Franchise Focus by Franchise Focus

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Issue 3 - July/August 2008

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Guide to franchising in China

World leader in mobile advertising Mobil'Affiche seeks international master franchisees

Hot Sector Trends - Celebrity craze hits the menâ&#x20AC;&#x2122;s fragrances market w w w. f r a n c h i s ee k .com

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CONTENTS CONTRIBUTORS

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Richard Holden Lloyds TSB Bank plc Richard Holden is Head of Franchising for Lloyds TSB and leads a dedicated team responsible for maintaining and developing the Bank’s relationships with the franchise sector. Richard is a full time specialist franchise manager evaluating new and established franchises for the Bank, as well as acting as a point of reference for the Bank on franchising generally. Lloyds TSB are affiliate members of the British Franchise Association.

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Publishers Franchiseek Limited 5 Britannia Place Station Street Lymington Hampshire United Kingdom SO41 3BA Tel: +44 (0)1590 689755 news@franchiseek.com

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Advertising Tel: +44 (0)1590 689755

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Manzoor Ishani Sherrards

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Manzoor Ishani is a Senior Consultant Solicitor with Sherrards (Solicitors), a commercial practice advising franchisors and franchisees in the UK and internationally. He has specialised in franchising for more than 25 years and is a former member of the Legal Committee of the British Franchise Association and is co-author of “Franchising in the UK”, “Franchising in Europe” and “Franchising in Canada”.

Priyadarshini Sharma Priyadarshini Sharma completed her MBA with specialization in marketing, from the prestigious Indian Institute of Management, Indore. She has over 6 years of work experience in brand management and sales with fortune 500 companies such as Pepsi and Samsung in India. Priyadarshini has written numerous articles in various magazines in India. She currently lives in Singapore and can be contacted via email on priyadarshini.77@gmail.com.

Matt Pigott Matthew Pigott Public Relations (MP-PR) Matthew Pigott, founder of Matthew Pigott Public Relations (MP-PR) was sub-editor at the official journal of the British Franchise Association, Business Franchise magazine, until April 2005 when he left to set up his own company. He has a wide body of experience in business journalism, and an impressive portfolio of clients. Matthew lives in Walton-on-Thames with his partner and new baby.

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4-5 Who makes the ideal franchisee?

Robina Every explains exactly what franchisors are looking for in franchisees

6-7 International franchise news 8-11 Guide to franchising in China

China's developing franchise market

12-13 Buying a foreign franchise

Manzoor Ishani explains the case for due diligence

17-19 The changing face of retail

Priyadarshini Priya challenges both on-line and offline retailing

20-21 Franchising your business

Richard Holden finds out whether franchising can lead you down the right road to success

24-25 Is biggest always best?

Fiona Corallini provides some advice on avoiding the pitfalls of marketing your franchise in the UK

26-27 Planning a franchise CRM system 28-29 Global market trends

International fragrance trends

Editorial Trevor Hart Pamella Moffatt news@franchiseek.com Production Talk Media Ltd Tel: 01590 688593 Disclaimer The inclusion of any article or advert does not constitute any form of endorsement or approval by Franchiseek. All submitted articles will be considered. We reserve the right to refuse any advertisement or article which we consider unsuitable. Whilst we make every effort to ensure all advertisements and articles are correct, Franchiseek, will not be held responsible for errors or omissions. © Franchiseek Ltd 2008 All rights reserved. No part of this magazine may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or using any information storage and retrieval system, without permission in writing from Franchiseek, except that brief passages may be quoted by a reviewer in a magazine, newspaper or broadcast review. This publication is designed to provide its readers with accurate and authoritative information with regards to the subject matter covered. If legal advice or other expert assistance is required, the services of a competent person should be sought. ISSN: 1747-9479

franchise focus 3

FRANCHISE ADVICE

We ask a franchisor:

Who makes the ideal franchisee? You have found your ideal franchise business but how do you get t hrough the interview with your potential franchisor?

Robina Every, managing director of greeting card publisher and franchise Card Connection explains exactly what franchisors are looking for in potential franchisees.

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FRANCHISE ADVICE

FRANCHISE ADVICE Unlike a job interview ‘experience’ is not the main qualification for a successful application to buy a franchise. However, a franchisor is typically looking for three main qualities in potential franchisees: firstly, evidence of research and therefore a good understanding and about how franchising works; secondly an appreciation of the financial commitment required to buy a franchise; thirdly – and most importantly - the right attitude.

