Failure or victoire
The tug of war over the beleaguered Pierre Victoire chain has turned out happily for a select band of franchisees, who succeeded recently in their bid to create a new restaurant company from the tatters of the old chain. But for the remainder of the franchisees, and others who went out of business along the way, the collapse of the budget bistro group has been a sorry lesson in the economic realities of franchising.
The hopes and dreams of some 83 businessmen and women were finally dashed in June when the restaurant group was put into receivership, following an unsuccessful bid by founder Pierre Levicky to sell the chain.
Recriminations followed, but the most persistent allegation made against Levicky and his team was that he was pushing the chain to expand too quickly without establishing sufficient infrastructure to help franchisees build successful businesses. The company's target to expand the chain from 108 to 300 restaurants appeared to be "plucked from the air" rather than from an economic basis, said a spokesman for the receiver Grant Thornton.
Pierre Victoire's fate appears to turn received franchising wisdom on its head. Catering brands are, after all, some of the most successful franchised companies in the developed world. But for many UK operators the restaurant group's circumstances have confirmed the inadequacies of franchising as a way of growing a traditional restaurant company with a varied and complex menu. For others, it was not franchising that caused the group's troubles but operational and managerial difficulties.
Mike Evans, director of consultancy the Retail Group, which advises retail and leisure operators on how best to reach their consumer, is critical primarily of Pierre Victoire's growth rate. At the height of its expansion Pierre Victoire was opening restaurants at the rate of two a week - some wholly owned but most of them franchised. According to the Retail Group, this is a programme of expansion that even the most experienced of retailers would be wary of, let alone a business with such complex requirements as the restaurant trade.
Growing at such a rate inevitably compromised service levels at individual sites and franchisees complained they were left without any support from the parent company.
Despite Levicky's claims, in a 1995 Caterer article, to have invested £1m in setting up the franchising element of the business, some franchisees continued to complain that head office spent little on marketing and training.
"There are a host of worldwide catering brands such as McDonald's and KFC, but there is a real difference between that sort of formula-type catering offer and an out-and-out restaurant. Whether restaurants per se can be repeated as a franchise still remains to be proven," says Evans.
Evans thinks the root of the problem is the difficulty of capturing environment, atmosphere and style - all crucial to a successful restaurant - in a franchisable formula. "Even with a budget-price restaurant the experience and environment is an important part of the offer. But replicating the experience as part of a franchise is very difficult," he says.
Restaurateur Neville Abraham, chairman of London-based restaurants Groupe Chez Gérard, agrees. He believes that the more complex the business, the more dangers there are in franchising because of the difficulty of maintaining high standards in everything from management to chef skills, training and food consistency. Groupe Chez Gérard, like the Pelican Group, has shunned franchising. "Our business is at the quality end of the market. It's difficult enough to control that business ourselves without trying to do it at arms' length," says Abraham.
It's a position that Stuart Price, restaurant analyst at Credit Suisse First Boston, has considerable sympathy with. Price blames operational difficulties for the Pierre Victoire fiasco, but is also concerned that the claims made for franchising as a tool for growing businesses are often overstated. At the same time, the responsibilities of franchisors towards their franchisees are underestimated.
"Franchising is an implicit conflict between the needs of the franchisor and those of the franchisee," he explains. "The franchisor is motivated by sales and sales growth because of the royalty structure and benefits from opening additional units. The franchisee, meanwhile, is motivated by profits." Consequently, it is not surprising to find franchisors developing policies that benefit them rather than the franchisee.
Successful franchising
However, argues Price, the most successful franchisor in the world - McDonald's - is a good example of how to manage this relationship successfully and profitably. McDonald's is proactive in its management of franchisees and will send in its task force if it believes a franchisee is having troubles. It has also successfully exploited and nurtured the entrepreneurship of its franchisees. The Big Mac and Filet-o-Fish were both invented by franchisees, as was the fries shovel, which dramatically cut down waste and standardised portions when introduced. "Without head office support, franchisees wont tell the franchisor about their best ideas and the whole operation suffers," says Price.
The problem is not so much that it is too easy to become a franchisee, but rather that the barriers to entry for franchisors are too low. Price argues that as a form of investment, franchising should be regulated and subject to the same scrutiny as other investment vehicles. Legislation is, he admits, unlikely. "But at least it would curb some of the excessive claims made by many franchisors in their advertising literature."
