Source: Growing businesses through franchising – NewsDay Zimbabwe March 29, 2019
Franchising as a business growth strategy for Africa
There are many pathways of growing a business such as franchising, mergers and acquisitions, joint ventures and arrangements and strategic partnerships. This article will draw in on how African business can grow through the franchising model.
South Africa is franchise industry leader in Africa. South African franchising industry has proven that African economies can grow using this business model. According to the Franchise Association of South Africa, the country has about 757 franchises systems and 35 111 franchise outlets. Franchising contributes about 13.3% to South Africa’s GDP and provides jobs for over 400 000 people. The success of the franchising model in South Africa demonstrates that franchising can be a successful business growth strategy for Africa.
Internationally, many thriving economies such as the U.S.A and China have grown their economies on the backbone of franchising and these markets are slowly becoming saturated with this business growth model. In contrast, Africa does not have a lot of franchise businesses and is slowly embracing this business model. This makes Africa an attractive option for local and international franchisors to expand their businesses and broaden their geographical presence. Franchising can provide big business for small businesses in Africa and can be an instrumental conduit for wealth creation, economic growth and job creation. Small business in Africa are failing because they lack adequate financing and sustainable business infrastructure. Franchising provides a sustainable and proven business template and reduces the risk and impact of business failure.
Small -Medium Enterprises (SMEs) in Africa, especially Zimbabwe are thriving and contribute significantly to the country’s GDP. Introduction of franchising to SMEs will force these businesses to upgrade operational standards, improve business processes, continuously develop its human resources and upgrade its infrastructures.
Franchising is a business concept whereby businesses seek rapid business growth with minimum capital outlay. The business owner (franchisor) extends contractual permission for specified commercial activities to an independent third party (franchisee). It usually involves the franchisor letting the franchisee use their business model and intellectual property. The franchisee pays a fee for this privilege and the franchisor will provide brand support, training, marketing and access to suppliers. The most successful franchises are in the fast-food chain industries, clothing and food retail industries.
Types of franchising
There are three main types of franchising namely, Business format, product and manufacturing franchises.
- Business format franchise
Business format franchise is the most common franchising arrangement. It involves the franchisee using the franchisors name, trademark as well as proprietary systems and processes. The paramount characteristic about business format franchising is that it provides an operational safety net for the business by providing continuous business support.
Some well-known business format franchising arrangements include KFC, Nandos, Spar and some International audit and consultancy firms.
- Product (Distribution) franchise
This is a franchising arrangement in which the product manufacturer gives a retailer the right to distribute its products. However, the franchisor often does not provide the franchisee with continuous business support. A good example of a product franchise are authorised dealer shops that sell branded products e.g. Apple products and Samsung products. The Toyota Assembly unit in South Africa is also a product distribution franchise.
- Manufacturing franchise
Manufacturing franchise is when the franchisor licenses the right to manufacture and distribute its products. Coca-Cola often franchises the right to manufacture and bottle Coca-Cola products. An example of a Coca- Cola franchise is Delta Beverages Coca-Cola and Schweppes Zimbabwe.
Franchising vs Go it alone
It is important to note that not all franchises work. In order for a franchise to be successful, the franchise model needs to be tested, refined and proven to be viable for Zimbabwe and the rest of Africa.
Franchisees have low failure rates compared to standalone business start-ups. This is because franchising is premised on a proven idea and an established market for the goods/services. This makes franchises low-risk investments and therefore are considered to be a more attractive investment option for financiers and investors.
The start-up costs for any standalone businesses are usually significant. However, the difference between franchising start-up costs and standalone business start-up is the timing of cash outflows. Franchisee usually pay a significant amount for the franchising license and pay royalty fee to the franchisor periodically. Other start-up costs for a franchise are covered by the franchisor such as training and marketing. On the other hand, a business owner has to bear the burden of start-up costs all at once.
Binding legal contract
A franchising agreement is a business contract. Parties to the franchise have to strictly adhere to contract terms and conditions. A breach in a franchising agreement may result in penalties, loss of franchising license and other legal consequences. Moreover, typical franchising contracts provides minimum operational flexibility to the franchisee. This can limit innovation and organic growth of that franchisee.
Building a solid brand requires a significant investment and time. Brand reputation and awareness are an important building block for any business. An added advantage of being part of a franchise is that it brings along an established brand and market. This makes it easier for both franchisors to distribute their product and services whilst making it easier for franchisees to penetrate markets. Another added advantage of the franchisee is that it allows small business to compete with big name brands which can stimulate performance of the franchisee.
An important business block in franchising is the franchise network. This network provides a platform for franchisees to receive support, share ideas and network. The network allows continuous training, development and marketing for the franchisee. A franchising network can benefit the franchisor through economies of scale from using franchisor approved service providers.
Whilst some franchisors require a traceable track record others do not. No prior experience or proven track record is required for a business owner to enter into a franchising arrangement. Franchisors will provide all the necessary training required to run a viable franchise business.
Why has franchising failed to support GDP growth in Africa?
There are four primary pillars that determine the probability of success of a franchise. These pillars include the regulatory environment, availability of skilled labour, the potential market for the goods/services and infrastructure. Out of these four pillars, regulatory environment, potential market and infrastructure are the main reasons why franchisors may shun away from investing in Africa.
Franchisors usually require an operating environment that has transparent policies and legal frameworks. Most African countries including Zimbabwe have been branded to have unstable political and economic environments which affect the business operations, transparency of regulatory policies and legal frameworks.
Infrastructure also plays a key role when making decisions about investing in a particular country. Important infrastructure include IT infrastructure for communication and business processes and good road conditions and network for distribution of product.
African franchises usually fail because there is no viable market for its goods/services. International franchisors expect to sell or distribute their products without tweaking them for its African consumer’s preferences or taste.
How can franchises thrive in Africa?
- Many aspiring business owners have limited knowledge on franchising and the availability of franchising opportunities. Independent transaction advisors should raise awareness to business owners and investors about franchising as a way of seeking business growth.
- Franchisors should navigate and familiarise with local realities. Franchisees should be allowed to tweak franchise operations to cater to the cultural or geographical needs of each franchise location.
- The African market landscape and consumer trends are forever changing. The franchises should respond to market changes in order to stay relevant.
- Franchisee usually source their supplies from franchisor-authorised suppliers. These suppliers are often foreign suppliers. This may cause friction between local governments, authorities and suppliers as they would prefer franchisees to support local business.
- Local and international franchisors looking to invest in Africa should study their potential operating environments and assess how it can contribute to socio-economic growth of that franchise location.
- The African economic landscape is always shifting. For a franchise to survive the African market, good management needs to be in place. Good management should be able to respond to African economic cycles and effectively manage its people and resources.
Franchising can be a viable option for business growth and expansion in Africa that can generate wealth and create jobs. However, awareness of this business growth model needs to be raised especially for SMEs through business organisations, government and non-governmental initiatives. In order for African franchises to be successful, it is of paramount importance that franchisors and franchisees respond and adapt to local preferences. However, franchising arrangements might not work for all type of businesses. The nature, vision and strategy of a business determines which growth strategy is suitable for that particular business. Our next article will focus on other business growth strategies suitable for African business.