1) Understanding In an interview situation, understanding and knowledge demonstrate interest. However, in the franchise industry a basic knowledge of what franchising involves gained through research is necessary as the successful candidate will not just become another ‘employee’. He or she will run their own business and represent part of a larger franchised brand. Therefore, how seriously the candidate is taken, is often reflected in the quality of research they have carried out. The good news is that the internet makes it easy to understand a little about what franchising involves. There are many very informative websites like the British Franchise Association website (www.british-franchise. org) to ensure you know as much as possible about the subject of franchising. Magazines and exhibitions are also great sources of information. Spend some time getting the feel of the industry. In addition, rather like in a job interview - a basic understanding about the franchise organisation itself will be expected. Research the types of customers you will be dealing with, the competition and learn about the product or service you will be selling. The decision to buy a franchise is significant. It is only possible to evaluate if this decision is correct following a comprehensive analysis of the whole situation and franchisors are simply looking for evidence that you are sensitive to all the implications taking on a franchise will involve.

2) Financial Commitment Part of the reason franchisors are so keen to see evidence of knowledge about franchising from potential franchisees is the level of financial commitment required. For many, life savings may need to be invested in the purchase of the business and this requires serious and detailed consideration. Franchisors will expect a potential franchisee to have a basic grasp of how to calculate if the business they are interested in buying will be sufficiently profitable. They will be expected to be asked for the profit and loss accounts of the outgoing franchisee or a similar sized territory. They will also anticipate a potential franchisee to have an idea how much profit the business will need to generate in order to make a sufficient salary to live on. Therefore, they will also expect questions about the cost of stock, training, equipment and ongoing costs. This will allow calculations to be made to see if the likely profit does match the required personal income level. As well as an interest in the financial side of the franchise, a franchisor will also need to be confident that the potential franchisee has assessed how the venture would be financed. Whether that is from savings or w w w. f r a n c h i s ee k .com

finance – the main high-street banks have franchising departments and can lend up to 70% of the franchise purchase price – or a combination of the two. Similarly, franchisors are looking for potential franchisees who have a realistic understanding that some working capital is required to run a franchise on a day-to-day basis particularly while it is growing. Depending on the business model of the particular franchise, working capital can amount to up to 20% of the purchase price of the franchise.

3) Attitude

Robina Every, managing director of greeting card publisher and franchise Card Connection

A successful franchise is a special kind of person. Because little or no previous experience is usually needed for franchising, new franchisees must respond well to training. They must also have the ability to take advice and follow the franchising manual’s instructions. Franchisors will be evaluating these aspects of a potential franchisee’s personality during the interview. On a more general level franchisees must be capable of running a business. Again this is not usually demonstrated by direct experience but confirmed through the traits of tenacity and determination that will be needed on a daily basis when running a franchise. Willpower, drive and endless energy, enthusiasm and a positive outlook are key and are invaluable in customer facing situations which franchisees will find themselves in on a daily basis. These characteristics are often combined with a ‘hunger for success’, all of which make up the elements of the proactive, positive type of individual franchisors are typically looking for. It is worth preparing examples of previous success stories in advance of the meeting. In addition to a positive outlook and strength of character, it is critical that the potential franchisee accepts and enjoys responsibility. Although the franchisor will offer support and advice, it will be the franchisee that must take the initiative to use the experience of the wider organisation if necessary. Ownership and responsibility are not only part and parcel of running a business but they are key factors in its overall success. Team players are also popular. The majority of franchisors have a vested interest in the achievement of their respective franchisees so they are looking for people who can help each other when required so the whole team can becomes as successful as possible. If a franchisee finds something that works well in his or her territory then they are expected to pass on that information to colleagues. In this way, sharing best practice throughout the franchise network can be helpful in increasing sales or even motivating colleagues. Owning a franchise is hard work however, it brings with it the equal rewards of running your own enterprise. It requires a particular type of personality, an understanding of the intricacies of the industry in addition to a significant financial commitment. If you can demonstrate these essential qualities you will be well on your way to a successful interview with your chosen franchisor and the dream of owning and running your own franchise.

