by Colin Taylor
last updated 23/07/2009
Buying Group or Franchise?
by Colin Taylor
last updated 23/07/2009
One of the many advantages that is often quoted for franchising is that of buying power – the ability of the franchisor acting for the whole system to obtain better prices on goods and services than each franchisee would be able to obtain individually.
In fact, it is even said that in many systems the value of the discounts available to a franchisee can exceed the royalties they must pay as part of the system.
But the idea of banding together to get a better price has been around for years. So is a franchise just a glorified buying group or are there some real differences?
The first thing I should say is that the following has to be based on generalisations. One thing that both franchises and buying groups have in common is that they are able to be created with a great deal of flexibility and designed to suit the needs of specific people operating within a specific industry. There is therefore no standard buying group and no standard franchise system.
Buying groups are generally created in the retail sector by owners of existing stores on the basis that there is 'strength in numbers'. Often a group of five or six independents will have felt pressured by increasing opposition and will respond by joining together to buy product, thereby enhancing their ability to be competitive. Such groups may grow to become quite large, thereby increasing their buying strength.
Unlike a franchise, however, all the members of a buying group will be existing owners with their own retail names. As a result, they will generally have historic recognition for their store in the district and are often unwilling to change that name, preferring some sort of compromise. If the new buying group is called, say, VideoWorld, each owner will want to include as much as he or she can of the historic name: for example, Weston's VideoWorld Whangarei, or Jones & Mather VideoWorld. In many cases, the 'Jones & Mather' will be larger than the word 'VideoWorld', and the result will be a mish-mash of branding in the system.
Because a buying group is made up of independent and often equal individuals who value their branding more highly than that of the group, there are no disciplines in place to enforce a universal name format or style – the group has no teeth.
If the focus of the group is purely upon buying product in bulk this may be acceptable, but it does represent missed opportunities in the long term. Stores which are members of buying groups often do not have universal colour themes or design features, leading to customer confusion and inconsistent standards and services. They may also vary in product stocked, pricing, procedures, systems, levels of staff knowledgeability, and many other things.
Inconsistencies in naming and design also have an impact not just on the value of the VideoWorld brand and consequently the effectiveness of the marketing long-term, but also mean it is difficult to achieve the bulk buying and cost-saving benefits on the buying of advertising. National advertising is, if not impossible, at least difficult. It is rare for all members to agree on a common format or content, and often the name variations make it impossible to get a distinctive and common heading for their advertisements.
Funding for advertising and management are also often a problem. A buying group is set up to save money, often without much thought of the fact that it might also be necessary to collect and spend it. Because the members join together voluntarily there is often not a good strong contract between members, and/or because it was the members themselves who drafted the contract then it is almost always the case that management and advertising contributions are minimal.
This is human nature, even if it is not good business. I must admit that without the contract which requires them to do so, even Stirling Sports franchisees would be unlikely to contribute voluntarily 4% of turnover to advertising or even 21/2% of turnover to a management buying office.
Competition is another big issue for buying groups. Because members are working as individuals without an overall umbrella organisation to help direct the way ahead, the tendency is for each to have parochial jealousies and act purely in their own self-interest. They will want exclusive rights to trade in a very big area, or total territory rights for a whole city, even if they are unlikely to attract customers from so wide an area.
They do not think, 'if there were three or four of us here, we could afford a far larger advertising budget; get even better buying discounts; help support each other and swap stock if necessary.' Instead of thinking of ways to have a share of a much larger pie, they want to restrict other members from creating competition for them which might reduce the size of their existing pie. But remember – there is proportionately less meat and more pastry in an individual pie than a family-sized one. In this case, the meat is the profit and the pastry the costs.
Buying groups are also extremely unlikely to share sales and profitability information between members, let alone send it in to be analysed against the performance of others as we do at Stirling Sports. This process of providing benchmarks against which franchisees can measure their progress is vital to continually improving performance: however, the fear of internal competition and the lack of a central driving organisation deters most buying groups from even attempting it.
Frankly, most buying groups do not work very well eventually, mostly because of the lack of discipline. The rules, such as they are, are soft and unenforceable and are anyway not designed to achieve best business results. Buying groups are usually a selfish system designed by members purely for the perceived reduction of costs which they offer, and their purpose does not include growing 'critical mass' and covering the retail scene in totality.
Franchising, on the other hand, does have that discipline and has it enshrined in a document called the franchise agreement to which every party has consented. Discipline is enforced partly by the franchisees themselves for their mutual good, but it is driven by the franchisor (the 'benevolent dictator') who manages the system with the overall goal of achieving a win/win for the total group.
Most franchises have very strong legal contracts which set out what the franchisee must and must not do. In addition, they have systems which are put in place from the day the franchise commences operation, and which each franchisee is specially trained and required to use. These systems apply not just in the beginning, but from the induction of new franchisees to the eventual retirement of those same people. They may be improved and updated, but they are always there to ensure consistency, excellence and efficiency. We even try to have a universal method of answering the telephone.
And there are also the strict disciplines of those contributions to advertising and to the management structure.
As franchisors, we at Stirling Sports try to drive sales not only because we are rewarded for increases, but because it is better for our franchisees – and what is good for them is good for us. We have universal signage standards, core product ranges, consistent and improving standards of shopfitting. From beginning to end we have an identified system of control which is driven initially by a fairly democratic system, but when necessary is driven by the benevolent dictator. It is that leadership and discipline which buying groups lack.
The Hardest Job In The World
There has recently been a trend for some of the better buying groups to re-model themselves as full business format franchises in order to obtain the many advantages which have been outlined above. They have not always managed this successfully, it has to be said.
This is not surprising. When you create a franchise, you tend to start with an individual vision, then recruit and train people who can share that vision and who will accept your leadership. If you are trying to create a franchise from a group of individuals who got into business by themselves and have their own dreams and visions, there are going to be inevitable conflicts and disagreements. Inevitably, the progress towards franchising will be marked by splinter groups and fragmentation, and the system which emerges at the end of the process is likely to be considerably smaller than the one which started.
However, the resulting franchise may be a lot stronger than it would otherwise have been, and has the potential to re-grow and re-establish itself with the right kind of people. Ultimately, the system can be the winner.
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