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Franchising during a crisis
08.04.2015 12793

Franchising during a crisis

It is no secret that franchising consists of two main participants: the franchisor and the franchisee. The goals and objectives of these market players during the crisis are absolutely the same - to stay afloat, but the ways to achieve these goals are different.

Natalya Chinenova Natalya Chinenova - Chief consultant for business technologies in retail at Fashion Consulting Group. @in_retail, www.fashionconsulting.ru

For a franchisor in a crisis it is important to sell as many goods as possible at prices that are relevant at the time of the crisis. For the franchisee, the most important thing is to preserve the flow of customers, ensure the profitability of the enterprise and not lose out. From these two postulates the main contradictions of franchising are born during the economic turmoil of the market:

1. Franchisee:

  • wants to receive goods with deferred payment, on the terms of a commission or for sale
  • selects products with the lowest price and only those that, according to experience, will be sold in his region
  • expects advertising and marketing support at the expense of the franchisor

2. Franchisor:

  • wants to receive money for goods on a prepaid or post-paid basis
  • involves the sale of all groups of goods at prices that were set at the time of the crisis
  • tries to save on advertising and marketing events

The main areas of franchising in Russia

What to do in this situation? According to the experience of past crises, and there were already at least three of them in the memory of the main Russian players, the market rotates: some franchised networks begin to develop actively, while others, on the contrary, “deflate” and lose ground. At the same time, franchisees do not disappear from the market, they migrate and balance between brands, choosing the optimal working conditions for their business.

It should be noted that in the Russian fashion industry there are two main areas of franchising:

  1. hidden wholesale - when the franchisee is obliged to complete the design of the premises project, to purchase goods not less than the minimum specified in the franchise agreement and to maintain the appearance of the company enterprise. This franchise option is common in most Russian companies, and almost all high-brand holders use it when they sell franchises to the Russian market
  2. almost a real franchise system - when the franchisee along with the goods also receives support from the holder of the trademark in the form of: standards, regulations, business processes, settlements and other technologies required for a successful business. There are very few franchises in our market

Go to concessions

According to Reinhard Deppfer, President of EFTEC, in his speech at CPM from 25 on February 2015, most foreign franchisors are ready to make some concessions to their franchisees in the face of the crisis. For example, for each individual franchisee, in each particular city, all together or one of the following benefits can be provided:

  1. decrease in the required volume of orders to 30% of the amount planned for the contract in monetary terms
  2. granting the right to choose the necessary models and sizes (in contrast to the mandatory pre-crisis procurement matrix)
  3. the ability to defer payment on collections from 30 to 60 days
  4. co-financing the delivery of goods from factories in Germany to warehouses in Russia
  5. the adoption of the burden of advertising activity to promote the franchisee in the media
  6. offer additional ex-post discounts in the amount of 10 - 15% on purchases of the collection

Moreover, it is not at all a fact that each company will be ready to provide all these benefits to its franchisees. And even more so, it is not the fact that these privileges will be claimed by Russian franchisees against the background of economic sanctions, the existing inflation and the devaluation of the ruble.

Interesting offer

Nevertheless, the proposals of foreign trademark holders are formulated and voiced, the situation with Russian brands is much more complicated. There are no explicit and open offers on the benefits and benefits of franchising in the media or on the Internet.

What privileges would be of interest to both the franchisor and the franchisee? This question is easier to answer from the perspective of a franchisee, since the franchisor, as a stronger player, must decide for himself which of the events and to what extent he is ready to implement:

1. The most important benefit is the release of money from the franchisee, namely:

  • exchange of the remains of the fall-winter collection for spring-summer collection goods
  • the possibility of returning purchased but not sold goods, at least within 10%
  • the possibility of exchanging some of the unrealized collections of past years, even with a certain discount, for collections of the current season or demanded remnants of past years

In international franchising practice, a rule of return of up to 10% of an unrealized collection is accepted. This is not critical for the franchisor, since it has more opportunities to resell the rest of the collections to large discount centers. Either form full capsules from the goods of past collections and offer these products to franchisees from other regions, or, in the end, sell these leftovers in your own stock stores. In this regard, the offer of the manager of one of the well-known shoe brands to his franchisees is interesting - to exchange balances and form a pool of a new offer for buyers for the current season. It is not clear how this will look from the point of view of accounting, but, if desired and under the control of the franchisor, such an event can be carried out with high probability and effectiveness for the franchisee.

2. An equally important component is the franchisee's ongoing costs of maintaining the business. In this regard, the franchisee is interested in the following "concessions":

  • delivery of goods at the expense of the franchisor or “50 to 50”
  • production of fashion posters and promotional products of the current season at the expense of the franchisor
  • coordination of transfer to another taxation system (in this case, the legal entity of the franchisee will change, which formally will require re-registration of the Commercial Concession Agreement in FIPS).