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FRANCHISE NEWS

Franchiseek Canada Proud to be a sponsor of the CFA Annual Convention convention allows all those involved in the franchise industry to highlight their achievements, share their innovations and inspire others to achieve similar success,” said Kim “We are happy to have had the opportunity to participate, and are grateful for our ongoing relationship with the Association.” Franchiseek was founded by Trevor Hart, CEO Franchiseek International, in the UK more than 8 years ago. In November 2007, Trevor and Kim formed a partnership with Franchiseek Canada which has quickly established itself as one of the most respected Canadian franchise internet sites. “We understand the values of the CFA and aim to compliment the association’s mission and mandate. At Franchiseek Canada, we’re delighted to be joining a community of businesses, suppliers and affiliates within the franchising community, all of whom support the mission of the CFA and agree to adhere to the CFA code of ethics” said Kim Divell With thousands of potential franchisees looking for the right franchise opportunity, Franchiseek Canada is a valuable online resource that enables them to begin that search in full confidence, regardless of their knowledge of the industry. The site is also an ideal environment for franchisors and industry suppliers to make news announcements, in addition provides a focal point for individuals and companies within the Canadian franchising community. The UPS Store highest bidder for online ad package Shown in Photo, Steve Moorman, Senior VP Franchise Ops, The Ups Store. Kim Divell, President Franchiseek Canada, David Druker, President ,The UPS Store

Demonstrating a continued commitment to Franchising in Canada, Franchiseek was proud to sponsor the 2008 CFA Annual Convention and Frankie Awards. “This forms part of our support of the Canadian Franchise Association and commitment to driving business excellence in the franchising industry. We applaud all those businesses that have taken the opportunity to enter into these awards and participated in this year’s convention,” says Kim Divell, President, Franchiseek Canada. Although Franchiseek is a new member of the CFA, Kim Divell has long been involved with the Association, prior to re-launching Franchiseek Canada Kim was the past Director of Marketing and Communications for the CFA, she had been with the association for over 6 years and began as Director of Membership. Her flare for design and “out of the box” thinking assisted the CFA grow tremendously over the years. Some of her accomplishments at the CFA, include the research, development and launch of CFA’s Franchise Canada Magazine & Directory. Kim has franchising at heart - prior to joining the CFA she franchised her own company across Ontario and Quebec and has successfully assisted other franchise concepts in developing their franchise business models. “It was great to see the turnout at this year’s convention, clearly franchising in Canada is on the rise “The CFA

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“We aim for quality as a result you will not find any ‘get rich quick’ schemes or flimsy marketing propositions on the site. As an advertiser you will quickly see that leads have specifically inquired about you, we do not share leads amongst our online partners, which also prevents those that inquire from receiving countless emails from opportunities they did not request. For us it is not the amount of leads it is the Quality!

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FRANCHISE NEWS

One of the world’s leading automobile and telecommunications groups choose Mobil Affiche Puteaux, Paris, France - Mobil Affiche, one of the leading mobile outdoor companies, is proud to conduct the new exclusive advertising campaigns for Toyota, Volkswagen, Orange and SFR. The following campaigns were organized during the month of June. Volkswagen promoted its new model, the Touran Movie, with a special offer for the launching. The new Touran suits especially the needs of young families, with at least two children. As for Toyota’s special offer “400 new Toyota at rock bottom prices”, the target was wider and concerned the general public. Mobil’ Affiche also accompanied the opening of two new stores for SFR, one of the main French mobile telecommunication operators. The campaigns took place in the cities of the new stores and promoted the special offers that were reserved for this occasion.

And finally, Orange used Mobil’ Affiche’s trucks for the launching of its “Origami package”. Orange is the mobile telecommunication brand of France Telecom, one of the world’s leading telecommunications operators. It lasted two full weeks and targeted the 35-45 aged people.

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The campaigns lasted each at least a week and covered from 5 to 10 different French cities. More than 20 Mobil Affiche trucks were involved through the month of June, which followed a predetermined plan to target the high traffic areas, business communities and various strategic locations.

International Franchise Consulting Group brandEXPANSION steps into Indian Franchising Market It seems that the Indian Franchise industry is in the midst of a golden era of growth and transformation. With each passing day, the industry is becoming a major player in the international franchise industry. While small, big and giant franchise companies explore the Indian market, immense possibility has emerged for Franchise Service Providers.

and franchise units in over 600 locations in the U.S. From compiling franchise documents to selecting real estate locations and brand development, this company has done it all and all with great success. And this success appears in the fact that currently brandEXPANSION represents more than 400 proven Franchise Concepts.

