By Sanjay Duggal
Like most people in the corporate world, I used to live in a box. In the relentless pursuit of formidable organizational goals, I had to work with extended teams of at least a few hundred people. So I guess you could call it a relatively large box.
The mix was pretty diverse too – owners, board members, operations heads, PR companies, franchisors, vendors, marketeers, real estate specialists, strategic advisors and other sundry cogs of business machinery.
Nonetheless, a BOX it most certainly was – finite and closed, with largely impervious boundaries separating it from rest of the world.
Then one day, the latent entrepreneur buried deep within me emerged to the surface and I decided to start my own consulting firm. With that, the professional monogamy that I practiced one box at a time for countless years was to come to an end.
Stepping out to a different reality
I was excited and bullish about the future. In my new avatar, there would be no limits. The world was my oyster and I could be whoever I wanted to be. Or so I thought.
Up to that point, my views had been framed within the confines of specific brand philosophies, experiences and corporate cultures. But regardless of how eminent and edifying these had been, being ‘boxed’ in had undoubtedly restricted my professional outlook.
Success in a larger arena necessitated an expanded perspective that could be acquired in only one way – by jumping in, head first, into the wider ocean of food and beverage retail.
Exploring the depths of food franchising
Its been a few years since I first embarked on that journey of accelerated learning.
During this time, some of my earlier beliefs about the business have been emphatically reinforced. Other convictions have been challenged to varying degrees, and some entirely new precepts have taken root too.
Without saying which is which, I’m sharing my findings and conclusions below. But first, a disclaimer:
Making absolute assertions in a subjective field can be a dubious endeavour. But a truism experienced multiple times in a multitude of arenas has far more credence than one encountered in the isolation of limited brands, segments or organizations – and that is where I come from.
1. Franchise relationships: Where there is a will, there is more than one way
You know those really cool food brands with creative themes, to-die-for food and impeccable execution……but with just 2 or 3 stores half way across the world? Well, I periodically receive ambitious ‘franchise decks’ from some. A single unit fast casual brand from North America even had the audacity to declare in red bold font: “5 year target – world domination” (replete with a map of the world in the background).
I admit that from my franchising purist’s perch, I’ve been rather dismissive of their aspirations. After all, there are simply too many reasons why they shouldn’t even be thinking franchising (let alone nurturing global ambitions) at this point.
In retrospect however, franchising propriety or not, it appears that I might have been the one lacking imagination.
Let me explain:
The instrument of choice for most franchisors coming to the UAE is an Area Development Agreement, that affords more control and is better equipped to preserve the integrity of a brand. A distant second is a Master Franchise Agreement, where the Master Franchisee can assume the role of de facto franchisor in the assigned territory. Theoretically these sound good, but are challenging to execute.
Another option being increasingly exercised by aspiring foodpreneurs is to develop an original brand of their own. Typically, they need to shell out Dh. 400k to 1.5 million to consultants for the concept development.
Now, lets go back to those small brands. Even though they might appear to have an egregious contempt for franchising wisdom, fact is that they are tried, tested and tuned, and only need adaptation. As a result, they could prove a better option than a home-grown brand, that still needs a steep learning curve despite the investment.
Proceed with boldness and disregard franchising norm. Break new ground with a creative quid pro quo. Propose joint ventures, equity participation, flat fees instead of royalties, long-term agreements for your territory and large swathes of the map for rights of first refusal. A deal that propels a brand forward and out of stagnation could prove irresistible.
Conclusion: Franchising needn’t have standard options. Just because you can’t put a potential relationship in a conventional slot, don’t walk away from it. You could end up with something that is as good as your own brand, PLUS tried and tested.
2. People offer better ROI’s than bricks and mortar (even when they’re allowed to jump ship in 24 months!)
Lets take the case of the ABC Cafe/Bakery chain with budgeted construction and fit out cost @ Dh.375/sq ft (MEP, fixtures & decor, without equipment costs) when built from plan. This amounts to Dh.750k for a 2000 sq ft unit. Add another Dh.150k for the furniture, and we have a total of Dh.900k.
Nine out of ten times, with a mix of ingenuity, vigilance and experience, its viable to shave 15% off this amount without compromising the concept (but don’t touch the equipment!). This saves us around Dh.135k or Dh.2,800 a month under a four year depreciation schedule.
Now lets divert this money to employee welfare, i.e., recognition schemes, get togethers, symbolic awards etc. for a staff of around 30. The resulting boost in morale will inevitably increase sales by at least 5%. For a hypothetical modest revenue of Dh.7k a day, this means Dh.10,500 incremental revenue a month, and with a 10% net margin we’re talking Dh.1,050 net return on a 2800 expense or a 37% roi.
Incremental returns if the Dh.135k is retained in physical assets – virtually zero.
Conclusion: Most companies just pay lip service to employee welfare and empowerment. In what is a myopic and misplaced approach, they are far more inclined to invest in physical assets than people, and will even resort to pinching pennies on staff to offset overspending elsewhere.
This is simply poor financial management. Do well by your staff, not because you are nice, but because you are smart, analytical……and genuinely understand how bottom lines are developed.
3. Premium Chocolate and Confectionery: Bitter wisdom is better than sweet folly
Show me a premium chocolate company with an impressive P&L, and I’ll show you a local production facility driving its profits.
You simply can’t make enough money if your premium confectionery boutique is import-centric. Period.
The landed cost of imported gourmet chocolate and confectionery (not FMCG brands or candy) in temperature controlled refers can be up to 40 to 50% of original cost. For a business that relies on ability to service bulk orders on short notice, the delivery time lag of several weeks doesn’t help either. This results in the the following not so unusual duality:
At brand A, a successful and ubiquitous name, that sells mediocre chocolate produced in Dubai, Dh. 500 will fetch you a significant volume of goodies as a beautiful work of art in a chinaware, silverware or faux crystal container. At brand B, a world class chocolate connoisseurs delight, the same amount will get you less than a kilo of imported chocolate in an average box. You might argue that the latter is of superior quality, but brand A is considered a much better gifting proposition. By far.
Conclusion: If you want to get into the premium confectionery retail, produce it locally, using widely available quality ingredients and modern tech. This might increase your initial cash outlay, but it will also help you develop a versatile and potentially thriving business.
Otherwise, like many premium confectionery importers, you’ll be forced to dilute your identity with food, coffee and miscellany to stay afloat, and possibly risk the demise of your brand in the country. This has happened to many an illustrious name.
4. Evaluating a brand to invest in: All that glitters is certainly not gold.
The owner of a home-grown restaurant chain accepted my franchise development proposal with one caveat – he’ll pay me by personal instead of company cheque. Understanding employee sensitivities involved in hiring an outsider, I presumed that he wanted details of our arrangement under wraps, so I readily agreed.
As I got neck deep in creating structure, attending shows, conducting negotiations and generally evangelizing the brand, the real picture began to unravel. The staff hadn’t been paid for four months, vendors had stopped supply due to payment defaults and malls were sending ‘final notices’ with alarming regularity.
The company was a prime candidate for imminent closure and here I was, naively promoting franchising!
Conclusion: The above case is not an exception – deceit in franchising is far more common than you might think. Therefore, in contemplating an investment, never rely solely on formal due diligence. More often than not, information acquired from the internal or external ‘grapevine’ proves far more valuable.
5. Statistics and external feasibilities: Beware of misleading numbers
In an intense three hour session several months ago, I was interviewed by one of the ‘big four’ companies on various aspects of the local food service industry. As a part of the exercise, I was asked to ‘estimate’ some numbers on segment sales. Several weeks later, in a report that has wide readership, I found those very same numbers presented as fact.
The real ‘fact’ is that most brands in the region’s Food & Beverage domain are in private hands, that don’t need to share their numbers. And they don’t.
Now feasibilities. Have you ever been pitched pessimistic numbers? Did a brand presentation ever say, “the downside is that you might lose your shirt”? Didn’t think so. When selling, the product needs to appear as attractive as possible. Anything less would be simply counter intuitive. Moreover, projections might be well intentioned educated guesses, but they are often laced with inadvertent, hard to detect bias.
Conclusion: From initial research to execution, all key business decisions are numbers based. Yet, as long as there’s a credible looking rubber stamp affixed, we seldom question how authentic or well-thought out the figures are.
Regardless of the source, numbers should always be consumed with a pinch of salt…..and a generous side of gut instinct.
6. Be cautious about excessive caution
Its been observed that franchisors are increasingly reluctant to formally register their agreements, invoking the fact that the process isn’t mandatory. A perception seems to have crept in that regardless of how flagarantly a franchisee defaults on commitments, seeking the termination of a registered agreement is extremely tough.
Conversely, with the increased proliferation of franchise information through various forums, investors are far more informed than before. Armed with the knowledge acquired, they often take their expectations to totally unrealistic levels.
Conclusion: By all means protect your interests, but make sure that respecting the other party’s intelligence remains part of the negotiation process.
Many a lucrative deal has been prevented from consummation by excessive and avoidable splitting of hairs, that might have won the battle for one side, but lost the war for both.
7. Success might leave clues, but pick the right ones.
Brand X sells square burgers and foot long milkshakes, and their stores are always full. So we deduce that square burgers and foot long milkshakes are a great business to be in.
We then create or bring in brand Y that also sells square burgers and foot long milkshakes, but only tastier. And then we wait for the the crowds……that don’t come.
Maybe brand X has the first comer’s advantage. Perhaps the owners have 10 other brands that they leverage with developers for good locations. Or maybe, people don’t care much about the shape of the burgers or height of the milkshakes. It could just be that brand X has the most comfortable chairs, the best loyalty programme in town and is consistently mediocre!
Don’t attempt to reverse engineer someone else’s success when making investment decisions.
There are several examples in recent years of assumptions like the one above going drastically wrong. In terms of quality and proposition, there is little that separates the top five brands in most food service categories. Yet some do significantly better than others in overseas territories, and only incisive analysis will reveal why.
The journey continues and there’s more to learn everyday. Be it rapidly evolving technology, changing demographics, the influence of social media or the thriving entrepreneurial spirit – they are all influencing the vast food industry unlike ever before.
As UAE assumes an increasingly important role on the world stage, foodpreneurs based here are well placed to take advantage of the inevitable progress and growth that the sector will witness.
However, in an industry that is increasingly fluid, the instinct to follow the crowd should be curtailed and all preconceived notions must be kept at bay.