How to make franchising a success

20 November 2015 -

Find out the secrets of making a franchise business model a success for people on both sides of the equation: the third in a series leading up to the announcement of the Management Book of the Year 2016 winners

By 2016 Management Book of the Year shortlist author Chris Edger

Franchising – How Both Sides Can Win was written by Chris Edger and Andrew Emmerson to provide practical advice on how franchisors and franchisees can optimise their returns from franchising systems.

The book contains tips drawn from the authors’ own commercial experience, allied to insights captured in 19 case studies provided by industry-leading franchise operators.

Here, an extract of the first case study in the book, contributed by the leader of one of the UK’s most successful food service franchises of modern times, encapsulates the philosophy underpinning the book.

Case Study 1 – ‘Give and Take – How Both Parties Can Win’ by Chris Moore

Moore spent 22 years with Domino’s Pizza, firstly with the US and European operations, subsequently playing a major part in the team that set up the UK Master Franchise in 1993 During his time at Domino’s Pizza Group (DPG) UK – where he eventually became COO and then CEO - Chris assisted its stellar growth from 37 to over 700 stores, establishing DPG as one of the most successful and valuable franchised networks in the UK. Prior to Domino’s, Moore was an account director at McCann Erikson; he is now a serial business investor and international consultant in franchising.

It’s easy for companies to say ‘let’s franchise!’ only thinking about the financial upside and how they can grow a brand using other people’s capital… but I have always believed that you can only build a successful and sustainable franchised business by adopting a ‘win-win’ mentality which builds trusting, long-term relationships… So how do both sides win?

Franchisors will win if they understand that firstly, it is more about the EQ (emotional intelligence) than the IQ… second, it is about establishing hard ‘number grinding’ financial advantages… Let me illustrate these points by highlighting what we did at DPG:

Emotional Intelligence – when I say that successful franchisors win by having a good EQ what I mean is they attend to the (more difficult) ‘softer’ cultural side of the organisation in order to achieve ‘hard’ tangible outcomes… What we did at DPG was to produce a culture that was ‘akin to a club’ where we could persuade and coerce members to do the ‘right thing’ for the greater good. The way in which we did this was: 

Stick to a Mission – people at all levels of the organisation needed to know what we were all about… our company mantra was ‘Sell More Pizza, Have More Fun’. Simple, quirky, engaging, resonant.

Leadership Stability – when building up the network, we were signing up franchisees for long periods of time… it was important (doubly so when we abandoned owned stores) to have knowledgeable, credible leaders… with high levels of operational/support expertise and strong franchisee ties. You have to have a system based on long-term relationships!

The fact that at one time our leadership team had an average of 13 years’ service was incredibly important for information/knowledge continuity purposes.

Communication & Recognition – at DPG, in addition to district and regional meetings, we held two major set-piece events which were deliberately inclusive… In October every year we had a managers conference where we ‘got them pumped up’ for Xmas… Our key event was the DPG awards ceremony in March/April where, after having business and information sessions at the beginning we had a ‘big bash’ at the end… But the point is this; we didn’t only invite franchisees we also invited their partners (who bear as much, if not more of the burden!) and franchisees invited managers, along with other staff members and drivers that had been nominated for the top awards… The mood and spirit was phenomenal – it really ‘glued us together’ for the year… even some of the franchisees and leadership team joined me in getting dressed up on stage (I made a great Marilyn Monroe and a cracking Queen!) and we made fun of ourselves… We chanted ‘Who Are We? Domino’s!, What are We? Number One!, What do We Do? – Sell More Pizzas Have More Fun!!!’

This ‘Anglicised Americanism’, as I call it, might seem trite to cynics – but it worked – for a few days we were altogether, bonding, celebrating winning… with precious little sense of hierarchy and looking forward to winning together over the next year!

Financial Advantage

Equitable Share – the way in which you ‘divide up the profit pig’ is also critical… To my mind a proper share that worked for DPG (as a quoted company) was 1/3 (franchisor), 2/3 (franchisee)… When things were challenging – particularly during food cost inflation spurts and the subsequent credit crunch in the late noughties – we tried to keep to this split by maintaining product cash profit (at the expense of erosions in net margin).

Growth Opportunities – we also rewarded the best by offering them store growth opportunities… At one point we had too few stores per franchisee (2.7 in 2005) – making the network expensive/hard to monitor, with some poor quality operators ‘squatting’ in large territories… As store valuations were linked to an ever-increasing multiple of sales, franchisees that were less engaged with the 'club' and the brand were tempted to sell up by increasingly attractive exit values.

At DPG, we had the ultimate control as to which franchisees could expand... this meant that - over time - the quality of the franchisees in the system improved substantially as the more mediocre operators were bought out by those franchisees that really understood the 'club rules'... So by re-engineering the network (buying and ‘breaching’ free-loaders out) we not only rewarded good operators by giving them more outlets (the ratio went up to 5 stores per franchisee by 2010), net sales per store also rose significantly (from £10k to £15k per store)… This was a real ‘win-win’ for both parties!

If these are the major ways in which the franchisor can ‘win’, the franchisee can also contribute to the relationship… Again I’ll use DPG as the example:

Local Knowledge – at DPG about 70% of the core menu was fixed with the ‘classics’, allowing considerable latitude for franchisees to cater for local tastes (with different toppings and sides)… Pricing was set at a local level by the franchisee depending on demographics/disposable incomes… also franchisees had a lot of flexibility regarding local promotions… This meant that operators with good local knowledge could make a real impact in their proximal markets… great local knowledge enabled franchisees to win on the ground and (financially) benefit the wider system!

Personal Energy – allied to this knowledge, however, great franchisees required extraordinary energy reserves… The service delivery system in DPG is slick because ‘sales timeslots’ are narrow… you have to organise, monitor, motivate and mobilise resources quickly and effectively in order to win! This takes passion, energy, belief and commitment to the cause… energising those around you to demonstrate the same behaviours!

Mature Participation – at DPG we had advisory groups that coalesced around our four core processes; menu development, IT, marketing and operations… To be invited onto these groups was a privilege and we expected mature contributions from ‘seasoned’ people… All were treated respectfully as equal partners at these meetings; all views were counselled… The best franchisees who commented on ‘contentious’ issues such as the supply chain or cost of goods did so politely and rationally… DPG was really a club – and to be a member of that club, all participants (both franchisor and franchisee) had to abide by certain rules so that both sides could win through ‘selling more pizzas, having more fun!

Authors’ Questions for Both Parties (that arise from the Case Study above)

Franchisors

Relational – How effective is the ‘cultural binding’ of your organisation? How do you recognise the contribution of your franchisees? How inclusive are you? How do you communicate honestly with, and listen to, your Franchisees?

Transactional - How effective is your business model and/or financial arrangement with your franchisees? How are franchisees incentivised to drive sales and grow? Do you have a quality product backed up by excellent support expertise?

Franchisees

Relational – What is your level of commitment to the brand? Do you have a respectful attitude to the franchisor? To what degree do you share insights and local knowledge with the Franchisor and your peers?

Transactional – Are you deploying maximum financial resources to grow your business(es)? Are you complying with the main tenets of the brand whilst collaborating with the franchisor on ‘new ways’ of doing things?

This is an edited extract from Franchising – How Both Sides Can Win by Chris Edger and Andrew Emmerson, which is shortlisted in the Innovation and Entrepreneurship category of the 2016 CMI Management Book of the Year, in association with the British Library and sponsored by Henley Business School