Franchising: a solution to operator / tenant profitability? | Kimbells ...

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The single biggest issue in the current economic climate ?faced by those who own pubs, hotels, coffee bars and late night venues is just how to increase operator profitability.? Could franchising be the answer?? The essence of franchising is using a package of intellectual property rights to drive up profitability. ?There is an initial investment on both sides and this can bring cash into the business. Franchisees often find it easier to get finance as the business format has a proven track record. ?For the pub industry this is new ground (despite some protestations to the contrary) and the issue will be: what are the key ingredients which can help drive profitability in this sector?

A franchise package is likely to include an established business brand and the franchisor?s knowledge of how to operate the business successfully. This goes way beyond business support of the type that many brewers and pubcos have been used to providing, although in the past, in different economic circumstances, limited support might have been enough.?

Currently, it is reported, Greene King has one of the biggest franchise operations in the pub/restaurant sector.? So the company, for example, provides franchisees with a full food and drink menu, full training and ongoing support in marketing and the logistics of running an outlet day to day.?

But brands have to endow value and this means the intellectual property rights included in the franchise package have to be substantial and not play mere lip service to the idea of offering something of value to the franchisee. ?If you are not prepared to share your brand and business format with a franchisee then this may not be for you. For example, if all you intend to share is a few menus and promotional activities this is unlikely to be enough to provide a proper and valuable franchising opportunity.

In order to work there are a number of considerations:

• A franchise in the hospitality sector is not going to suit anyone who opts for it on the basis of a life style choice ? without understanding the true commitment needed. It is important to ensure a potential franchisee has the right personal qualities to make it work. Rigorous selection policies are required to screen out those do not and will not be able to make it work profitably.
• One of the issues the pub industry has suffered from is the lack of business acumen and know-how among new entrants to the trade.? BISC, and before that BEC, have bemoaned the lack of quality of training in the industry.? A franchised operation may not be suitable for some new entrants, without the business wherewithal, and who may require a different entry point into the trade.
• Training has to be comprehensive and continual. ?A major problem with the pub industry in the past has been that not enough training has been provided. An operator who is paying for this comprehensive training has to be sure he can get back the investment by way of profitable franchises.
• There is then the brand training which goes beyond the basic business training. What are the key characteristics of the brand and what are the brand behaviours?? This requires in-depth training in order to ensure the value in the brand is not diluted and the full value can be translated into turnover and profit.
• A few standard menus alone are not enough to create a franchise; there has to be a look and feel which is recognisable to customers. Is this likely to be the case with many pubs?
• Multiple operators should not be excluded from taking on franchises; indeed some of these may be better bets than the one site operator/occupiers.
• Franchisors should be ready for some possible loss of control.? Many brewers and pubcos pride themselves on their close working relationship with operators.? This may take a knock with a more independent breed of operator, albeit subject to the terms of the franchise. This can lead to the classic franchisor complaint that the operators are doing too well out of the franchise. This may seem like a distant dream at the moment but it happens!

The future

Commentators have suggested that in order to realise the full potential of franchising the pub industry needs to look at examples from other sectors such as the hotel industry and coffee bars.? Here franchises are more collaborative with very high calibre, entrepreneurial franchisees becoming multi-site operators with real input into how the business is run.

Practical points

• If you are considering a franchise operation you will need to ensure that you have a strong brand and offering in order to make a successful franchise operation which is able to attract the desired calibre of franchisee.?
• You will also need well drafted documentation to ensure that your brand and your business are adequately protected and that the future options for the franchise operation are set out.?
• Membership of the British Franchise Association will both enhance your credibility and enable you to attract good quality franchisees.? See:?www.thebfa.org?

For further information on franchising or drafting documentation please contact Fiona Boswell at Freeth Cartwright, who is a BFA accredited solicitor.?

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Disclaimer This site is provided by Kimbells Freeth LLP for general information purposes only and should not be relied upon as a source of detailed legal knowledge. Information was correct at time of publication, but be aware that it is possible that legal points may have been superceded since. Users should seek advice from a suitably qualified solicitor before taking any action based on information contained within this site. Kimbells Freeth LLP disclaims all responsibility for any losses arising from reliance on information contained within this site.

Source: http://hospitalitylaw.co.uk/franchising-a-solution-to-operator-tenant-profitability/

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