Franchisees are feeling the pinch and franchisors need to help them combat margin compression, says Greg Nathan, founder, Franchise Relationships Institute.
At an FCA lunch attended by franchisors from brands such as Bakers Delight, Just Cuts, Mad Mex, Soul Origin, SumoSalad and The Cheesecake Shop, Nathan revealed why one third of franchisees feel pessimistic about the future.
On average, costs are going up between 3 and 6 per cent, he said. “We’re finding a softening of sales and my estimate is about one third of franchisees are doing it tough.”
Some are finding it more challenging than others, with the food retail sector a tougher market to operate in, Nathan added.
Based on statistics drawn from franchisee surveys, FRI found that 40 per cent of franchisees are concerned over lack of profitability and margin compression and 45 per cent are feeling pessimistic about future profitability.
Other figures from the surveys revealed franchisors have more work to do build confidence among franchisees with 42 per cent not believing their franchisor cares about their profitability and 34 per cent lacking confidence in the leadership team and its vision.
One of the ways franchisors can exert a positive influence on their franchisees, even when times are tough, is through leadership. “The optimism of the leader has a ripple effect,” Nathan said.
It was noted that multi-unit operators were less pessimistic – partly perhaps because they make more money, have a better lifestyle, and are treated with more respect.
So what can franchisors do to help combat margin compression and profit pessimism?
Make metrics matter
Measuring the business is important but can be haphazard and ineffective if there’s no real structure to the process. Dividing the franchisor’s metrics structure into four levels, FRI has pinpointed the top two standards for best practice – level three and level four.
Reaching for the top: level 3
Franchise systems operate with the following:
- Monthly P&Ls with standardised Chart of Accounts
- Internal benchmarking and analysis
- Business plans with budgets and goals
- Real time menu of KPIs from cloud based POS
- Structure review of metrics with meeting rhythms
Top of the top: level 4
Franchisors operating in this space have the following:
- Real time financial dashboard
- Full transparency of data across the network
- Focus on financial literacy for franchisees
- KPIs adjusted to suit maturity of each business
- More than 50 per cent of franchisees in performance groups
- Unit level profitability is counted as one of the top three franchisor KPIs
“We have to work very hard to keep profit margins healthy, claw back revenue and claw down costs,” Nathan said. “I think this is what franchisees want from us.”