The weaknesses inherent in franchised businesses and the health of relationships between franchisor and franchisees are being revealed as the Covid-19 pandemic unfolds. Excessive reliance on retail infrastructure, insufficient investment in digitisation and poor delivery capability is severely impacting franchised networks. In contrast, more agile franchised businesses are riding the crest of the Covid-19 wave by providing services that drive changed consumer behaviour.
Franchising is a human endeavour. The franchisor develops a brand and business model and grows it by sharing intellectual property with willing franchisees. The franchisee rightfully expects direction and support from the franchisor, but the Covid-19 situation has demanded that franchisees receive intensive care from franchisors.
The pre-Covid business model needs nimble changes to ensure market share is retained. Market responsiveness must be balanced with panicked franchisees and staff to navigate all parties involved through the crisis.
Digitisation and online ordering capability were required by restaurant and fast food franchises, which were allowed to reopen for trade in May 2020. Food lovers placed orders on progressive online applications like Mr D Food and UberEats.
Whilst Nando’s, Andiccios, Debonairs, Steers and others have the delivery capacity, consumers continued to order through MrD and UberEats, as opposed to brand-specific websites and applications. The unintended reliance by well-known brands on distribution intermediaries may lead to the loss of brand value.
The balance of power has always rested with the bigger fast food and restaurant brands when negotiating with delivery businesses. The tables have now turned. Mr D franchisees and owner-drivers have responded nimbly to growing their respective businesses. Restaurant and fast-food operators have exposed their weak digital presence. Traditionally retail-focused businesses franchises should be concerned about sustainability for franchisees in the wake of the pandemic.
The largest franchise group Famous Brands prepared an impressive Integrated Report wherein it assesses business risks facing the group. The report for the year ended February 2020 includes a risk that the group has “an inability to respond appropriately to business disruption”. Covid-19 has turned this moderate risk into reality, with Famous Brands being caught with its pants down.
Famous Brands reported a swing of nearly R500m for the 6 months ending 31 August 2020 from operational profit to a loss of R110m before non-operational items. The losses are attributed to the pandemic and its poorly considered investment in Great Burger Kitchen in the United Kingdom. The poor performance of GBK and the inability of Famous Brands to steer the UK business back to profitability has been a worrying factor for investors. Once the doyen of the franchise sector, Famous Brands has much to do to regain its reputation.
Consumers searching for value
A major impact on franchised businesses is consumers who fear a loss of income due to retrenchments and salary decreases. Customers have become sharply attuned to reducing household expenses, so franchises may see revenue reducing.
For example, franchised OEM workshops charge a premium for vehicle services and repairs. Consumers will gravitate in greater numbers to franchises such as Car Service City. This franchise and other non-OEM workshops offer greatly reduced vehicle servicing and repairs and should see a well-earned increase in business.
Second-hand goods businesses including Cash Converters and Cash Crusaders should also be increasing business in both their buy and sell shops. The extensive franchised building, hardware and paint retailers should benefit from home-owners investing in home maintenance and improvements as they spend more time at home as a result of no longer working at the office.
Business-to-business franchises should be aggressively scouting for businesses keen to outsource certain functions. Accounting, taxation, human resource management and bookkeeping service providers should benefit from the pandemic.
Management will be evaluating the future and budget with clean sheets. Pre-Covid overhead structures will not always be relevant for the future. However, the larger the business the more difficult it will be to adjust overhead structures.
Struggling to adapt
We have witnessed an inability to adapt in the airline industry; Safair has responded admirably to the demand for domestic travel whilst the Comair British Airways franchise and Kulula remain grounded. Strategists should consider franchising as an option to unlock capital and reduce gearing.
The health and beauty category has not responded well to the restrictions placed on its services. Franchisees and franchisee staff “are the most vulnerable” people, as Long4Life’s Brian Joffe describes the situation at its poorest-performing business Sorbet. Technicians and therapists should have been allowed to travel to customers, offering customers protection from any exposure to Covid-19. Covid testing, working outside people’s homes, perspex screens and sanitising would have sufficed to ensure the safe provision of services.
Leaders in many categories have floundered as the pandemic has unfolded in South Africa and the world. Many businesses have failed to listen and connect with their customers. Some are trying to deceive franchisees into believing that Covid-19 is responsible for poor performance. In some cases, poor customer retention can be attributed to Covid-19, but in others, the weaknesses were inherent and overlooked, masked by a better albeit subdued market in South Africa.
As the pandemic changes the consumer tide, rest assured that businesses that have been swimming naked will be exposed.
Source: BizCommunity – https://www.bizcommunity.com/