Building a bigger Crechendo: Franchising could be the answer to the playschool firm's growth problem. Paul Durman reports

FRANCHISING seems to offer small businesses the opportunity of rapid expansion without the need for huge financial resources. But it is not right for every business.

The founders of Crechendo, the London playschool firm that the Independent has followed since it started up two-and-a-half years ago, will soon learn whether franchising is right for them. With the aid of a government grant, Philip Davies and Nigel Ragg have taken on a franchising consultant to explore the possibilities.

The firm runs groups for pre-school children, mostly one day a week. It uses 14 rented halls in parts of London with a good catchment of middle-class mums - Chelsea, Fulham, Knightsbridge, Hampstead, Islington and others - providing 45-minute classes to about 1,400 children a week.

As was already evident when we last spoke to Crechendo at the end of 1991, the firm has slipped far behind its original business plan. Messrs Davies and Ragg had hoped to open their eighth unit of five centres in January 1993; as it is, they are still working towards opening their fourth unit.

Progress has been held back less by the recession than by the difficulties of recruiting friendly staff and of finding suitable venues. Mr Ragg says Crechendo has largely overcome the staffing problem, assembling a stable core team able to lead children through jumping, climbing and other activities. It has recently taken on an office-based standby who is able to fill in if a class leader is ill.

Turnover has almost doubled and will reach about pounds 250,000 in the year ending this month. The slower growth has meant Crechendo has absorbed less cash than anticipated, so the firm will not be too far away from breaking even, despite a VAT bill of about pounds 35,000.

However, Mr Ragg, 33, and Mr Davies, 44, are still drawing modest salaries of pounds 15,000 a year. Although they both have well-paid wives, they also have young families to support.

Crechendo makes a gross margin of only about pounds 40,000 on each fully operational unit, so it needs at least four to cover central overheads which have risen to pounds 150,000 a year.

If Crechendo is to reward Mr Ragg's and Mr Davies's hard work with a comfortable living, it must get bigger. Hence franchising.

The Department of Trade and Industry recently agreed to pay two-thirds of the pounds 6,000 cost of commissioning a consultant to study whether and how Crechendo should franchise. Michael Way of the Centre for Franchise Marketing will not produce his final report for another month but says: 'It's got all the elements of a franchisable concept.'

Mr Way regards the high level of commitment needed by the managers to make Crechendo work as a positive indicator for its franchising prospects. Franchisees will have to be committed to maintaining high standards to ensure they continue to attract the parental recommendations that are so important to Crechendo's success.

Tumble Tots, a rival of Crechendo's, 'has shown that active learning centres are something which people do like to own and run', Mr Way says. Crechendo offers high job satisfaction from working with children and great variety because of the ever-changing classes.

Mr Davies claims franchisees would benefit from lower overhead costs than the parent operation. The franchisee's owner-manager would have fewer salaries to pay and Crechendo would continue to handle membership lists and other administrative functions through its head office.

Mr Way says he has still got to look at the financial feasibility of franchising Crechendo, but adds: 'I do get the feeling that they're undervaluing what they're offering.

'It's surprising that people are prepared to pay anything between pounds 5.50 to pounds 7.50 an hour for their gardener and not prepared to pay (as much) for something more vitally important, the development of their child.'

Crechendo is aware, in Mr Davies's words, that 'if the company is to pay its way, it's got to generate more margin'.

Nevertheless, the firm must be cautious about imposing price increases. Although Crechendo believes the strength of its product and its brand sets it apart, rival activities, including Tumble Tots, already provide a cheaper alternative for mothers seeking to give their children some exercise.

Crechendo found it difficult to get established in Wimbledon until it cut prices to pounds 3.50 a session. Most centres charge pounds 4.50. After an initial period, the price in Wimbledon has been raised to pounds 4.

In Battersea and affluent Knightsbridge, the firm has faced exactly the opposite problem - too much demand. These centres have proved so popular that parents have become frustrated because of the length of time it takes to get their children registered for classes. The Knightsbridge centre charges pounds 5.50 a session. Crechendo intends to run additional classes in these areas when it opens its fourth unit.

One way forward may be for Crechendo to develop its party sideline, which offers better margins than the core playschool business. It charges from pounds 200 to more than pounds 500 to organise and rent its equipment for children's parties.

The firm has not been helped by its bank's intention to jack up charges, its first experience of the problems small businesses face from their banks.

Just before Christmas, Barclays Bank proposed raising Crechendo's tariff, a move that would have more than quadrupled its bank charges from pounds 670 in 1992 to more than pounds 3,000 this year. This is more than 1 per cent of turnover. Messrs Davies and Ragg found this particularly galling since their average monthly balance was pounds 8,000 last year.

They are still disputing the increase but are not optimistic, despite the return to Barclays' Clapham Junction branch of the bank manager who had initially been so helpful.

Given a positive proposal from Mr Way, Crechendo hopes to begin franchising by the end of this year. At the moment, it seems the best way to proceed would be to establish a franchise of three centres all at once. However, the cost of the franchise and most other details remain undecided.

(Photograph omitted)