Franchising Gone Wrong & Why

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Ideal scenario: The franchisor wins (gains economy of scale; has a network of committed, system-abiding franchisees, making profits); the franchisee wins (peace of mind because of a committed franchisor who continues to strengthen the brand, to invest in improving the systems, and is making profits); the consumer wins (more choices, more locations, more value due to promotions by franchise chain…)

Unfortunately, the ideal does not always happen.

We are all aware of franchise brands that have come and have gone. Some are even big brands that seem to have done well in other countries.

There are a myriad of reasons. Let me share just some:

1) Culture /Lifestyle

A no-brainer example will be trying to sell non-halal foods in a Muslim nation. The palette (too sweet, or not spicy enough, etc) can be a challenge.

2) Consumers

Their spending power; the size of the market. An example will be trying to sell expensive steaks in an undeveloped country where the pool of customers is rather small. Or the end-consumers are fickle-minded, and the franchise is not catching-up with their aspirations.

3) Competition

If the whole town already is inundated with bubble tea stores, the chances of another bubble tea store making it will be lessen, unless the differentiating factor/s is/are very strong. Achieving economies-of-scale is also important.

4) Contract/Law

The regulations in the territory may restrict or forbid you from offering your product or service. For example, a pain care center may not be able to bring in trained staff from overseas (and the locals are not qualified) due to the local government’s regulations on manpower.

5) Commitment

The franchisor might not have spent enough time thinking through whether they should franchise or not in the first place. And after being persuaded by a third party to embark on franchising, they realized that the journey is arduous (continuous improvements/R&D/training, etc) , and their dream of earning lots of money from collecting franchise fees and royalties are unrealistic vis-à-vis the expenses and effort needed. Similarly, the franchisee might have signed up to be a franchisee with the wrong expectations, without doing enough homework (studying the financial models, the franchise agreements, etc), and thinking they can quickly get back their investment.

6) Consultants

At the risk of shooting my own feet, consultants should take some of the blame. Many encourage unsuitable business owners to become franchisors. Others offer a laundry list of franchises to any one who has the money and/or want a change of career…When you clone a sick animal, there will be many sick animals in the market.

This article is contributed by Albert Kong, Chairman & CEO of Asiawide Franchise Consultants Pte Ltd

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