Claims of failure rates of just 5% are misleading, he says, because they are not corroborated by independent research. It is up to the individual franchisee to investigate just how financially viable the company it wants to invest in is and, as most franchisors are small businesses, they are not required to lodge full accounts with Companies House. "The freedom you have as a franchisee is not as great as running your own business. You pay a rent to follow someone else's rules. Some people think that's a price worth paying for a better chance of success, but often they are investing in a business on the back of little research," says Price.
Price's concerns are shared by the Retail Group's Evans. "It's easy to buy a poor franchise. Some franchisors don't realise the level of support they need to give. If franchisees are left to their own devices they may not have the wherewithal to drive that business forward," he says. "Unfortunately, in franchising it's an easy temptation [for franchisors] not to take direct control."
One company that has maintained close control over its franchisees for a long period of time is PizzaExpress. Its chief executive, David Page, is easily the company's most successful franchisee, although he has long since relinquished control of his own restaurant for control of the boardroom. Last year Pizza-Express concluded a deal to buy back 30 franchised UK restaurants, after cherry-picking restaurants to buy back for a number of years. The motivation for the move was simple: the group was making more money from its company stores than its franchised ones. However, says Page, this does not mean that franchising is flawed, just that it is not the best vehicle for PizzaExpress at this stage of its life-cycle.
The majority of PizzaExpress's expansion in the UK was franchise-led: in 1993 at the time of flotation there were 68 stores in the group - 54 were franchised and just 14 owned by the company. "However, it had taken us 28 years to get to that position," he says. The message is clear: slow and steady growth pays dividends.
Overseas franchises
Now the only franchised part of the group is overseas. Franchises are open or about to open in India, France, Switzerland, Turkey, Egypt, Moscow, Pakistan, Kuwait, Cyprus and Germany. And these, too, may eventually be bought back by the company. "When you know the territory, the customs, the labour laws and the property laws of a country there is no point franchising because you don't make as much money," says Page.
Meanwhile, PizzaExpress rival City Centre Restaurants (CCR) is also turning to franchising. It has agreed to franchise the Garfunkel's brand to hotel and catering group Granada, which wants to open the restaurant in some of its hotels, and has set up a franchise department to develop this area of the business in the UK and overseas. For CCR chief executive James Naylor the most important thing is to make sure any partner has the financial muscle to make a success of the venture, in order to protect the integrity of that brand. For that reason his preference is for corporate deals.
Another franchisor who is keen on corporate deals is Dallas-based Metromedia Restaurant Group (MRG). Bob Petska, president of international development at Metromedia, which owns the Bennigan's and Ponderosa brands, has already established a successful relationship with Bass Taverns. "It does depend on picking the right franchise partner with a hospitality background. Bass Taverns is an outstanding partner."
Franchisor responsibility
Petska also recognises that the franchisor's responsibility does not end with establishing the financial viability of the prospective partner. "You have to make sure you have the infrastructure in place to serve franchisees properly. We also monitor purchasing and product development very closely."
MRG worked closely with Bass to duplicate recipes and source products in the UK. The finished product was sometimes better than in the USA, says Petska. Experience also counts for a lot: "We've been in the restaurant business for 30 years and franchising internationally for 30 years. We can anticipate hurdles in many encounters because we have probably seen them before," says Petska. In other words, only a fool would underestimate the complexities of franchising its most precious commodity - its good name.
Even sceptics such as Abraham respect the intricacies of franchising. When Groupe Chez Gérard bought the Richoux group of cafés recently it put a hold on early plans to franchise Richoux coffee cafés abroad. But the group may yet return to the franchise route for that part of its business, though it certainly will not do it hastily. "It's a very specialist world, if we were serious about it we'd hire a franchising person and that's all they would do," says Abraham.
The rise of the corporate franchising deal in the UK underlines the fact that franchising has a role to play as one way of growing a business. But it is also a reflection that franchising is not a risk-free route to easy riches. If the experience of Pierre Victoire's franchisees is anything to go by, the franchising game is certainly a tough one, especially when it puts your livelihood on the line. As the restaurant industry consolidates in the fight for the share of the eating-out pound, perhaps franchising is best left to the corporate sector.
