Franchising: saviour of the high street or HR nightmare?
Steve Hemsley, April 03, 2012
Retail – and growth? When it comes to UK GDP, few economists would put ‘the state of the retail sector’ in the same sentence as ‘prospects for the growth of UK Plc’.
The high street has been shaken, not just by consumer migration to online retail, rather than physical shopping, but by the lighter wallets of the population as they struggle to make ends meet. According to a December 2011 report by the Department for Business Innovation and Skills (BIS), retail spending in town centres has fallen to 42% of total UK retail spend, from 49% in 2000 - and is projected to fall further to 40% by 2014.
Manufacturing, infrastructure, customer services and of course the small and medium-sized enterprise (SME) sectors are the vessels of hope in the Government's plan to claw the UK away from the threat of double-dip recession. Mary 'Queen of Shops' Portas has even been wheeled out in an attempt to bolster the beleaguered - but still 'good old' - British high street.
Peter Shrimpton, managing director of recruiter, Randstad Retail, explains: "Oddbins, Habitat, La Senza and Woolworths are all quite literally not on the high street anymore. Although overall employment in the retail sector rose by 0.5% in the final quarter of last year, a total of 42 retailers went into administration in the same quarter - a rise of 27% on the third quarter.
"And, while the future of Peacocks in 2012 has recently been secured (thanks to a deal with Edinburgh Woollen Mill), its reach has been severely curtailed, with the loss of 224 stores - leading to 3,100 redundancies with immediate effect. Retail employment accounts for 10.5% of all UK jobs, rising to 40% for all under-20s in employment. Essentially, retail is a major force for tackling youth unemployment and future prospects, especially since the sector spends more per head on training than either the finance sector or manufacturing," says Shrimpton.
But one branch of the retail sector is clawing its way out of the ruins of economic uncertainty and offering jobs to those with the inclination to make it as an entrepreneur. Yes, franchising is back in vogue.
Buying a franchise has become a popular route for people hoping to be their own boss - under the umbrella of a well-known brand. While for corporates, licensing a successful business model can be a cost-effective way to grow.
Could it be that this is the answer to the problem? Businesses can grow (franchisors are often retailers - Body Shop, Benetton and Avon are some of the most well-known); entrepreneurial spirit is nurtured; and SMEs will spring up, giving the unemployed local jobs in local areas (convenience stores, including Budgens, Londis, Spar and Costcutter, operate using a franchise model).
Roy Seaman, MD of Franchise Development Services, says: "This is a wake-up call for the Government to make the most of the opportunities that franchising can do to help the UK economy nationally and internationally. There are 20 MPs who are supporters of the method of starting a business by owning a franchise, as well as encouraging owners of successful businesses to expand by franchising."
The majority of customers will view franchisees as simply 'managers' of company branches, but the model also means that they are the MD, FD and HRD rolled into one - and not only will they have the HR policy of their own business to maintain, but that of a much larger banner to conform to. Yet keeping on top of HR issues and employment law within a franchise network of individual small businesses is a challenge, to say the least. For most of the franchisees, it is a question of moving from employee to employer, overnight.
Whether someone is running a branch of McDonald's or one of 18 Nicenstripy garden care operations, the profits will only roll in for everyone if the franchisees can find and motivate employees at a local level - and they buy into the national or global brand.
So could franchising be the saviour of the economy - or is it an HR nightmare?
As soon as a franchisor licenses its idea, HR support must be available, either in-house or through an HR outsourcer, to help the business grow and to avoid costly HR mistakes. The financial damage of losing an unfair dismissal claim, for instance, will come off the bottom line of both franchisor and franchisee, while any negative PR that arises for the brand could have a knock-on effect on other franchisees' businesses.
McDonald's is taking no chances when it comes to people strategy within its franchised businesses. Hopeful franchisees have to navigate themselves through 'several' interviews to ensure they have the right philosophy to run a McDonald's branch - key attributes include personal integrity and leadership skills.
Then they have to embark on a training programme, which typically takes nine months. This involves visiting and working in several restaurants, as well as classroom-based tuition.
McDonald's offers no salary or form of payment during this period, so its would-be franchisees have to support themselves while they learn about the jobs and they have to pay the company a refundable £5,000 training deposit.
This is before they have to pay for the restaurant - which will be somewhere in the region of £125,000 to £325,000. There is also a one-off franchise fee of £30,000 (on top of the training deposit). While they work under the McDonald's banner and although they are an SME MD, they are 'encouraged' to commit to the brand's CSR and community agenda.
But while franchising has been established in the retail and hospitality sector for years, it is now moving into the financial sector. Insurance provider WPA has been selling franchises since 2005. Charlie MacEwan, a director at the firm, explains: "We used to have a direct salesforce, but began to believe they were less concerned about the quality of the business they were bringing in - but were being incentivised on their client wins. Being a not-for-profit organisation, we decided to move to a franchising model where we would reward our franchisors for business growth and this culture complements our philosophy. There are so many high-quality candidates coming out of the rat race - or indeed who may have been made redundant.
