Franchising success
POCHOLO C. DOMONDON
Through the years, we have witnessed the influx of a number of foreign stores into the local market and homegrown brands replicated through the franchise route.
As a retail- and consumer-centric populace, the Filipino market has significantly contributed to the success of international entrants from old household names such as McDonald’s, 7-Eleven, and Dunkin’ Donuts to the relatively new that include Uniqlo, H&M, and Denny’s as well as to the expansion of local entrepreneurships of Jollibee, Potato Corner, and Fruit Magic.
The franchise business model has certainly proven to be profitable, simple, and straightforward. This is particularly true for the franchisee who is mainly tasked to identify and select preferred location and ensure the brand is well-protected.
For the franchisor, the primary responsibility is to build the brand, deliver required materials and services to franchisees, and innovate to cope with competition.
In 2017 alone, the Philippine Franchise Association (PFA) estimates the economic contribution of the franchise sector at $18.1 billion or almost a P1 trillion which it expects to breach in 2018 with a projected growth of 15 percent to 20 percent.
The growth will be mainly driven by approximately $3 billion worth of investments that the PFA projects to generate from its recently concluded two-day conference and expo on July 18 and 19 this year.
Success has normally been measured in terms of profit presented as the bottomline but needless to say it’s a top priority. Simply put, businesses including franchise operations need to ascertain that the revenue growth rate should always be higher than costs.
Inversely, the decrease in costs should be greater than the decline in sales.
Selling the experience
Under franchise arrangements, goods and services are standard across stores and branches. Any innovation or modification is performed at the franchisor level, with little wiggle room for franchisees to introduce customization.
In certain instances, even store layout is dictated and controlled.
The differentiation lies in in-store experience, particularly on how instantaneous sales transactions are, how products are made readily available to customers, as well as the thrill and excitement of encountering something new and interactive.
In PwC’s most recent survey report on global consumer insights, 44 percent of respondents are still enamored with physical shopping. Store visits have evolved from a practical errand into an increasingly sensory and social experience.
This may rationalize Ikea’s approach in store layout where customers are made to feel varying room designs with furniture and fittings exhibited for sale, vs. the traditional arrangement of goods in rows and queues.
In the same report, mobile payment is gaining strong momentum with a 10 percent increase in responses from last year. It’s expected to overtake electronic commerce through laptops and tablets in the short term.
As such, we see franchise stores such as Shakey’s, Starbucks, and Zark’s introducing their mobile applications (apps) to facilitate orders and payments in collaboration with telecommunication networks.
In selling the experience, marketing strategies are also transitioning from print to digital with 2017 as the year when businesses have spent more for promotions through social media and websites than TV ads, according to IPG Mediabrand.
Last year, total marketing expenditure attributed to digital channels reached $209 billion against $178 billion for traditional media. This underscores the need to shift campaigns and maximize coverage provided by Facebook, Twitter, Instagram, and even Snapchat.
Notwithstanding this shift to digital media, franchise operators shouldn’t randomly invest in blogs and social media without gaining a good understanding of its target customer base. And in utilizing credible ambassadors, they should not limit their choices to celebrities and politicians.
Indeed, franchisors and franchisees alike would need to consider these changing consumer behaviors and plot their strategies around these evolving trends, not only to maintain sales growth, but to make sure their brands remain relevant in the market.
Analyzing the cost landscape
To better manage costs, there has to be better appreciation of accounting nuances that directly impact the more significant franchise operations expenditures such as inventory costing and provisioning, rent and related dismantling costs, joint venture arrangements and passed-on charges by franchisors.
Inventory management doesn’t only encompass adequate safeguarding against physical losses and theft, but likewise assessing and determining appropriate costing methodology (first in, first out; average costing) that will be reflective of actual stock movement and consideration of fluctuation in unit prices.
In addition, franchise operators are highly encouraged to keep close tab of material turnover to reduce losses from expiration and obsolescence, and to manage sufficient flow of working capital.
Accounting for rent or lease charges is also a transaction that more than meets the eye, with unique concepts of straightlining specifically for lease contracts that carry escalation clauses (or those whose rent charges increase annually) and decommissioning obligations (where the lessee is directed to dismantle leasehold improvements and ultimately return the space to its original condition).
Correspondingly, any business objective that entails production efficiency and cost saving measures should be performed with a firm grasp of accounting principles, lest franchisees misinterpret numbers that lead to higher losses.
Redefining success
Changing times have made businesses rethink its definition of success. This is not to discount financial performance as an essential element in key decisions that impact franchise operations – such as whether to expand or focus on certain territories, or innovate or preserve the original brand – but it shouldn’t be the sole measure.
Other attributes of equal importance include social contribution (e.g. employment numbers) and employee health and welfare, which customers are gradually factoring in, and in certain instances, have become strong determinants of their loyalty.
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Pocholo C. Domondon is an Assurance Partner, Startup Business Lead Partner, and Government Relations Partner of Isla Lipana & Co., a member firm of the PwC network. He co-leads the firm’s VentureHub@PwCPH. For more information, please email markets@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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