The British Franchise Exhibition: Buy yourself a brand-name: New players are moving into the world of franchising. Roger Trapp looks at the opportunities and challenges that come with the trend

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The Independent Online
LINDSAY MORGAN got into franchising 17 years ago, when National Westminster Bank lent him pounds 500 towards the pounds 1,400 cost of his first Wimpy kiosk. Now his string of fast-food outlets in South Wales turn over millions of pounds a year and he has expanded into car parks, amusement arcades and other areas.

It is the sort of dream- come-true that has spurred many people into setting up their own business. The recession has slowed the growth of a sector heavily tilted towards retail - UK franchising turnover was pounds 4.8bn in 1991, compared with the previous year's pounds 5.2bn. But those involved in the industry claim that it has suffered no more financial collapses than other sectors, and predict overall turnover will pass pounds 10bn by 1996. The potential in some European Community countries is thought to be even greater.

Entering in a low-key way like Mr Morgan is still possible. For example, Card Connection, the greeting card operation set up last April by Simon Hulme and Chris Drew (the entrepreneurs who built up the picture framing chain Frame Express) requires an initial outlay by franchisees of less than pounds 10,000.

Based on the realisation that 1990 saw 2.3 billion cards sold at a cost of nearly pounds 700m, the business acts as a link between the wholesaler and small retail outlets, such as newsagents, petrol stations and sub-post offices as well as specialist card shops. The franchisee is trained and equipped with a range of cards and spinning display stands and left to persuade retailers to take them on a free- loan basis under which they pay only for those sold.

It sounds simple enough. However, Mr Drew, the finance director, stresses that it is 'not a 'get-rich-quick' scheme, but an opportunity for a dedicated franchisee to build up an interesting business, earning a sizeable yearly income'. This emphasis is important, because the franchising industry is anxious to show that it has shaken off the slightly 'sharp' image that characterised its early days.

The self-regulatory body, the British Franchise Association, requires members to comply with a European code of ethics under which a franchisor, among other things, must have operated a pilot scheme before launching the franchise, be the owner of all relevant brand-names and trade marks and provide initial and continual training. In addition, both franchisees and franchisors are required to deal fairly with each other.

There are also sound commercial reasons for following these guidelines, for experience suggests that a franchisor cannot expect to expand his or her business successfully without giving the franchisee the right support. At the same time, the franchisees must remember that their success depends on being associated with a well-known name - and that that relationship is threatened if they do not abide by the rules.

But it is the very fact that the franchise provides a stronger link than such concepts as distribution and licensing agreements that is bringing new players into the market. For some time, the brewing and car industries have been using what are known as 'first generation' franchises to distribute their goods. But the tied pubs and motor dealer arrangements did not have the two essential elements of 'second generation' or 'business format' franchises. These are: the franchisee operates under the franchisor's name, so that the outside world is given the impression that the franchisee is the franchisor; and the franchisor must be able to exert substantial influence and control over the way the franchisee operates the business.

Now that the petrol and brewing companies have started to sell a variety of products and have seen their main products become less important sources of income, they have become more interested in true franchises, says Amanda Griggs of Stoy Hayward Franchising Services.

The extra management time and value attached to brands makes the idea of greater control more attractive. She also identifies a 'big strategic change' brought about by FT-SE 100 companies using franchising as a way of expanding. Where previously they might have used the concept in a subsidiary, they are now making it 'a mainstream way of doing business', she says.

A fundamental factor is, again, the strict relationship the concept provides with third parties. 'Everybody is having to look at their balance sheets. And capital is not so available, so they cannot get on the acquisition trail to expand. They are trying to maximise the benefits of their brand-names.'

Furthermore, many retailers, such as Tie Rack and the Early Learning Centre, have found to their cost that expanding overseas is not as easy as it looks, even when the language is the same, as in the United States. They are hoping that franchising their business formats to local operators will help them to adapt to different markets, adds Ms Griggs. But, while this end of the market looks ripe for expansion, opportunities for those wanting to emulate Mr Morgan at the other end are likely to be limited for some time to come.

The traditional source of finance for the typical husband-and-wife team seeking to set up a small printing shop or fast-food outlet is the high street banks. But they have become increasingly cautious about all types of lending as bad debt problems have mounted in the recession.

Peter Stern, head of National Westminster Bank's franchise team, says that the downturn has altered perceptions on what can be achieved and brought a return to basics. But couple this stricter attitude with the problems associated with that other means of raising finance, selling property, and it is easy to see why even franchisors with 50 or more units are finding it difficult to obtain funding for expansion, let alone the smaller ones just getting going. 'It is cheaper than other ways of expanding. But you still need capital,' says Ms Griggs.

However, the economic slowdown has not held Mr Morgan back. Just before Christmas he opened another Wimpy in Pontypridd - at 170 seats, the country's largest - and has expanded into laundry and dishwashing materials. 'We're basically in fast-foods and amusements, and anything that dovetails with that we're into. But we start from scratch. We don't buy into other businesses.'

Admitting that the business is hard work and that he had a heart attack last year, he puts his success down to the partnership between him and the franchisor. 'You don't spend an awful lot of money in the early years on marketing because it's an established brand. That's the advantage of franchising.'

(Photograph omitted)