"Franchising allows them a 'half way house', where they can have much more control than an employee - but they are not on their own."
WPA offers franchises (based on a geographical area in which to sell insurance) at a cost of between £7,500 and £10,000 and this includes WPA's training, examination, IT support and a local mentor to help them grow their business. While MacEwan maintains that franchisees are self-employed, he adds: "We say no to more people than we take on. But we don't necessarily need any experience - we recruit people for their attitude and we do the rest. And while the franchisee is responsible for his or her own business, from an HR perspective we have to ensure they are behaving as we would expect."
Responding to the trend, the British Franchise Association (BFA), whose members include Bathstore, Mail Boxes Etc and Snappy Snaps, is also increasing investment in the amount of HR training it offers, including providing more legal advice.
BFA marketing manager Tom Endean encourages HRDs at its franchisor members to communicate regularly with their franchisees.
"Guidance on recruitment and disciplinary issues from a franchisor can be extremely valuable and HR support is usually included within the licensing fee, because the franchisor does not want a people management issue to damage the brand," he says.
Working closely with franchisees is the policy at Cash Converters, which buys and sells pre-owned goods. It began as a single store in Perth, Western Australia in 1984 and is now an international brand with 210 stores in the UK, of which 155 are franchisee-owned.
Rachael Franklin, head of HR and training at Cash Converters, joined in 2010, at which time the HR function was outsourced. She immediately brought it in-house and asked franchisees what support they wanted. Top of their list was more help to ensure they had the correct employment policies in place and advice on recruitment.
"By listening to them and acting on what they said, we built trust, because you cannot tell them how to run their business, you can only encourage and persuade them," she says. The company has an HR training programme for managers and the one-store and multi-store franchisees meet every quarter. "Because we have company-owned as well as franchised stores, we can share best HR practice with our franchisees," says Franklin. "We share our policies and procedures with them and this stops any knee-jerk reactions to people issues. The secret is to make sure they know we are there as an HR resource."
She recalls how at one regional meeting she met a husband-and-wife franchise team who were struggling, despite putting in the hours. She spent time with them and advised them on how they needed to give their staff more responsibility and adjust everyone's working hours, so the business would become more profitable.
Cash Converters has a strong relationship with local Jobcentres and has created standard job descriptions, which franchisees can use locally. Vacancies across the network are shared, so talented people can move if there is an opportunity to advance their careers.
US-based restaurant multinational, Yum! Brands, which owns household names such as KFC and Pizza Hut, has more than 80% of its stores owned by franchisees and plans to grow that figure. James Watts, vice president HR and chief people officer, KFC UK and Ireland at Yum! Brands, says there must be a culture of collaboration with franchisees when it comes to HR. He knows he cannot dictate what storeowners do, but he can, in his words, "strongly recommend". "We have a hiring management software system and online recruitment, selection and screening tools they can use," he says. "We make sure we put forward a sound business case for why they should be using them."
Head office also advises franchisees on what their organisational structure should look like and it expects most franchisees to have their own training budget and training managers.
They are expected to assess what training their staff need and ensure they attend Yum! courses, including the organisation's 'Developing Champions' training programme. An online training system called Learning Zone launched last month.
"The customers don't know who owns our stores and regard it as one company and brand, so we make sure we promote our 'How we win together' cultural values and our franchisees follow these in their restaurants," says Watts. "We talk about the capability of our people all the time and our franchisees need to have the same mindset as we do. We help them to see there is a clear link between having the right people, managing them well and a healthier bottom line."
The CIPD says a franchised business will only succeed if there is consistency in terms of customer service and culture, so consumers have the same experience wherever they are in the country.
"Franchisees need to gain knowledge and skills and often want to be helped by the franchisor's HRD and their team with the basics, such as how to recruit and manage payroll," says CIPD adviser, Angela Baron. "They also need to learn the 'whys' - why they should keep staff engaged, for instance." She adds outsourcing the HR function can mean HR processes are more consistent across a franchise network. It is also one way to manage employee data and ensure compliance around employment law. "But this by itself will not mean you have smiling staff in a store. Additional work needs to be done to show franchisees how their staff are crucial when it comes to adding value to the business."
The HR Dept is a franchised business with 45 franchisees across the country owned by HR professionals. They in turn provide SME franchisees of other brands with telephone-based and on-site HR support.
"The franchisees soon realise employing the right staff and taking the right decisions on people issues is crucial to making their own business a success," says director Tom Doherty.
Doherty says HRDs must be aware of common mistakes made by franchisees. These include failing to find the right people to fit the brand culture or to provide a career structure, so people can grow with the business. "Franchisees tend to fall down on HR processes, rather than not having the will to do things properly." One franchised business to use The HR Dept is Nicenstripy. There are 18 Nicenstripy franchises that control a holding company, which pays The HR Dept out of the collective franchise management fees.
