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Is your future franchising?

01 December 2005
Is your future franchising?

Six years ago, Anthony Tagliamonti, a part-time Domino's Pizza delivery driver in north London, decided to take the plunge and spent all his savings on a 50% stake in the store where he worked. Today, he's a millionaire at the tender age of 26. He's one of Domino's Pizza's star franchisees, having built up a successful empire that means he's now the sole owner of the branch in Woodford, Essex, where he started out, as well as two other outlets. He employs more than 100 staff, has three further stores in the pipeline and his turnover last year was more than £2m.

So what's his secret? There's no formula, says Tagliamonti, who still works an average of 70 hours a week, except hard work and knowing his businesses inside out. "I started at the bottom and I've done everything, from deliveries, to making pizzas, up to working the ovens," he says. "That means I can relate to my staff and I know exactly what needs to be done." This includes tracking every part of the business, from the toppings that go on each pizza, right down to how long each driver takes to deliver.

"It has to be a very tight operation to keep costs down," says Tagliamonti, who reviews his team's performance every week and gives them a bonus if they hit sales targets. "It's also about service. If we can deliver in 20 minutes while Pizza Hut takes 30, customers will come to us every time."

Having a brand name is also a big plus in the cut-throat take-away market. It's one reason why Tagliamonti likes being a franchisee.

"The more Domino's there are out there, the better, because it reinforces the brand," he says. Is he worried about other branches stepping on his toes? "No, because we're delivery-based, and each territory is mapped out, which helps to stop any boundary intrusions."

While Tagliamonti is responsible for certain areas, like recruiting staff, menus and setting prices, others, like training, are taken care of by head office. For him, the system works well. "I don't find it restrictive," he says. "You get lots of support and advice on things like personnel or legal issues."

He also gets a helping hand with marketing. Tagliamonti, whose motto is to never lose a customer, regularly mails out deals and coupons to try to keep customers loyal to his stores. "Head office breaks down data from our databases, and they tell me which households prefer certain deals, like two for one pizzas for couples, for example," he explains.

He advises any wannabe franchisees looking to earn their first million to be as hands-on as possible. "That's how you'll get the most out of it. Don't expect a franchise to be any easier than setting up on your own," he says.

The rise and rise of Subway It might not yet be as well known as McDonald's or Burger King, but there's no denying that one of the most successful franchise brands to hit the high street in recent years is sandwich chain Subway. The biggest take-away chain in the USA, it's now making a serious impact over here, with nearly 600 outlets in the UK and Ireland and a company goal to open more than two thousand by 2010.

And as the UK's fastest-growing fast-food brand - a new store opens every 48 hours - Subway looks set to overtake McDonald's and Burger King within five years. So has the UK gone sandwich-crazy, or is there another explanation for Subway's success? According to Max McHardy, a business consultant with BDO Stoy Hayward, people in the UK are increasingly drawn to branded products, in an echo of the US market.

But Subway hasn't been an overnight success. "The brand didn't work at first because people had never heard of it," says McHardy. "So it specifically tailored itself to the UK market by going for smaller retail units and offering healthier food."

While some may query just how healthy Subway sandwiches are, the chain does aim to attract more health-conscious consumers by offering low-calorie and low-fat ranges under its Eat Fresh trademark. The Subway website even features the story of one US diner who lost more than 17st in a year after eating nothing but Subway sandwiches.

"It's a product that's bang on trend because people are more concerned about what they eat today, and we give them a choice," explains Subway development agent Steven Richards. "But we're not doing anything differently now compared to 10 years ago. It's not about jumping on a bandwagon."

Richards also points out that Subway stores fit easily into most locations. "Generally, we only need A1 planning consent so it's a very flexible product," he says. "That means we can penetrate that market."

Today, most Subway franchisees own more than one store, with one owning 30 in Manchester. Average set-up cost is £140,000. "But it could be half that amount to open on a petrol forecourt. Or much much more in a city-centre shopping mall," Richards says.

There appears to be no sign of a slowdown for Subway. The company has no problems recruiting new people, and it currently receives about 15,000 applications a year from potential franchisees, ranging from retired people to young professionals looking for a career change. Future target locations include railway stations, motorway service areas, and inside supermarkets and hospitals.

Elsewhere in franchising Franchise food chains are no longer just about mainstream burger restaurants. Nowadays the choice of fast-food outlets on the high street is almost bewildering, with bagel, donut, and muffin shops, upmarket sandwich bars and big-name coffee franchises like Costa Coffee and Coffee Republic all frantically competing for custom.

