Making Money - helping franchisees increase profits

Making money isn’t the only reason to start a business: security, lifestyle, the opportunity to work with a partner or to change careers; the need to meet visa requirements or the desire for a new challenge are just as important for many people.

But although money isn’t everything, if you are investing your time, career and savings into your own business then you want to make sure that you won’t lose the lot. Since the Global Financial Crisis (GFC), many businesses have struggled in the turbulent global economy and a lot haven’t survived. If you’re in a business by yourself, there’s only so much you can do to counter the impacts of rising rents, falling sales and increased costs. But if you are a franchisee, you should have lots of help – after all, that’s what franchising is about.

Over the last few years, franchisors have put a lot of effort into supporting their franchisees and helping them maintain or increase profitability – in fact, according to regular surveys, it’s been their number one concern. During the period immediately following the GFC, many stopped opening new outlets as they focussed their attention on helping their existing franchisees to survive and thrive. They found cost savings, developed new products and services and extended their markets. They introduced new technologies and found extra efficiencies. Above all, they learned from each other through gathering data and sharing information.

As one franchisor proudly told me, ‘After the GFC, our sales dropped by an average of 10 percent at each of our stores, but we didn’t lose a single franchisee.’ In this article, we look at four of the key ways franchises have reacted to changing market conditions and how they are helping their franchisees grow again. These are:

1. Increasing buying power.
2. Reducing overheads.
3. Increasing sales.
4. Improving performance.

1. Increasing buying power

One of the biggest advantages that a franchise can offer its franchisees is buying power. The more franchisees, the bigger the group; the bigger the group, the better prices you can get from suppliers on everything from ingredients to insurance. In a franchise, there’s also the advantage that by using one supplier across a whole network, the better consistency you offer the customer and the more loyal fans you create across the country. But making the most of that leverage can require careful management.

When Peter Webster joined Columbus Coffee a few years ago, one of his goals as general manager was to improve franchisee profitability by driving greater consistency around food. ‘Columbus had evolved from offering coffee only in the very early days to full-service cafés with in-house kitchens and chefs, but there was a lot of variation between stores,’ he explains. ‘That meant that every franchisee was buying different ingredients from a whole range of suppliers, which affected our ability to negotiate the best prices. It also meant that margins varied considerably between different products and different franchisees.

‘We introduced a core menu across the business to drive consistency for the customer which would also, in time, give better pricing and therefore better profitability for our franchisees. Reducing the number of items also gives us stronger buying power. The more we can drive up purchases through preferred suppliers, the more we can drive prices down – and that’s good for everyone.’

‘I found in a previous role that one of the issues is getting everyone to see the benefits of using fewer suppliers. It’s inevitable that, on any given day, you might find a common product slightly cheaper at Gilmours or Pak’n’Save because it’s on special, and that can be tempting for a franchisee. But shopping around like that takes time and affects the volume that we can generate with our preferred suppliers over a whole year, so in the end it’s counter-productive. Here, once all the franchisees are on board with a supplier, we can lower elements of their food cost by some 15-20 percent. That will make a massive difference to their bottom line.’

Four steps to success

Columbus is just one example of how franchisors are using better buying power to increase franchisee profitability. Callum Floyd of Franchize Consultants says that, inevitably, franchisors sometimes need to persuade or pressure their franchisees not just to use the preferred suppliers but to standardise other elements as well to get maximum benefits. The four steps are:

1. Specify product;
2. Specify supplier;
3. Specify how it’s merchandised (eg. front of window in all stores);
4. Specify how it’s promoted in local marketing.

‘It’s the franchisor’s role to be a good steward of the franchise business model,’ says Callum. ‘The franchisee is locked into it for 5 or 15 years, or however long the term lasts, so it’s the franchisor’s duty to keep the business model potentially profitable. Driving down costs by specifying suppliers is a major part of that, even if it can seem a bit proscriptive sometimes.’

2. Reducing overheads

The power of the franchisor can also be hugely valuable when it comes to reducing the cost of going into business in the first place. One of the overheads that many franchisees carry is debt – the cost of borrowing the money to buy the franchise in the first place, including vehicle or premises fit-out, stock, any bonds and, of course, enough working capital to enable the business to grow. As Daniel Cloete, National Franchise Manager for Westpac regularly says, it’s not how much you borrow that is the issue –­ it’s how much debt the business can afford to service. Carrying less debt, though, puts less pressure on any business and allows for greater profitability. Franchisors have therefore been looking for ways to reduce the ingoings of new franchisees.

‘We have seen a number of franchises making big reductions on ingoing costs in recent years,’ says Daniel. ‘Some franchise systems have been able to reduce store fit-out costs by up to 30 percent by moving to new suppliers or value-for-money designs. International franchises coming to New Zealand often start up by shipping everything in, but once they move to local suppliers the costs come down.