Against the background of austerity and the desire of each company to "survive", the provision of certain financial benefits for the franchisee seems disadvantageous to the franchisor. However, if we take into account that transport and advertising costs make up no more than 3-7% of the turnover and compare these costs with the loss of even one franchisee buyer, then it is better to make reasonable concessions than to lose market share. Moreover, the closure of the store and the removal of the sign is, in fact, the loss of the consumer audience of the whole city for a long time. Reopening a store in a “closed” city, especially in the current decade, is very difficult.

3. Training, anti-crisis measures and rallying - these factors are also important:

  • seminars, trainings or corporate congresses at which franchisees can share their experience and receive support and specialized advice from the franchisor
  • crisis management or the departure of narrow-profile specialists to help the franchisee to a specific regional store, etc.

Anti-crisis tools

As a rule, franchisees are private entrepreneurs or small business owners. Most of them chose franchising not so much from the point of view of the economy, but according to their personal feeling: “like - not like”. Small regional stores in the crisis are much more difficult to understand what to do next? Right now it's time to turn the shoulder of the “elder brother” and show that franchisees are not abandoned, that they are important and expensive for each franchisor.

And what is important during a crisis for a franchisor? Of course - the opportunity to expand the network, and, accordingly, increase sales. Not all franchisors are ready to support their franchisees, not all have time to revise the product matrix, not all have approached the crisis in full combat readiness. Franchising is now in the stage of "chatter". Someone is losing the franchisee, someone is leaving the franchisor. It is high time to attract regional businessmen free from the unprofitable franchise into their team and expand the network of stores. The tools of attraction may be the simplest offers, for example:

  1. the possibility of opening a store not on proprietary equipment (since the franchisee already has a ready-made empty and fully equipped store)
  2. absence of royalties and lump-sum payment for mandatory registration of the Agreement with FIPS
  3. decrease or vice versa, increase in the area of ​​the trading enterprise
  4. free signboard or compensation for the manufacture of a sign at least 30%
  5. proposal to open stock stores or discount centers, etc.

Crisis is a time of opportunity. The future of the company depends on how the company uses these opportunities. As an example, I want to talk about the positive experience of running and developing a franchising business of the world famous TM HUGO BOSS during the global economic crisis of 2007 - 2010.

As you know, until 2008, HUGO BOSS did not develop franchising and only opened its own stores around the world. The global crisis negatively affected the financial performance of sales and brand activities. As a result of long work (preparation for the introduction of franchising and franchising sales took more than a year), during the 2008 - 2010 year, the brand opened more than 1 000 franchised stores, increasing its network size by more than five times and strengthening its market position.

At the same time, the press repeatedly slipped reports on the development of franchising with the brands Sportmaster, Detsky Mir, KOOKAI, ESPRIT, OVS, River Island and many others who tried to develop franchising business in Russia, but this experience was unsuccessful or unclaimed for various reasons .

In any case, franchising is a good anti-crisis tool for both the franchisor and the franchisee. Only this way of doing business requires careful preparation, development of a technology package and the effective work of the parent business, since franchising is a "cast" from your own retail network. It makes no sense to clutch at the franchise, like a straw, if the retail is “lame”, just as there is no reason to “strangle” the franchisee in his arms, since the franchise is a way to make a profit, not a charity.

For each company in the market there is only its own unique franchise recipe, which is developed in the "secret laboratories" and the bowels of each particular business. And if there are no such “alchemists” in your company, then I recommend that you better seek the help of consultants than get negative experience by learning from your own mistakes: save more time and minimize losses.

The structure of the Russian franchising market
by company origin

The structure of the Russian franchising market

The structure of the Russian franchising market by type of activity 

The structure of the Russian franchising market by type of activity

The structure of the European franchising market by type of activity 

The structure of the European franchising market by type of activity
Franchisors Help

The situation of the franchisee in the crisis is perhaps the most fragile. Experts say that without additional anti-crisis expenses, many franchise holders this year will lose financial stability and curtail their business. Are franchisors ready to sacrifice their profits, take part of the costs for themselves, or increase the costs of helping their franchisees in order to maintain their occupied share in the Russian market?

As a survey among operators shows, the recession in the Russian economy, a sharp increase in the exchange rate and a decrease in the purchasing power of the population are forcing Russian franchisors to change their business strategy in favor of the franchisee.

Thus, the Alba shoe retailer launched a program for returning unsold goods at the end of the season, said Alba Franchising Director Mikhail Chernikov. Also, the retailer began to provide its partners with a factoring payment system that allows you to get a deferred payment for a percentage of the amount payable. The percentage itself is divided in half between the franchisor, the owner of the franchise, and the franchisee, its buyer. According to Chernikov, such measures were taken so that the partners had free funds.

Among other ways to help their partners were mentioned: reducing lump-sum contributions and royalties, transferring payments between the franchisor and franchisee from currency to rubles, refraining from price indexation, reducing the requirements for commercial equipment, and negotiating with landlords on the ground.

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