The explosion in the food sector echoes the growth in the overall franchise market, which has a total annual turnover of 9b. The number of franchises in the UK has almost doubled in 10 years, with 718 brands currently in business.

Unlike the rise of quality burger brands, such as Fine Burger Union, Gourmet Burger Kitchen and Real Burger World, all of which are centrally owned, the franchise model is popular with Cornish pasty outlets, including the Cornish Oggy Oggy Pasty Company and Morris Pasties. Another UK franchise, the Real Pasty Company, is starting to make its mark on the high street. Despite launching only 18 months ago, it recently opened its sixth store in Manchester and the company hopes to have 10 stores up and running by Christmas.

According to The Real Pasty Company's marketing director Nigel Bruce, it's an advantage to have a niche product. "Customers want something healthy and different," he claims. "Pasties are a traditional type of food but we're selling them in a contemporary setting."

But finding the right locations at the right price can be a challenge. "Getting the city or town right is one thing, but you also need to make sure you're in the right position within that centre," he says. Getting it wrong, he warns, can spell disaster, like insufficient footfall or difficulties with a lease.

Recruiting suitable franchisees is less of a problem, and the company is currently receiving more than 500 enquiries a month from potential new store-owners, including one enterprising Dubai-based man keen to sell pasties to the expat community there. "Because we're small, our package is much more affordable than the big established names like McDonald's," Bruce says. The average store, including "everything you need to get up and running", costs about £85,000, and the company charges a management fee of 7.5%.

To compete with emerging brands, Irish sandwich chain O'Briens, which currently has 142 outlets dotted around the UK, has upgraded its stores and menu this year, investing £750,000 to introduce new juice bars, and new organic and low-fat sandwich ranges. As well as traditional retail units, the chain now offers franchisees other flexible selling opportunities, like outside catering, sandwich deliveries and coffee carts. Franchisees need about £125,000 to get started, including £45,000 in liquid capital.

For Young, being flexible is part of being attractive to franchisees - a problem often faced by franchise companies. "Growth isn't just about meeting customers' expectations. You've got to demonstrate that you're really taking the business forward," he says.

The pros and cons of franchising

According to the British Franchise Association there are many types, but business format franchising is the most common.
The owner of a business (the franchisor) grants a licence to the franchisee, who pays an initial fee to use the business idea and brand name, often in a specific "territory" for a fixed period of time, eg, five or 10 years, under rules set by the franchisor.

Typically, fees might also include training, financial support or help with marketing. The initial fee is then followed by a regular management fee (an agreed percentage of turnover).

So maybe you've decided that franchising is for you. But it's worth doing your homework before leaping in. Here are some of the pros and cons.

Pros

  • Increased security is probably the biggest advantage for most people. You're buying a tried and tested business format, with an established market and proven operating systems. If you go for a big name, customers will already know your product.
  • Most franchisors will be on hand to help out where necessary. After all, they want you to succeed. They might offer finance or IT training, for example, while ongoing support might include mentoring, legal advice or organising marketing campaigns.
  • Financial backup to get you started is available from certain franchisors - although most will expect you to put up some working capital. Many will give you special rates on equipment or supplies.
  • If getting finance is a problem, some banks will look on you more favourably for loans and overdrafts if you're a franchisee rather than a struggling entrepreneur setting up on your own.
  • Franchise businesses are often in prime trading spots like high streets and shopping centres. Franchisors usually choose their locations carefully to maximise business, and many will have defined territories to avoid overlap.

Cons

  • High start-up fees can put some people off. According to NatWest, the average initial cost of a franchise is £59,200, but it varies hugely according to the type of business and location. A branch of McDonald's could cost more than £500,000.
  • Ongoing costs can also be a deterrent. A franchisor will take a percentage of your annual income (turnover, not profit) as royalties or a management fee. Average fees vary, but most are between 5% and 12%.
  • You might also have to pay a fee once the original fixed-term trading contract is up after, say, five years. Check the small print first.
  • A lack of control over the business means that if you're highly entrepreneurial, franchising may not be for you. Franchisees have to operate within terms and conditions of their agreement. This might cover design or branding or restrict what you can sell.
  • The franchisor decides the overall direction of the company, not you. And a bad company decision could affect your individual business.
  • As with any other type of business, owning a franchise will still require lots of hard work, determination and effort.

For further information, contact the British Franchise Association on 01491 578050, or visit www.british-franchise.org.

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