Business Management

by Simon Lord

last updated 11/12/2009

Simon Lord is editor of Franchise New Zealand magazine & website. He has worked in franchising for over 25 years, including five years in the fast food industry in the UK.

Managing marketing funds

by Simon Lord

last updated 11/12/2009

Simon Lord is editor of Franchise New Zealand magazine & website. He has worked in franchising for over 25 years, including five years in the fast food industry in the UK.
September 2009 - How do franchises collect marketing funds, who is accountable for them and how should they be spent?

Judging by the number of people who read it, a recent story in our email newsletter about the problems being encountered by food franchises in the US as they attempted to entice recession-hit customers back into their stores obviously struck a chord.

The Wall Street Journal reported on one particular promotion for a new pastrami sandwich at Subway in New York that attracted particular criticism from franchisees. This offered customers a coupon for a free trial sandwich, with no other purchase being necessary. Subway provided free pastrami, but the franchisees had to supply bread, cheese and other condiments - at a cost of about $1.50 to $1.75 per sandwich. While the promotion might have achieved the franchisor’s intent of driving extra traffic into the store, many franchisees felt they were actually losing sales opportunities as well as money.

Bearing in mind that, in many franchises, the franchisor derives their revenue from a percentage of top line sales (turnover) while the franchisee makes their money from bottom line profitability, marketing is a political ‘hot potato’ in many franchises. We talked to some experienced New Zealand franchisors to find out how they approach this important area.

Where do marketing funds come from?

It’s common in most franchises for the franchisees to contribute to a national marketing fund. There are a number of different ways in which these funds can be collected. Some of these include:

  • A flat weekly or monthly fee
  • A percentage of turnover collected as part of the royalty
  • A percentage of turnover collected separately from the royalty
  • A mark-up on product supplied
  • A rebate from suppliers

‘At Civic Video, there’s a marketing levy of 2% of turnover each month that goes into our national marketing fund,’ says Peter McConnell, the company’s managing director. ‘That’s in addition to a 4-5% system royalty. We also receive a rebate from suppliers based on our spend with them and that goes into the marketing fund to increase it by about a third.’

It’s a similar approach at Liquorland, although there is no separate marketing levy. Instead, a marketing budget is allocated every year from the royalty revenue which is calculated as a percentage of sales and collected monthly from franchisees. This fund is then augmented with rebates from suppliers. ‘Rebates make up about half of our marketing budget,’ says Angela Butler, Liquorland’s marketing manager.

The Green Acres franchise operates via a two-tier system with local sub-franchisees supported by regional master franchisees. While sub-franchisees pay a fixed weekly brand levy, regional masters pay a varying amount depending on the size of their territory. ‘That all goes into a fund intended to promote the brand on a national basis,’ explains Green Acres’ Andrew Chisholm. ‘The brand levy is a reasonably recent development. Although it’s only the price of a few cups of coffee it trebled our advertising budget overnight.’

Brem Ellingham says that Fastway Couriers changed its approach to marketing five years ago to help it get back to basics. ‘We used to have a fund that franchisees contributed to and a marketing committee with franchisees and our own people who decided how to spend it. But there were so many opinions it was actually quite difficult to reach decisions. We did bill-boards, we did TV, but unless you have a huge budget it’s not actually worth it. We knew that the best forms of marketing were very simple core activities at local level, so we agreed to disband the committee and focus on those. So we stopped collecting marketing as a separate item and now all our activity is pretty much centrally-managed.’

Who controls the spend?

While McDonald’s may give the majority say in how it sets and spends its marketing funds to its franchisees (see separate article), this would seem to be very much the exception. In most cases, the franchisor has the final decision after varying degrees of consultation with the franchisees.

‘We account for the way that we spend the national marketing funds to franchisees, and marketing is always a hot topic at meetings, but we don’t enter into long discussions on how to spend it,’ says Andrew Chisholm. ‘Green Acres’ regional master franchisees carry out local activity as well (see below) and we help them develop strategic marketing plans for their own area, but it’s our job to set the national strategy.’

Liquorland’s marketing and merchandising managers are the specialists responsible for how their budget is spent, but they work closely with a Marketing & Merchandising Committee comprising some of the company’s most experienced franchisees. ‘We explain the direction we want to take and look for buy-in from the franchisees,’ explains Angela. ‘If they suggest changes or improvements, we take it into account so that we can get the best possible results. Of course, we’re also working with a huge number of suppliers with their own marketing ideas and have to take those into account, too.’

Peter McConnell says that, like Green Acres, Civic Video is also careful to account for the money it collects. ‘The marketing fund is shown as a separate item on our balance sheet and we know exactly what is there every month. At our regional meetings, which happen three times a year, we provide franchisees with a breakdown of how that money has been spent along with a forecast of what we are going to spend and where. Through the regional meetings and the Franchise Advisory Council, they can also have some input at the planning stage.

‘We’ve changed the way we spend the budget considerably in the last three years almost entirely due to franchisee feedback,’ says Peter. ‘Yes, there are always bound to be disagreements because what works for one person won’t work so well for another, but we carried out a survey this year and pretty much everyone was happy overall.’

National versus local

One of the changes Civic Video introduced was to rebate a proportion of the marketing fund back to franchisees for local marketing initiatives. ‘Markets do differ and strategic local marketing is a big part of our mix,’ says Peter. ‘As in many franchises, in addition to the marketing levy we suggest franchisees have an additional budget of around 1% of turnover for local promotion such as supporting schools, teams and the odd event. By rebating some of the levy funds as well we are helping to make sure that actually happens. We advise them how much money they have to spend and they come to us with proposals. We don’t always agree, but if a franchisee wants to have a vehicle sign-written, or a special price promotion, or run extra radio promotions, we’ll say yes.’