‘Another area that has helped reduce the ingoings for new franchisees is good lease negotiations. Since the GFC, some franchisors have been able to get strong landlord contributions to store fit-outs in the order of $50,000 to $100,000. That can make a big difference, although care needs to be taken to ensure that the cost is not simply loaded on the rent instead.

‘And, of course, lower interest rates in the last few years have made it a lot cheaper to fund businesses.’

Sensible steps

Franchisor Vaughan Moss has taken several property-based steps to increase profitability for Para Rubber franchisees. ‘We’ve been making very few demands on franchisees in terms of redevelopment, but actively helping them move into more cost-effective locations as their leases have come up for renewal,’ he says. ‘We’ve avoided new builds, which are always expensive, and instead looked for ‘brown-field’ sites – redeveloped premises – or engaged with the landlord to redevelop existing sites. There are a lot of opportunities as corporates abandon older premises and we can back-fill quite effectively. We have also reduced our footprint by about 10 percent, which reduces fit-out costs and lowers ongoing rents.’

At Pita Pit, Chris Henderson says the franchise team is constantly looking for ways to save on the initial investment without sacrificing the quality of materials and workmanship in the stores. ‘This is more critical in markets where the fixed costs are higher, such as Auckland and Wellington,’ he says. ‘One way to do this is to look for smaller footprints; another is to consider complementary brand offerings within the same tenancy – eg. frozen yoghurt. Both deliver a greater operating profit to the franchisee which results in a higher resale value if and when they want to move on. It’s about multiples (see more): I like to say that every dollar earned in the business by way of decreasing expenses, reducing Cost of Goods or increasing sales, is actually equivalent to three dollars when you sell – or even more with a hot brand like Pita Pit.’

A clever approach to property is also behind the success of Streetwise Coffee, whose eye-catching outlets feature not just a tiny footprint but a relocatable structure. If the rent gets too high or a better location presents itself, you can just pick up your business and move! Other franchises have managed to reduce their costs by doing away with premises altogether, such as Mr Woo Sushi and, more unusually, Tall Poppy Real Estate. ‘Most real estate buyers these days look online and very few ever visit a real estate office, so agents are leasing premises and employing staff just to have a window display that no-one sees,’ franchisor David Graves told us. ‘We’ve packaged all the services and functions of an agency into a web-based package so our franchisees can just use a laptop or tablet to manage their business and communicate with salespeople.’ The result has reduced overheads massively and enabled Tall Poppy to gain a significant share in its home market of Wellington.

You can’t just cut costs

While cutting costs has an immediate impact on the profitability of a business, it’s only half the story. As Scott Travis, an accountant with Hayes Knight, points out, ‘When the GFC hit everyone focused on cutting costs first. It was the easiest thing to take a hatchet to, but you can only squeeze the lemon so much before you start to affect morale, lose staff, and impact customer service and product quality.

‘The appetite to run lean hasn’t gone away and people are still keeping overheads as low as they can, but many franchisors have also looked at the second part of the profitability equation: increasing sales.’

3. Increasing sales

Another of the benefits that franchisees pay for when they join a franchise is ongoing research and development into profitable new products and services. Exceed, the door and window maintenance franchise, took a very planned approach when it came to increasing its franchisees’ sales. Maintenance is primarily a matter of working at an hourly rate plus charging a margin on any replacement parts required, so the company looked for new products and services it could offer which would enable franchisees to grow their businesses profitably. It evaluated ideas on five basic merits:

1. Value/market potential
2. Competition
3. Investment
4. Energy required vs. profitability
5. Liability/risk

Exceed then introduced a number of new products in areas closely-related to its franchisees’ existing skills and knowledge base. Here’s how Exceed explained the value of the new products to its franchisees. Table 1 shows the existing profit from an average sale being made by an Exceed franchisee:

Average Exceed Sale
	Sale price	Margin	Total profit
Standard product	180	50%	90
2 hours labour	148	100%	148
Total			238
10 hours @ 80% efficiency = $952    (4 sales x 238 per sale)

 

Of course, launching new products isn’t easy – it requires teaching franchisees how to sell them as well as install them. To help explain the benefits, the company calculated the increase in profitability that franchisees could achieve by selling new products – we’ve shown three examples. You’ll notice that efficiency levels differ from product to product: this is for several reasons, including the fact that franchisees are spending less time driving from customer to customer for small jobs and are able to schedule in half or whole days on larger projects. The same number of hours’ work combined with higher transaction values can therefore result in big increases in profitability.

