The brand of a winning formula

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The Independent Online

By Roger Trapp

By Roger Trapp

9 February 2000

Pirtek is an ideal standard bearer for Britain, one of the few franchise operations that is industrial rather than fast food or retail, and highly successful as a nationwide mobile hydraulics repair service since it was set up in 1988.

With 73 centres in Britain and half that in Germany, France, Belgium and the Netherlands, it has grown into a business with annual sales of more than £30m. Pirtek, Prontaprint and Kall Kwik are all proof of the power of franchising to achieve rapid growth for ambitious entrepreneurs.

Franchising has caught the imagination. Figures from the British Franchise Association and NatWest Bank due next month are expected to show a continuation of growth. That has hardly faltered since the concept arrived in Britain from the United States 20 and more years ago.

Last year's survey revealed the number of individual franchise units had hit 30,000 for the first time, and the industry reported a 6 per cent rise in annual turnover to £7.4bn. But analysts reckon last year's sales figure would be £60bn - almost one-third of the UK's total annual retail sales - if soft drinks' franchises, motor distribution partnerships, petrol retailing and tenanted pubs were included.

Some in the industry say this would distort the picture, since the term franchise is increasingly applied to situations, such as television and the railways, which are licences to operate in certain areas. Franchising has become big business. Though associated with fast-food and retail outlets, it has stretched to the point where almost any business is reckoned to be franchisable.

This significant expansion is helped by fairs and exhibitions such as the one in London this April promoting franchising as a way of setting up in business which is less risky than going it alone. For operators of the business systems or formats being franchised that means they get the chance to expand their company more quickly.

The sums invested range from tens of thousands of pounds for sandwich bar operations to hundreds of thousands for more complex businesses. But Andrew Pollock of the accountancy firm Rees Pollock says franchisors rarely succeed with their expansion plans unless they supplement the franchisees' cash injections with investments of their own. That gave rise to the view that in some cases franchising is not dissimilar to pyramid selling.

Brian Smart, director general of the British Franchise Association, dismisses suspicion of franchising as old hat. But he acknowledges it is still a young industry without "an organised body of knowledge" devoted to it. Although bankers, lawyers and accountants have become highly experienced in the field, franchising is just starting to become professionalised through the emergence of centres of learning at Westminster and Middlesex Universities.

Assumptions about what operations could be franchises do not always work. One of the most frequent mistakes is made by US businessmen convinced an idea that took their home market by storm will find a similar response in the UK.

Mr Pollock frequently reminds such operations that their idea is "worth a pint of beer, but no more unless it has been shown to work". Even the hamburger chain McDonald's, often cited as one of the most successful examples of franchising, had to tweak its way of doing things after it crossed the Atlantic.

In The Franchise Paradox, published in 1997, the author, Stuart Price, says the industry places "excessive stress on uniformity and conformity", so is out of touch with modern business environments.

He finds individuals running franchises are up to five times more likely to succeed in establishing themselves in business than in other forms of start-up because of the support offered by the franchisor. But Mr Price also warned there was a 70 per cent chance of a franchise group not making it to celebrate its 10th birthday.

The reasons include poor franchisee management skills, lack of planning, insufficient focus and loss of direction. Franchises also suffer special problems. One stems from tensions between the people involved. Those who set up the operation and the early franchisees are likely to be highly entrepreneurial, and those who join once the idea is established are more inclined to be risk-averse, in effect buying a job. The relationships can also change as the operation gets bigger, particularly if the founder of the operation gives way to a professional manager who is likely to impose a more corporate style upon franchisees who, in the words of one insider, "think they are in business on their own but aren't brave enough".

Success itself can breed problems, when the operation becomes complex and costly to run, especially, as is often the case, the group is operating in a field where intense competition squeezes margins.

This is claimed as a big reason why Pizza Express, which had expanded through franchising under Peter Boizot's control, joined several high-profile companies turning their back on franchising. But the Association's Mr Smart does not see them as indicating a general decline in interest in the sector. Instead, he says, franchising may be right for a business at a certain stage and not at another.

Moshe Gerstenhaber, who built Kall Kwik into a £70m turnover, 200-franchise operation before selling out last summer to Adare Printing Group, the Irish firm that also owns Prontaprint, remains committed to the franchising concept.

Conscious of the benefits of being "in business for yourself but not by yourself", he urges those thinking of setting up firms to consider franchising because "at the end of the day what's left in your pocket is much more than you would have if you were independent".

Another of his convictions - that franchisors have to learn from their franchisees and also support them through training, marketing and the rest - is not lost on Pirtek. It has invested considerable sums in developing a nationwide chain and moving into mainland Europe, but the management is aware that the central operation will continue to make money only if the individual sites are doing well.

Here, the company has an advantage. Its link with Pirelli, the hose supplier from which it takes its name, enables it to obtain the product at a much better price than its competitors, and so share a healthy margin with its franchisees. "It's a pretty solid formula," says Mr Price.