Financial pressure rarely stays confined to one part of a franchise business. Rising operating costs can force franchisees to cut staffing or delay training, affecting service standards and customer experience.
Larry Hodes | image supplied
As sales weaken, margins come under further pressure. Relationships between franchisees and head office can also deteriorate, turning an initial financial problem into a wider operational challenge.
Findings from the Franchise Association of South Africa’s (Fasa) 2023 survey illustrate the scale of these pressures. Six in ten franchisors identified costs as a major challenge, while 45% cited franchisee-related issues and 42% pointed to staff challenges.
These problems are closely connected, yet they are often addressed in isolation. Cost-cutting, additional franchisee support and more staff training may all be necessary, but none will resolve the underlying issue if its cause lies elsewhere.
Franchisors need to understand how weaknesses in their operating model, franchisee capability and workforce management interact. Otherwise, the same problems are likely to resurface in different forms.
1. You cannot cost-cut your way out of a weak model
Costs were the biggest challenge in the Fasa research, cited by 60% of respondents. Behind that figure are the realities franchisors and franchisees face every day: inflation, expensive rentals, a slow economy, rising operating costs and shrinking margins.
Most franchisors know their costs have increased. The question is how many have reassessed their franchise model's financial assumptions, some of which may have been set three, five or even ten years ago.
If rent, labour, electricity, stock, finance and logistics have all become more expensive, the economics of running an outlet have changed too. Addressing that requires more than an annual price increase or another instruction to franchisees to control expenses.
Franchisors should know where margins are being lost across the network, which outlets are under pressure and why. That means examining supplier arrangements, product mix, labour models and rental exposure.
It also means asking whether certain formats have become too expensive to operate in particular locations.
The Fasa report points to smaller-footprint models and more flexible investment options as possible ways to contain overheads and labour costs. Sometimes, the answer is not to ask franchisees to squeeze more out of an already stretched business. The model itself may need to change.
Expansion can also disguise weak unit economics. Opening ten new outlets does not make five struggling ones healthier.
Growth may look impressive until the costs of supporting struggling outlets, closures or franchisee disputes emerge. A franchise network is only as commercially sound as the businesses operating within it.
2. Choose franchisees for more than their money
Franchisees were the second major pressure point, cited by 45% of respondents. The Fasa research also identified difficulties finding franchisees with sufficient capital and experience, as well as problems with franchisees failing to meet operating standards.
Some of these problems can be addressed through better support. Others begin during recruitment, when franchisors underestimate the cost of bringing the wrong person into the network.
When growth targets are involved, it can be tempting to focus on whether a prospective franchisee can afford the investment. Capital matters, but having the money to buy a franchise and having the ability to run one successfully are two different things.
A capable franchisee needs to manage people, understand the numbers, follow an established system and make sound decisions under pressure. They must also accept accountability when things go wrong and know when to ask for help.
There are risks at both extremes. A franchisee who treats every rule as optional can undermine consistency across the network. One who expects head office to run the outlet for them creates a different set of problems.
Franchisors need to be willing to reject candidates who are unsuitable, even when they have the money to invest.
Once a franchisee is in the system, support must not become a substitute for accountability. Difficult conversations about standards, profitability, staffing, debt and performance need to happen early.
If head office only intervenes when a franchisee is already in serious financial trouble, the options for resolving the situation may be limited.
3. Staff problems can become brand problems
Staff challenges were cited by 42% of franchisors in the survey. These included training, turnover and retention, difficulties attracting qualified employees and retrenchments.
Although franchisees employ their own staff, customers experience the brand as a whole. A customer who receives poor service is unlikely to distinguish between a franchisee's management shortcomings and the franchisor's responsibilities.
Recruitment, training and management capability therefore cannot be treated as outlet-level concerns that head office addresses only when something goes wrong.
Franchisors should equip franchisees with practical recruitment and onboarding tools, clear job profiles and management training. They should also look for patterns across the network.
If one outlet has unusually high staff turnover, the cause needs to be investigated. If several franchisees struggle to recruit for the same position, it is worth examining what has changed.
Where managers repeatedly leave, the reasons could include remuneration, workload, management style or weaknesses in the operating model. These patterns can reveal problems that extend beyond an individual outlet.
Spot the warning signs before they affect profits
Franchisors need to recognise signs of trouble before they appear in the profit-and-loss statement. A franchisee who suddenly stops engaging with head office should attract attention.
Other warning signs include deferred maintenance, repeated discounting, aggressive cost-cutting, declining service standards and persistent staff turnover.
Any one of these issues may be manageable on its own. Several appearing together could indicate a deeper problem that requires intervention.
Franchise networks are built on replication, but successful management involves more than ensuring everyone follows the same manual. Financial pressure affects franchisee behaviour, which in turn influences staff, service standards and the customer experience.
Franchisors cannot eliminate rising costs, franchisee difficulties or staff turnover. They can, however, identify how these pressures interact and intervene before one problem triggers a chain reaction across the network.
The earlier the underlying cause is identified, the greater the chance of addressing it before the damage spreads.
