A heady mix of ignorance and ambition
“FORTY FIVE PERCENT??!!! ……………….I mean wow, forty five, that’s incredible”.
Ever felt incredulous, but then had the good sense to pull back and instantly mask it with your best calm impression – all in the interest of keeping a professional demeanour? Well that was yours truly, not too long ago, guilty as charged. But hear me out.
The head of a reputable investment firm invited me to his Dubai HQ to discuss what he called an ‘unusual franchising proposition’. In the past year, his company had decided to diversify its investment portfolio, and the broad consensus was that…..surprise, surprise……Food & Beverage was the best way to go. Subsequently, they managed to acquire Master Franchise rights for three rather obscure North American food service brands for “the entire GCC”, as he proudly declared. Now the all important objective was to devise a promotional strategy targeting investors in the region.
Meanwhile, in what seemed to be a distant, parallel world, the number of stores opened through the company’s direct investment across its three brands – a grand total of one.
Five minutes into the meeting, he whipped out a glossy brochure for the first brand, adorned with bright, bold headlines: ‘ 45% ROI (return on investment), voted as one of the top 10 promising food franchises of 2015 and………’ I didn’t read any further. He had me at 45%.
Firstly, Food & Beverage ROI’s are highly subjective and depend on a 1001 different variables, so they can’t be promoted like standard toppings on a pizza. Secondly, 45% was nonetheless an atrociously high number, not to mention misleading and unfounded (no, I didn’t need to see the feasibility). Thirdly, if the brand was voted as the top 10 franchises, how come I hadn’t heard of it? And where was this distinguished voting panel from anyways?
A disturbing pattern emerges
This company obviously viewed franchising like hot stock or quick-flip real estate. It was yet to establish any semblance of a decent operational setup or invest a Dirham in master franchise infrastructure. Moreover, the team had no discernible appetite for the micro detail that is so integral to this business. To me, their methods were tantamount to peddling snake oil, and being a conviction driven operator, I wasn’t having any part of it. I didn’t feel the need to challenge their approach either, as that was essentially off the table. Brand promotion and sub-franchising is all they wanted to talk about.
No marks for guessing how that ended, except for a sense of unease that wouldn’t go away. Looking back at my franchise dealings of the past months, a disturbing pattern was slowly beginning to reveal itself – one that I had observed, but hadn’t consciously registered or given a name to.
The spirit of franchising – hostage to the scourge of greed?
This ‘all’s not well with franchising’ feeling remained persistent, yet naggingly ambiguous while I continued to go about my work. But then quite suddenly a switch flipped. “Its greed” I said audibly while on my evening walk. That was it, a large number of my experiences were increasingly fraught with unreasonable, unfettered and thinly disguised greed from individuals and corporations. And in my opinion, it was doing irreparable damage to the greater good of the industry.
Franchising is nothing short of the business world’s equivalent of inventing the wheel. Prior to its advent, one’s profession would be determined by lineage, experience or education. But now, a learning curve in almost any field is transferable. Contrary to the spirit of franchising however, the premise of long term sustainability and equitable benefit is exceedingly taking a backseat to short term gain. And ironically, victims of this greed are brazenly perpetuating it with a self-justified vengeance.
A sucker is born every minute.
Very cynical you might say. Maybe even rhetorical and unfair, especially since franchise deals aren’t usually struck at gunpoint, so why discount the free-will factor? No one’s denying that there’s still plenty of good out there, especially (but not necessarily) at the top tier. Its the space below that is rapidly getting crowded with brands who have little faith in their own longevity. The result – a brilliant system of business is being abused by many and unfortunately, as the adage goes, a sucker continues to be born every minute. Whats alarming is that their greed is increasingly being served with a side of subtle deceit.
The realm of specifics
In order to give context to my assertion, here are specific examples (well, as specific as propriety will allow). They are from personal experiences in the past 6 months in various segments of the franchising universe and its rapidly growing ancillaries.
1. Overseas franchisors: These are normally restaurants, cafes, bakeries, confectioners and fast food companies from overseas (majority from the US, some from Europe & Australia, and a few from all around)
Example: A Cafe brand with 5 stores in 2 Australian cities, seeking a Master Franchisee for the UAE.
Greed indicator: Master franchise fee for the UAE $280,000. Royalty 7% of sales, Marketing 3% (they only have 5 stores in Australia!) and unit franchise fee for each store $60,000. The equipment has to be imported from Sydney. For support, the franchisor will send a team member for 5 days after 3 months of operations commencement. The franchisee will pay all related expenses.
2. Franchise programme developers: These are companies that develop bespoke franchise documentation and training programmes for brands that aspire to franchise their operations.
Example: A reputed franchise services company.