Peter says that the rebate applies only in the smaller regions. ‘We have 22 stores in Auckland and it’s more difficult there if everyone does their own thing because there’s always a certain overlap between territories, so we co-ordinate that spend centrally. The last thing you want to do is confuse your customers. For the same reasons, even where stores do their own marketing, they have to get approval of material in advance.’

The nature of Fastway’s business means that the great majority of its marketing is local. ‘We’re fortunate in that our franchisees have a reason to visit potential customers – they’re delivering freight to them,’ explains Brem Ellingham. ‘It’s pretty easy then to strike up a relationship. They can supply introductory flyers, timetables and so on and find out a bit about their clients’ needs. We ask franchisees to generate at least one, preferably two freight analysis forms a week from potential clients, and they can call on a sales person to come in and help if they need it. It’s pretty simple but it works better than any other form of marketing because it’s so direct. The marketing material itself, along with the sales support, is supplied free of charge to all courier franchisees with just a nominal fee to regional franchisees. They’re also able to promote our Fastway Post and print services, in which case they earn a rebate on sales. That’s an additional revenue stream.’

When it comes to promoting Green Acres, the national/local mix is vital. Not all of the company’s range of services is available nationally, and different services are at different levels of maturity in different areas. While much new business is referral-based, the regional master franchisees for each service have a major role in marketing. ‘Our field support team sit down with each regional master to help them develop a marketing plan specific for their service and their region,’ says Andrew. ‘They provide their own funds for local activity, which might include letterbox drops, newspapers, Yellow Pages and other advertising. That’s backed up at a national level with everything from Google Adwords to TV. Times are changing – it used to be that if you dropped x number of cards into letterboxes you’d get y number of leads. These days, customers are searching more on-line and expecting to book on-line too, so we’re investing more in website development, search engine optimisation and so on. The franchisees don’t actually see that work, so it puts us under a little bit of pressure sometimes,’ he admits.

Liquorland also suggests franchisees have their own budget for community marketing but for legal reasons strictly controls promotions. ‘There are so many grey areas around alcohol advertising,’ says Angela. ‘It would be easy to overstep the mark so we do all the production of material for franchisees’ promotions, whether that’s flyers or press adverts. Franchisees pay for print, postage or whatever at cost. We run everything through the Liquor Advertising Pre-Vetting System and we’ve never had a complaint upheld, so it works. It also means we control fonts, logos and everything else so that all our advertising looks cohesive and builds on everything else.’ Another valuable area of local promotion for Liquorland franchisees is database marketing, particularly to Fly Buys customers. ‘We work with franchisees on an individual basis to identify areas of opportunity then devise an offer to target specific groups. It’s hassle-free for them and the return on investment is very measurable, so if something works well we can make it available to the others.’

How do product promotions work?

As a retailer, Liquorland has one of the more complex product mixes with around 300 products being on promotion in any one 4-week cycle. These range from simple price promotions to add-on offers to win travel incentives or prizes. ‘Basically, we call for submissions from our suppliers for each cycle and then our merchandising team select from those,’ Angela explains.

In the entertainment business, film distributors offer ‘lots of free stuff,’ says Peter McConnell of Civic Video. ‘Jackets, T-shirts, DVDs and so on – that enables us to do a lot of rent-and-win prize promotions. These are co-ordinated nationally but we consult our Franchise Advisory Council. Generally there’s a prize to be won in every store; franchisees like that and sometimes you get some publicity out of it, too. We also run major national campaigns like scratch-and-win promotions where a lot of our suppliers contribute: people like Streets, Bluebird and Coca-Cola.’

And prizes are an important part of the marketing mix at Green Acres, too. ‘Because we are a national company and the leading brand, we get quite a few opportunities to provide our services for prize promotions,’ Andrew says. ‘If we associate with the right brands, that adds to our credibility and gives us a share of media exposure. The franchisee who provides the service to the winner gets paid in full out of the marketing fund – there’s no other way to do it, we’ve found.’

Top line versus bottom line

So how about the ‘top line versus bottom line’ debate? Are franchisors really happy to build sales at the expense of franchisees’ profitability?

‘I think it’s always something we’re conscious of in structuring promotions,’ says Angela Butler. ‘We know, for example, that if you structure your promotional offers across a range of, say, 10-30% on specific products it has less impact on gross profit than an across-the-board discount. It’s possible to place too much emphasis on gross profit rather than on increasing overall sales. In sales periods, franchisees may take a hit on gross profit but if you get it right, the rise in foot traffic more than compensates in actual dollar terms.’

Peter McConnell agrees that franchisors need to be careful. ‘You need to understand your franchisees’ needs and concerns and consult them on a regular basis. We’ve found that transparency is the key. Explain what you’re receiving and what you’re spending where and why. Ask people what they think and tell them what results you get. You won’t get it right all the time – and you’ll never get 100% of franchisees happy all the time – but you’ll get better results for everyone. And that’s what it’s all about.’

This article was first published in Franchise New Zealand magazine Volume 18 Issue 3

Simon Lord is editor of Franchise New Zealand magazine & website. He has worked in franchising for over 25 years, including five years in the fast food industry in the UK.
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