Who is killing the restaurant industry?

By Michael Said

Investigating the suspects – Capitán Franchisor

“Franchising in not a democracy,” boomed the deep voice from across the room. “This is my brand and I will protect it at all costs!”

The statement above could conceivably have been heard at any one of hundreds of franchise meetings held around the country each year. Only names and places have been changed to protect the innocent. The precarious relationship that exists between franchisors and franchisees has been a topic of debate for many years and will likely continue so for years to come.

Is the franchisee to be treated as a partner? Absolutely. Without him/her there would be no income for the franchisor and they are dependent on each other for growth and survival.

Should he be treated as an employee? Well, they are expected to toe the line, to work within the constraints of the franchise agreement and are subject to certain penalties if they step out of line.

Should they be treated as a customer? Well, they do pay the franchisor a monthly fee, in return for which they expect certain deliverables and they did after all, for a hefty fee in some cases, buy the rights to trade under the franchisor’s brand name.

If at this stage you are feeling a little confused or unsure, we say: “Welcome to the wonderful world of franchising”.

Wikipedia defines franchising as follows: ‘Franchising is the practice of using another firm’s successful business model.’ Most franchisors would describe it as: ‘the practice of using another firm’s successful business model just so that you can try and do it completely differently and then blame us when it doesn’t work!’

To sum up the relationship in one short sentence: “A happy franchisee is one who is making money.” And there are not many happy franchisees out there at the moment!

The relationship hasn’t suddenly gone bad. Franchisors haven’t suddenly become money grabbing lowlifes who prey on the innocent. Some might say they have been that way for years, and franchisees haven’t suddenly become independent, lazy, brand-destroying, reprobates with absolutely no foresight or ability to understand the value of the brand. They too have been described that way since time began. Of course I am being facetious and inappropriate, but now that we have that out of the way we can attempt to discover where things are falling short and what can be done about it.

In order for any business, regardless of type, size or years in operation to be successful, you need the following departments in some form or another, and if you are a one man business you are probably trying to do it all.

-          A Finance and Accounting division. Finance plans for future growth and long term stability and Accounting takes care of the day-to-day expenses and bookkeeping duties.

-          An Engineering and Production division. Engineering plans ahead, developing new products and models and Production will produce these today.

-          An HR and a Personnel division. HR is responsible for the future development of your workforce, ensuring that there is adequate manpower and skills for the company to build on while Personnel looks after the day-to-day welfare and attendance of the workforce.

-          A Marketing and a Sales division - and they are not the same thing! The marketing department develops the strategy and the medium with which to take your company or product to market and your Sales team will go out there today and sell it to them.

The common thread is that Finance, Engineering, HR and Marketing all take care of the future of the company with the franchisor assuming responsibility for these roles, while Accounting, Production, Personnel and Sales take care of the now side of the business, which is the responsibility of the franchisee. The problems in franchising arise when either one or both parties are not delivering on their side of the bargain.

Let’s face it, as a franchisee, hiring a Finance, Engineering, HR and Marketing department or external consultants would cost you considerably more than the five to seven percent you are paying in royalty or management fees, so perhaps you should ‘shut up’ and get on with executing your side of the deal. If, on the other hand, you are not getting the input and the support you were either promised or were expecting, it is time to speak up and speak up loudly.

So what role is the franchisor playing in the Death of the Restaurant Industry in South Africa? Well, the role is multifaceted and we will start at the very beginning.

There is little or no doubt that a number of the concepts offered as franchises should not even be operating on their own, let alone as a franchise. Stricter laws need to be in force before you can take money from an unsuspecting public. While the Franchise Association of South Africa (FASA) is doing a fantastic job of setting controls and monitoring in place, it is not illegal to start a franchise company without being a FASA member. The Consumer Protection Act, having shifted the burden more firmly onto the shoulders of franchisors, may resolve some of the problems, but the onus rests with the potential franchisee to do his homework before signing.