New Product # 1
	Sale price	Margin	Total profit
Cost of product	800	50%	400
2 hours labour	148	100%	148
Total			548
10 hours @ 80% efficiency = $2192    (4 sales x 548)

 

New Product # 2
	Sale price	Margin	Total profit
Cost of product	2500	40%	1000
10 hours labour	740	100%	740
Total			$1740
10 hours @ 100% efficiency = $1740    (1 sale x 1740)

 

New Product # 3
	Sale price	Margin	Total profit
Cost of product	1200	33%	400
1 hours labour	74	100%	74
Total			474
10 hours @ 80% efficiency = $3792    (8 sales x 474)

 

So for the same 10 hours’ work, by promoting the new products, an Exceed franchisee could raise their overall profit from $952 to $3792. Now, of course, they aren’t going to do that every day, but selling just one of these new products a month can make a big difference to average transaction value. Here’s a real life chart showing how four Exceed franchisees performed over the months following the launch of New Product #2.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The chart shows the average transaction values being achieved by four franchisees for each of the five months. The red columns show when a franchisee sold one or more of New Product # 2 in a month. The impact on average transaction value is obvious.

Now, average transaction value is not the same as profitability, of course. The franchisees shown included two who employ staff, and two who don’t. The latter may have had to employ extra help to handle the bigger project that the new product entails. But Exceed have increasingly found that employing staff is necessary as joinery becomes larger and heavier, so the new product both encourages and finances that growth for franchisees. It’s a valuable lesson in making money for everyone.

The same approach can be taken to services, too. At sKids, franchisees are already well-known for the quality of their out-of-school programmes, so it was a question of finding new activities that would help grow their customer base at very little cost. One result is a sports programme that can be offered in school time as well as after-school, thereby increasing the number of earning hours in a day. A second is the Foodstorm programme which has been developed to help kids learn to cook for themselves and their families. Health and nutrition are aspects which also fit perfectly with sKids’ core values.

Meanwhile, Cash Converters has developed over the years from buying and selling secondhand goods into pawnbroking, cash advances and personal loans, with funds for the latter being provided by the franchisor so there is no requirement for franchisees to have their own capital tied up or at risk.

4. Improving performance

If there’s one thing it’s hard for the independent business person to keep up with, it’s ever-changing technology. Domino’s has spent thousands of dollars developing and trialling the GPS Driver Tracker it launched recently, McDonald’s has trialled ordering kiosks which are increasing average transaction values and sKids has a whole new online booking platform that not only automatically blocks bookings from parents who don’t pay their bills but is expected to reduce franchisees’ admin time by at least a third. None of these would be affordable outside a franchise group.

Technology of various kinds is also at the heart of improving profitability through greater efficiency, especially when it comes to gathering and using information. Daniel Cloete is quite clear about this: ‘In my experience, franchises that have good management information systems consistently out-perform franchises that don’t,’ he says firmly. ‘A lot of the new reporting and benchmarking systems are cloud-based and are eminently suited to nationally-dispersed franchise systems. The software automatically updates, and costs are a fraction of what they would have been for a comparable system five years ago.’

Philip Morrison of Franchise Accountants says that he has seen a lot of re-investment in management systems as well as transactional systems over the last few years. ‘There’s strong interest in franchise management software such as Franchise Infinity, which enables franchisors to manage communication within the network and compliance systems, as well as running performance, recruitment and training functions with transparency,’ he says.

‘Benchmarking has also become increasingly vital – capturing and sharing information on every aspect of the business, from cost of goods and wastage to staff productivity and promotional effectiveness. In the past, franchises often used to collect just top-line sales information from their point-of-sales systems, but as the focus has moved to franchisee profitability so other systems are being put into place. Cloud-based technology, like the Xero accounting system, offers franchise systems the opportunity to standardise the way information is gathered and presented across the whole group.

‘As with the move towards preferred suppliers, sharing such detailed information about their performance may not be popular with franchisees at first, but the benefits it offers them in terms of finding areas to improve profitability are massive.’

Using data to drive improvements

Logan Sears of Franchise Brands, which owns the Green Acres and Hire-A-Hubby franchises, agrees. ‘There is no question our joint venture with Xero and our new digital platforms have reduced operating expenses significantly. Our ENGAGE platform allows franchisees to do e-invoicing and take online credit card payments, making everything portable, current and easy. There’s also constant information flow with franchisees: we’re living in a video world with upskilling, introducing new products, cross-selling, quality control and local marketing all online.’

As Logan suggests, the secret of using technology to increase profitability is not just in gathering the data but in using it wisely to identify areas of improvement and then training and upskilling franchisees (and their staff) to do better.

‘Once you’ve got the right products and the right systems in place, training is key,’ says Peter Webster of Columbus Coffee. ‘We’ve been using an online training and induction system for a number of years and there are noticeable differences and improvements with the franchisees who really use it.’

Choose wisely, use wisely

Peter’s comment sums up the final point about increasing franchisee profitability. Since the GFC, many franchisors have worked hard to make improvements in their business model. Sensible business buyers will take time to learn about those changes, talk to franchisees and find out how effective they have been.

But remember – no matter how hard franchisors work to improve margins, cut costs, develop profitable new products or service, and create effective delivery and management systems, the results each franchisee achieves will ultimately come down to how well they apply those benefits in their own business. Choose wisely and make the most of the advantages your franchise provides.

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