Greed indicator: The owner of a domestic brand had paid this company AED 275,000 to develop his franchise manuals, and wanted me to review them. The first manual I opened had the wrong brand name at four different places within the first 35 pages. This wasn’t just blatant cut and paste, it was also a highly incompetent version of it!. What’s more, I know the owner of that other brand too. He paid $165,000 for his own set of customized cut and paste manuals.
3. Franchise Brokers: These are companies that provide a vital service to the franchising community by connecting franchisors and investors. Usually, they avoid calling themselves brokers though.
Example: A Dubai based franchise broker
Greed indicator: Brands who register with this broker have to pledge exclusivity and pay a $12,000 one year representation fee and a 30% success fee. With a modest success rate, the majority end up paying $12,000 for mailshots to a list that at best, is dubious. Beyond that, they have almost no interaction with the broker all year. I have lost count of those who have expressed extreme displeasure at the state of affairs, and feel entirely ripped off by this particular broker.
4. Operators/Brand Representatives: These are the individuals typically connected to the owner of a brand, and have the official (and often only semi-official) rights to it. These rights usually extend to operating the brand in a territory, but with someone else’s money.
Example: A group of private individuals having access to a fine dining brand from Europe.
Greed indicator: Although an elite brand in its country of origin, it has no branches outside of it. The group was asking my client for AED 23.5 Million upfront investment. In return, the client gets a secured location but parts with 30% of his equity and 8% of the revenue to compensate the operator. There were no clauses protecting the investor from the operator’s mismanagement of cash flow and the business plan looked like a wish list.
5. Domestic F&B brands: These are the franchising world’s underdogs and ideally, deserve all the support we can muster. Typically, they start off with a single unit and then a few more, and finally decide to franchise by hiring the guys from point 2.
Example: A domestic casual dining brand with just 3 units in the UAE, franchising for the first time.
Greed indicator: My client, who was interested in the casual dining brand approached them, and this is what they quoted: Unit franchise fee $60,000 each, with a minimum of 3 units, 6% royalty on sales, 3% marketing contribution. When questioned about their marketing plan, they said they’ll develop one before the store opens. When asked why the charges are so steep, especially for a new franchise, they said that they paid AED 300,000 for the franchising manuals!
6. Financial advisors: These are the numbers specialists – the guys who know their ROI’s from their IRR’s and the likes. Their job is to ensure that the business plan has a firm grounding in numbers.
Example: A group of chartered accountants who moonlight as franchise financial experts
Greed indicator: A client wanted to materialize her long held dream of opening a European themed restaurant. Prior to that, she hired this group. The idea was that by spending now, she’ll ensure that her investment is well protected. The feasibility was one of the most creative and amusing pieces of work that I had seen in a long time. Every projection was pandering to her whims, but had little to do with the real world. In other words, it wasn’t worth the paper it was written on. Price paid to the group: A special discounted rate of $ 17,350. While the report languishes on my client’s desk, we are back to square one for now.
7. Real estate developers/mall managements: Although associated with retail in a much broader sense, they rely heavily on food service franchises for volume occupancy across their properties. Yet, it seems that all food franchises are not created equal.
Example: A preeminent real estate developer
Greed indicator: In offering a confectioner a space in their fully occupied mall, this company took to the heights of inventiveness. Between two sections of their food court, there was an ever so slight empty sliver of space with no services. In their offer however, they projected this space as leasable, with the same prohibitive square foot rates as rest of the mall!
Dare to go beyond the franchising text book
So, what’s the conclusion here? Its in human nature to try and make an extra buck, especially if its entirely legal, you must be thinking. Sure, but the least you can do is ‘unsuckerise’ yourself. There’s an abundance of information out there to help you…..but one must go several steps further.
The next time a franchisor says his brand is the best thing since sliced bread, research 5 names in that category and ask why he is better than them. When they claim a lot of ‘interested parties’ in the region, ask them specifics about their regional homework and how much they are investing locally? When they claim high average sales, ask them for individual stores sales (averages can distort reality). When they quote a franchise fee, ask them to break it up to understand what you’re paying for. When they talk marketing fees, ask them about social media templates that will be customized to your country. When they say 7% royalty and 3% marketing ask for a specific justification (that may be all your profit right there)……and the list goes on. Same goes for all the ancillary service providers.
Bottom line: When in doubt, always go back to basics. Franchisors are essentially selling two things, i.e., a tried, tested and proven operating system and a brand equity. One without the other isn’t worth touching with a barge pole, otherwise you are just paying to develop someone else’s brand (also known as lose-win). The peripheral industries of consultants, brokers, programme developers etc. are directly or indirectly facilitating this proposition – so hold them to the same standards.
Beyond that, if parties do meet each other half way with mutual trust and conviction, franchising certainly can prove to be best thing since sliced bread.
by Sanjay Duggal
CEO, Investment Advisor & Troubleshooting Specialist – Food & Beverage/Franchising Industry