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The growth of franchising

19 July 2007 by
The growth of franchising

The number of franchised outlets in the hospitality sector rose by 6% last year and more businesses are franchising as a way of growing a successful brand. Nic Paton examines this relatively risk-free route into business ownership

Most customers walking into a McDonald's, Coffee Republic or Subway are just interested in getting their burger, skinny latte or sandwich - and rightly so. Chances are they will little realise, much less care, that they are standing - more likely than not - at the counter of a franchised business.

Yet franchising as a concept is becoming increasingly important to the hospitality sector as a relatively cheap and cheerful way to grow a brand. It is one which industry body the British Franchise Association (BFA) is now working to make much more recognisable to the average punter.

According to this year's BFA survey of the franchising market, hotels and catering is now the third-largest franchised sector in the UK, with the number of franchised outlets growing by 6% last year.

Campaign

McDonald's, for one, has been energetic in promoting its status as a heavily franchised business - about 37% of its UK outlets are now franchises - and is one of the key backers of a new BFA campaign to promote franchising.

The "Proud to Franchise" campaign will see franchisees encouraged to put up stickers, give out leaflets and brand their websites and stationery with the fact that they are a franchised business.

Franchising is a key plank in Domino's growth plans, according to business development director Andy Emmerson. The Milton Keynes-based chain has 150 franchisees in the UK and Ireland, who between them run some 464 stores, averaging three each. The plan is to double store numbers to 1,000 within the next 10 years, yet at the same time adding only a few more franchisees.

Emmerson said he sees no more than 200 as the ideal total, with each managing more outlets, probably about five. "I don't have an issue with single-store franchises, but we really want people who are looking to grow and to open more stores," he said.

Franchisees, particularly if they have previously come from a corporate environment, quickly need to get used to the idea that the buck really does stop with them, warned Roger Powell, director of franchise services at EasyHotel, which has three UK franchises, two in London and one in Luton, as well as two in Europe.

"To be successful in franchising you need to take responsibility for both the financial and operational aspects of the business," he said. "You need to have a firm grasp of the entire business process."

But for those with an ambition to become their own boss, whether new to the industry or old hands, franchising can be an accessible route in, as Simon Morris can testify. Four years ago he walked away from a high-powered management job at Barclays to become a franchisee with Esquires Coffee Houses, which runs 20 franchises.

"I had spent a lot of time in coffee bars in the City. They always appeared to be quite full," said 41-year-old Morris, who now runs a franchise in London, recently sold one in Horsham, and is looking for a site in Brighton. "As an independent it is much harder to get the good sites," he said.

Profit requirement

But it is vital franchisees are absolutely clear how they are going to make their money before they sign on the line, stressed Esquires' managing director Peter Kirton. "As a corporate-run business, if you're making 5-10% profit a year, you're probably pretty healthy," he said. "But with a franchise, you may have to pay the franchisor 5-10% a year in management fees, so your profits will need to be greater."

This need not be a problem with the right support and input from the franchisor, but Kirton sounded a note a caution. He pointed to instances of franchisors taking the upfront fee and then holding on to prime locations for their managed sites while offering only secondary sites to franchisees. So it pays to do your homework carefully.

Nevertheless, the figures indicate that franchising does generally have a higher success rate than being an independent.

On average, after five years, 97% of franchises are still trading profitably - considerably higher than the rate for independent businesses, according to BFA statistics.

"There is always going to be some risk, but being a franchise does take away some of it, particularly for people who have not been in this market before," Kirton said.

Read more from The BFA here >>Greene King signs Coffee Republic franchise deal >>Coffee Republic signs Dorset franchise deal >>

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