Next is “the joining fee”. This is the upfront money paid for the right to use the brand name and for the training and preparation that a potential franchisee will undergo. Unfortunately the preparation and training is often not forthcoming and new entrants are left to sink or swim on their own, and regrettably it is often the former. Of course the company has a right to charge an entry fee for joining their organisation and the training they will provide, but if there is no support structure, the manuals and documentation are either nonexistent or outdated and the value of the brand has been overstated, then surely somebody must be held responsible. But please remember the Latin phrase “Caveat emptor” – Let the Buyer Beware!

Now, if charging an upfront fee when you are offering little to no support seems unreasonable, then charging it a second time is surely bordering on criminal. All too often the first poorly vetted, hardly trained, badly prepared and over matched franchisee fails miserably and is left to pick up the pieces of a failed venture. He is left facing financial ruin and wondering why he failed when ‘anyone else’ would have succeeded. Now the franchisor goes out in search of another ‘victim’, sorry I mean franchisee, and the cycle stars anew. No vetting, no training, no support and... no chance. The problem stems from the fact that the franchisor does not have a sustainable business model for himself, and not for his franchisees. Instead he relies entirely on repeat joining fees to sustain his business. Your failure is his success.

I need to state for the record that this is not indicative of all franchisors and there are plenty of excellent companies out there delivering much more than they promise. They offer excellent support, top notch training and ongoing guidance. It is up to the buyer to ensure they are dealing with such a company. If you are thinking of entering the market, do your homework; speak to existing and ex-franchisees and contact FASA.

So you have signed for a store and put down a hefty deposit. What happens next? Well, you wait for a location, and this too is often in the hands of a franchisor who is desperate to get the store opened so he can collect on another joining fee, demonstrate how well his brand is growing and collect on the ‘rebates’ on the set-up costs. Remember that a rand spent is not the same as a rand earned. An extra R100,000 in set-up costs means you need to earn an extra R1 million in turnover to pay it off. Now ask yourself whether it is worth the aggravation of bringing down the set-up cost? Of course it is.

All too often the franchisor has not grasped this simple concept and believes the cost is what it is… hogwash I say! Times are tough and every rand saved is like ten rand earned. The problem is that quite a number of franchisors are earning rebates on every piece of specified equipment and shopfitting going into a store adding as much as 10 percent to the set-up cost that already runs into hundreds of thousands of rands. Remember, it is your money. Insist on a full disclosure of rebates before you sign.

Poor site selection, lack of upfront and ongoing training, no innovation, no sustainable marketing strategy, no vision for the future, no systems and procedures and a total lack of respect for the fact that the franchisee is a bottom line company as opposed to their top-line business model... No, this is not the state of the entire industry, but if you are a franchisor guilty of any or all of these, it is time to shape up or ship out. The industry has enough challenges without your help.

There are a number of other areas relevant to our topic that also cause for concern.

• Undisclosed rebates on specified products
• Substandard specified products
• Increase in fees without increase in deliverables
• Hindering the sale of businesses
• Lack of understanding of the challenges
• No solution to current problems

The list goes on and on and the casualties are mounting fast. While I have much to say on the subject of percentage or fixed royalties/management fees, disclosure of rebates, price fixing, collusion, unscrupulous business practices and the like, we will leave the rest for future discussion.

Once again I will stress that there are many ethical, honest and highly sustainable franchisors in the marketplace doing a fantastic job of empowering people and creating wealth and opportunity for many. I can only hope they will come out in favour of this article and work with FASA to reverse the image the industry is slowly gaining from a few rotten eggs.

We have covered a number of external forces at work in Killing the South African Restaurant Industry and in the next two chapters we move a little closer to home by looking at the role of the staff and the owners themselves.

Michael Said often refers to himself as “Just a Waiter Who Got Lucky!” After 22 years in the hospitality industry Mike brings his own brand of humour and understanding to the weird and wonderful world of marketing and franchising. His company, brandStrategy, specialises in the development and implementation of social media strategy working with companies and individuals from all industry segments, advising them on branding strategy, market development and customer service. You can visit his website at www.brandstrategy.co.za and follow him on twitter at mike_said_what

Chapter five: