In an economic environment where the news seems to go from bad to worse, franchising is well-positioned to weather the storm providing that franchisors and franchisees understand how the economy will impact their respective businesses.

Franchisors need to review key elements of their business model to ensure these are able to withstand the onslaught of economic volatility. Changes to these elements may include:

Review recruitment procedures

As unemployment is expected to rise with corporate redundancies across a range of sectors, more people will be drawn to franchising as a means of self-employment. Franchisors need to ensure that their recruitment processes continue to be as robust, if not even more discerning that previously to ensure that those people who are accepted as franchisees are the best quality candidates available.

Characteristics such as goal-setting, tenacity, and an unwavering attention to detail will become more highly prized among potential franchisees, who if accepted, will be launching businesses at a time when others will be closing.

Beware the temptation to accelerate the recruitment of franchisees just because candidates are there. They still have to be able to run successful businesses once they are in the system, so better to get only the very best people from the start.

Review site selection criteria

For any business that is affected by a reduction in discretionary consumer spending, density modelling under previous site selection criteria should be reconsidered.

For example, if a retail franchisor previously held that a store could be supported by 5,000 households, it may need to revisit this figure (or other factors) to ensure that new stores can still be viable despite a contraction of household budgets.

Undertake new market research

Market research that was conducted before economic turmoil erupted this year should be done again to check that the information on which marketing campaigns are built remains sound. New research can also help reveal opportunities for product or service extension, variations or new lines that did not exist previously.

Collaborate closely with franchisees

Now more than ever franchisors need to work more closely with their franchisees. This collaboration extends across a range of factors, including product or service mix, local area marketing, group marketing, supply arrangements, training and so on. Franchisees on the front line want to know their franchisor is in the trenches with them.

Improve marketing effectiveness

Determine an acceptable return on investment when planning any marketing campaign, and if the campaign can’t deliver, change it. Franchisors and franchisees will need to get the strongest possible bang for their buck in this climate, because if they don’t, marketing budgets will be among the first things to be cut when money gets tight. There is rarely an immediate effect when a marketing budget is cut or activities cease, so business owners often fool themselves into thinking that they can survive with little or no marketing, and by the time they realise their error, it is often too late.

All marketing should be directed at making the phone ring, bringing customers to your store, or whatever else leads to increased sales. Now is not a good time to be thinking about branding campaigns or anything else which simply “gets the name out there”. Marketing for both franchisors and franchisees now needs to be much more effective than that.

Establish and monitor performance measures

Unfortunately a reliance on assessing franchise profit and loss statements (for those franchisors who actually get them) is not enough to determine the comparative health of a franchisee’s business. P&L’s only convey what happened, not how it happened. They are generated after the fact and usually so much later that the information they contain can’t be put in its proper context. P&L’s are a lag indicator of a franchisee’s success, and equal if not greater importance should also be attached to lead indicators, which might include things like inquiry rates, floor traffic, sales per labour hour, average transaction value, transaction volumes, etc. These sorts of variables can be measured on a daily if not hourly basis, and can quickly alert a franchisee and franchisor to any serious variation in outlet performance.

Benchmark across the group

Where lead performance indicators are being used above, comparing franchise performance by different benchmarks will identify pockets of expertise within the organisation that can be studied and replicated elsewhere.

Maintain open dialogue with all business partners

For franchisors, business partners are more than franchisees alone. The supply chain for the organisation is critical to its success. Maintaining continuity of the supply chain on acceptable terms is a vital franchisor function, and to be effective in this role, franchisors must be continuously evaluating supplier offers, pricing, quality and ongoing capacity to supply.

Monitor head office costs

Monitoring costs means that inefficient spending should be addressed. It does not mean that staff numbers should be reduced (if anything high levels of staff may be needed to provide additional support to franchisees through challenging times), nor does it mean that franchisors should start cutting corners. What it does mean is costs which do not contribute to the bottom line should be assessed for greater efficiencies, and every organisation, no matter how large or small, can always be more efficient.

Franchisor directors and owners should also be wary of their own personal spending at a time when their franchisees may be doing it tough. Tension in a network can be easily aroused or aggravated if struggling franchisees perceive their franchisors to be behaving lavishly.

Respond quickly to franchisee distress

It may well be the case that one or more of your franchisees will experience financial distress. Develop a range of responses in advance that can be rapidly deployed when a distressed franchisee comes to your attention. Do not delay in dealing with financial distress, look for the root causes and be prepared to work with franchisees to resolve their problems. Also be prepared to work with a franchisee to exit the system on mutually agreeable terms as exiting the business may be the best outcome to preserve the franchisee’s assets and the brand integrity of the business.

Work smarter

While these are a few suggestions to assist networks manage uncertain times, there are doubtless many others that can be found by participating in seminars, workshops and other franchising professional development activities. Working smarter is not just about doing things better, it’s also about learning what things should be done better, and how much better they should be done. (The saying “You don’t know what you don’t know” comes to mind here).

Franchisors who improve their own knowledge put both themselves and their franchisees on a firmer path to long-term business success.

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 18 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues. In his spare time, Jason is a passionate collector of military antiques.

Copyright © Jason Gehrke, 2008.