Thursday, November 2, 2017

Why understanding franchise ecosystem is crucial

Wambugu Wa Gichohi

Wambugu Wa Gichohi 

By Wambugu Wa Gichohi

The franchise ecosystem comprises of many key stakeholders as discussed here under in no specific order of importance.

First are the main players, the franchisors and the franchisees, with the franchisor owning the franchise system and the franchisee investing time and money to trade using the franchise system. Ideally, the strategic relationship created between the two works in harmony to build the franchisor’s brand while enabling the franchisee to meet own personal and financial goals.

Then the Franchise Associations. Membership categories are designed to accommodate major players in the franchising ecosystem, as described here, but the main categories are the Franchisor and the Franchisee categories.

Associations offer self-regulatory dispute resolution framework between franchisors and franchisees and in countries with no franchise-specific laws, associations are nearly the default authority in such matters, save for matters requiring litigation. The Franchise Association of Tanzania (Fata) exists only on record given the low franchising activity in Tanzania. With growth of a vibrant franchising sector, FATA will recruit and take its rightful place and ably represent Tanzania in the Pan African Franchise Federation (PAFF) and the World Franchise Council (WFC).

In comes suppliers to the franchise system, the individuals and businesses that keep the franchise networks alive. Such include not just those supplying physical goods but also suppliers of support services such as franchise consultants (provide franchise development services), tax consultants (tax matters), accountants (financials), attorneys (legal) and banks (funding). For physical goods, it is important that local suppliers meet the quality required by the franchise system and often, franchisors invest in training them to meet these standards, otherwise import from centralized supply chain bases.

Franchise consultants, franchise attorneys and banks deserve some louder mention-they are a rare commodity in East Africa. While there are many so-called business development service providers, franchise consultants are experts specifically trained to prepare businesses to franchise. They also advise potential franchisees on selecting the right franchises and the right finance sources to fund their franchises.

The writer is aware of only a handful of such in the region and maybe it is time we grow a new discipline just like accountancy, law, etc to help grow this sector. Franchise Attorneys are commercial attorneys with a specific bias in franchising, from intellectual property law, preparation of legal documents (not just the franchise agreement) all the way to litigation. In East Africa, most franchise engagements are arranged by commercial attorneys while in markets where franchising is well-rooted, franchise-specific (commercial attorneys trained in the whole franchising spectrum) are responsible to oversee franchising engagements.

Adequate money is required to roll out franchise networks. While the prospective franchisor can choose between debt and equity finance, equity financing is cheaper than debt financing but you have to cede ownership to the equity investor. Banks thus become very important stakeholders in franchising as most entrepreneurs do not like ceding ownership. Ideally, banks arrange franchisee financing more readily than other options since franchisees join a tried, tested and proven business and not starting a green field venture-hence lower risk.

This service has, understandably, not grown in East Africa, with only a handful of banks supporting foreign franchises owing to the small number of franchise transactions. As franchising grows more banks will develop dedicated franchise-specific finance products for indigenous franchise systems as is the case in other parts of the world, South Africa being a good example where most banks have a desk dedicated to franchise financing.

Apex private sector bodies such as Tanzania Private Sector Foundation (TPSF) offer a ready membership with franchisable businesses as do the individual association members. Besides, they have a direct interest in growing a sustainable franchising sector by tapping into the smaller businesses that are currently not their members but would grow to become future members.

As the apex body of private sector players, Fata, once active, would join TPSF membership. As the voice of the private sector, TPSF plays a major role in lobbying and advocacy and as a bridge to government, a bridge which is needed in developing a vibrant franchising sector.

The government is particularly key being the custodian of intellectual property (patents, trademarks etc) laws which are the basis of franchising. It also provides policy direction and minimum legal framework necessary for growth of a vibrant franchising sector, particularly for home-grown franchises which play a key role in addressing trade imbalance. In East Africa, the long period it takes to conclude commercial disputes has for long been cited top among reasons discouraging leading franchise brands from venturing here.

However, as legal reforms take root, strong multinational brands have entered the market, most notably Re/Max, Carrefour, Subway, Pizza Hut and KFC. The government can also use its tax policies to influence growth of a vibrant franchising sector (e.g. tax rebates when indigenous brands franchise) to secure job creation and higher GDP growth as discussed here-below.

Some development partners support private sector activities. In the context of franchising, it is high time they direct some resources to support development of franchising infrastructure in addition to supporting the scaling up of home-grown brands through franchising, which would contribute immensely to job and wealth creation in East Africa.

Using the example of South Africa where franchising contributes 11.67 per cent of the country’s GDP, (2016 franchise survey) the average direct jobs created per franchise outlet is 17. It is acknowledged that one direct job creates one indirect job. The average household in South Africa has 4 to 5 people. It is therefore fair to say that franchising impacts on the lives of between 68 and 136 people per franchise outlet.

With 757 franchised brands and 35,111 franchise outlets, franchising impacts between 2,387,548 to 4,775,096 people across the 17 franchise sectors. Based on this example and assuming we can quickly mobilize and create 400 franchise systems in East Africa in the next 5 years (Egypt achieved this within 4 years of embracing franchising) with an conservative average 50 outlets each, franchising could impact between 1,360,000 and 2,720,000 people in East Africa by 2022.

This might be the secret key to unlock exponential GDP growth, one which our governments have missed. The author has prepared a realistic-well structured route map that governments can use (in partnership with development partners and the private sector) to achieve this.