An extract from our latest cover story in which Simon Lord investigates one of the biggest benefits that franchising can offer.
If you’re looking at buying a franchise, you’ll soon come across the phrase ‘buying power’. But what does it actually mean, how does it work and what advantages does it give you?
Although franchises are made up of independently-owned businesses, the franchise group as a whole uses the same brand name, the same operating systems and, crucially, offers the same products or services. This means that the franchisor can negotiate volume discounts on supplies based on the needs of the whole group, rather than each individual franchisee having to do their own deals.
For example, a café franchise with 75 outlets which buys all its milk from the same supplier will be able to get better prices for its franchisees than an independent café can get, even from the local wholesaler. A reduction of, say, 5c per litre might not seem like much, but when you apply the same principles across a whole range of ingredients, it starts to add up – and when you look at other areas where buying power can be put to good use, the value becomes obvious.
When you’re first getting started, for example, buying power applies to one-off expenses such as:
That can make a big difference to the cost of getting up and running. Apart from the fact that you’ll pay less than an independent business would, the franchisors’ experience should mean that you are buying exactly what you need when you first get started. That saves you spending your much-needed capital on the wrong things: equipment that won’t last or isn’t up to the job as you grow.
Another area where the size of the group can make a big difference when you first set up is funding. A well-established franchise with a strong track record will be able to access better funding options for franchisees from its preferred banks. These may include funding against the value of the business itself.
So how is buying power actually applied? Stuart Deeks, the former franchisor who took Esquires Coffee around the world, explains: ‘Let’s say that in your sector the industry standard gross margin is 70 percent – that’s before all the fixed overheads such as wages, rent, rates and so on. As a franchisor, my job was to ensure that franchisees could achieve at least that margin (after franchise fees) and beat it where possible, while still getting all the other benefits the franchise offers – marketing, support, systems, training and so on.’
Matthew Everest of Pack & Send says that in their business, ‘Obviously we receive significant discounts on our freight rates otherwise we would be out of business pretty quickly. But with regard to consumables and equipment, we ensure a certain standard, rather than just always buying the cheapest. Obviously volume helps with negotiations, but building good solid relationships with suppliers is also really important.’
Grant McLauchlan provides an example from the commercial cleaning industry. ‘CrestClean franchisees use chemical systems manufactured in New Zealand, and licensed by Environmental Choice, so they have proper environmental accreditation,’ says Grant, who is managing director of the franchise. ‘These are supplied at wholesale prices, as there are no middle men and franchisees can ...
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