Derrick Swain owns the franchise for a large area of Kent covering 230,000 homes and he employs three people. "Areas such as health and safety can seem very complicated, so we need defined HR policies," says Swain. "HR is not always something you can do yourself, especially if it comes to employment tribunals or questions over maternity pay - where you do need advice."
Many first-time franchisees have never had to employ people before and to them HR can be a scary distraction from the core day job. Regular communication with experts at the franchisor or externally is vital to ensure their dreams of running their own business - or the franchisor's brand - is not damaged by poor people management.
Additional reporting by David Woods
Top 20 franchises in the EU
- 7-Eleven (37,496 outlets) - retail
- Subway (35,000 outlets) - restaurants
- McDonald's (32,805 outlets) - restaurants
- Kumon Institute of Education (26,311 outlets) - education
- KFC (22,000 outlets) - restaurants
- Europcar (13,000 outlets) - automotive rentals and leasing
- Pizza Hut (12,700 outlets) - restaurants
- Burger King (12,000 outlets) - restaurants
- Mexx (11,600 outlets) - retail
- Jani-King (11,000 outlets) - hygiene
- Curves International (10,000 outlets) - health and beauty
- Domino's Pizza (9,000 outlets) - restaurants
- Dunkin' Donuts (8,835 outlets) - restaurants
- Century 21 (8,500 outlets) - estate agents
- Re/max (7,500 outlets) - estate agents
- Yamaha Music School (7,200 outlets) - education
- Dia (Carrefour) (6,475 outlets) - retail
- Fornetti (6,464 outlets) - distribution
- Benetton Group (6,200 outlets) - retail
- Estimates of the net worth of the UK franchise industry vary. The British Franchise Association (BFA) puts the figure at £12.4 billion, but according to the Norwich Business School at the University of East Anglia, the franchise industry could be worth as much as £20 billion a year
- The British Franchise Association (BFA) estimates there are more than 521,000 people working for about 900 franchised brands
- The overall number of franchise systems in the UK is 897
- The number of UK franchisee outlets is 36,900, 90% of which are profitable, according to the BFA
Case study: Domino's Pizza
Pizza chain Domino's has about 130 franchisees and 21,000 staff working across 720 stores in the UK and the Republic of Ireland.
Recruitment and HR are handled locally by franchisees, but the head office provides training, technology and HR tools to help them manage their people more effectively.
"It can be difficult to guide and advise a franchisee and to get them to manage their people in a particular way, if there are cost constraints, or the owner does not have the same agenda," says UK HR director, Jane Franks. "As the master franchisee, we have a significant influencing role to play and need strong communications skills to convince franchisees of the best course of action. We have to build trust."
She says all HR decisions across the franchise network must be taken in the context of developing the employer brand, protecting the brand's reputation and supporting the growth of everyone's business.
Domino's Pizza was founded in Ypsilanti, Michigan in 1960 by Tom Monaghan. His goal was to have three stores, hence the three dots on the company logo. Today, the company has more than 9,000 stores in more than 60 countries.
"The partnership relationship we establish with franchisees means having minimum standards and procedures, which we audit regularly. We work closely with the franchisees when there are areas of concern and help them strive for improvement in how they manage their people," says Franks. "There also needs to be an access point for the franchisee's employees, so we have a team member careline."
She is keen for her head office HR team to help every franchisee become more profitable.
"We can do this by improving any HR process. This way, the employer brand grows and it attracts a bigger pool and a better choice of candidates," she says.
"The franchisees that are known for taking HR and their people processes seriously can be approved for expansion within the franchised estate."
Case study: Signs Express
Ken Bevis has owned the Signs Express signs company franchise for northeast Lincolnshire for 20 years and is grateful for the HR support he receives from the franchisor's head office in Norwich.
His is one of 75 Signs Express centres across the UK, with a combined staff of more than 500. He employs more than 20 people at his centre in Grimsby and as an SME he gets assistance when he needs it on potentially complex HR areas such as employment contracts, health and safety compliance and staff disciplinary procedures.
"It is important that as a small local business we can have bespoke employment contracts and not just generic ones downloaded off the internet," says Bevis.
"There are many HR issues that come along from time to time and which I need help with. There can be sensitive issues to deal with, such as an employee's mental health, or theft in the workplace."
Signs Express's head office pays Norwich solicitors Leathes Prior a retainer to have 24-hours-a-day access to its HR specialist lawyer, Dan Chapman. It means action can be taken quickly to avoid any legal action because a franchisee has acted improperly.
"I would initially speak to our head office and they would email Dan with brief details and he would confirm in writing what action we need to take," says Bevis. "We effectively get talked through any HR issue, so we can concentrate on our core business."
The Signs Express head office also helps franchisees find staff through an active vacancies section on its website.