finance, medical care and pharmacies, business networking and even celebrity speaking. So why the snobbery about franchises?

For anyone involved in franchising, it’s sometimes easy to forget that these preconceptions still exist. We are very aware of the vast range of organisations that use some form of franchising to help them distribute in the most efficient way. We know that most of the world’s accommodation chains are franchised, from Hilton Hotels to Best Western. That in the world’s biggest industry, many petrol companies franchise their fuel delivery outlets and associated convenience stores. That the world’s top real estate companies are franchised. And that here, in New Zealand, franchise arrangements are used by government enterprises (Lotto and New Zealand Post), corporates (Fletchers with Placemakers and Cerebos Greggs with Robert Harris) and stand-alone franchise companies such as Fastway Couriers, which has used the franchise model to expand globally from its Napier base. But so many people – including highly-educated business people – still have misconceptions or prejudices about what a franchise is or can be.

Which is why a recent news story about Foodstuffs, which owns the New World, Four Square and Pak’n’Save brands, the Liquorland franchise and the Gilmours food wholesaling operation, caught my eye. The article quoted Foodstuffs general manager for strategy and new ventures as saying all the Gilmours businesses were now franchised, or in the process of being franchised and commenting that Foodstuffs’ core competency was in franchises.

It was noteworthy because, until relatively recently, Foodstuffs usually talked about ‘owner/operators’ or ‘licensees’ rather than ‘franchisees’. Now the company has fully embraced not just the franchise model but the word itself to describe its $8 billion-plus business, and is using its considerable expertise to develop other aspects of the business too. As Foodstuffs themselves commented, ‘We had a corporate model within a franchise organisation, and it was not a great fit.’

When a company like Foodstuffs promotes the fact that it uses a franchise model, it suggests that attitudes to franchising might be changing, at a big business level at least. Of course a franchise model won’t suit every organisation but to see it publicised might at least encourage others to accept that their ‘joint venture’ or ‘distributorship’ is really a franchise by another name.

But changing perceptions at a local level will take a long time. A few years ago, when franchise regulation was on the cards, the former chairman of the Franchise Council of Australia made a very perceptive comment at a meeting in Auckland. He said, ‘In Australia we didn’t realise how bad a reputation franchising had in some circles until legislation was brought in. Now that franchising is seen to be regulated, there’s a much wider understanding of what actually constitutes a franchise and how it works – and a much greater acceptance of it among professionals and the public as a valid business model.’

From my recent conversations, it could be that franchising in New Zealand faces the same challenges as Australia to a far greater degree than it realises. If you have any feedback on this, I’d love to hear from you – email me and tell me what you think, or add your comments below.

This article first appeared in NZ Business magazine

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