But unlike franchise businesses, when it comes to services for franchise industry there are hardly any offerings that truly create a difference. Be it real estate, legal aids, training, market development or branding, very few franchise brands in India have the access to quality services.

Moreover with its continuing research and development brandEXPANSION provides a niche to its clients with the most efficient and effective opportunities and services available. And other than its valuable services, what truly makes brandEXPANSION stand apart is its associate network structure. brandEXPANSION Associates get an access to the company’s elite listing of franchisors, and an intensive training to help potential franchisees find the right opportunity. As a brandEXPANSION Associate, one also receives exclusive opportunities to finance, establish and support the entire franchise community. This structure itself will open up lot of opportunities for young Indian entrepreneurs to learn about franchising with minimum risk or investment.

As every challenge is an opportunity in disguise, this situation prevailing in the Indian franchising industry has opened the doors for international franchise brand consultants to enter and offer their services. brandEXPANSION has recognized this opportunity and has recently stepped into the vast domain of the Indian Franchising market. With more than a decade of hands-on experience in the industry, and an objective perspective, brandEXPANSION helps both franchisees and franchisors navigate the myriad of options available.

As no single company boasts of such comprehensive services, brandEXPANSION will make its mark on the Indian Franchise community with its high standards of excellence, integrity and quality.

brandEXPANSION has placed more than 1000 business w w w. f r a n c h i s ee k .com

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FRANCHISE CHINA

FRANCHISE CHINA China

Guide to

franchising in China

By Gregory Sy and Currie Lee Grandall Legal Group With China’s opening of its market and recent succession into the WTO, it has undergone rapid development in the past two decades. Due in part to such growth and in combination with its massive 1.3 billion population (330 million in its middle-class alone as compared to America’s total population of 300 million), it represents the world’s largest yet ‘untapped’ consumer market. For many franchisors seeking to market reliability associated with brand recognition and systematic organizational structures to the oftentimes chaotic and fragmented consumer sector (particularly the food and personal service industries), China will be both the largest yet most challenging opportunity in the 21st century. Fortunately for both consumers and those in the franchising industry, 2007 arguably brought about the largest liberalization of this sector since the “Opening Up” reforms of 1979. That being said, however, foreign franchisors have, in the past, seen their share of successes and failures, many of whom have ‘stuck it out’ throughout China’s market changes to become a consumer household name, such as McDonald’s, KFC and Pizza Hut. I. Development of the franchise market in China In 1997, China’s Ministry of Internal Trade promulgated the Administration of Commercial Franchise Procedures (Trial Implementation and hereinafter “Franchise Procedures”) representing the first set of regulations directed at specifically addressing issues pertaining to the franchise sector. The Franchise Procedures introduced two types of franchises: i) direct franchising and ii) sub-franchising. The Franchise Procedures provided for the basic structure of current franchising laws, which requires the disclosure of material information to prospective franchisees and includes the following: basic information about the franchisor; operational results of the franchisor; financial results of its franchise 8 franchise focus

outlets; fees and payment obligations; and, terms and conditions for goods and services provided to franchisees. The Franchise Procedures also established the quasi-governmental China Chain Store and Franchise Association (“CCFA”). (Note that the Franchise Procedures were interpreted as not being applicable to cross-border franchise operations.) In 2004, as part of China’s accession into the World Trade Organization (WTO) and commitment to the principles therein, the Ministry of Commerce issued the Measures for the Administration of Franchise Operations (“Franchise Measures”) effective February 1st, 2005. The Franchise Measures were promulgated shortly after the Measures on the Administration of Foreign Investment in the Commercial Sector, which liberalized foreign investment in the retail and wholesale distribution industry. Unlike the Franchise Procedures, the Franchise Measures not only permit foreign investment in the franchising sector but also contain an entire chapter drafted exclusively for this purpose. Much like the Franchise Procedures, the Franchise Measures focused largely on franchisor disclosure, but also included the “two-plus-one” requirement, which mandated franchisors to operate two company-owned stores in China prior to commencing franchising activities. Obviously, this has prevented many start-up franchisors from immediately commencing operations in China and was a disincentive for market entry. Moreover, the promulgation of the Franchise Measures and the requirement that all franchising operations be conducted only by PRC entities has effectively removed the alternative measures being used by foreign franchisors for many years, including licensing arrangements and international franchising agreements. There have, however, been recent modifications to the franchising framework with the promulgation of a number of new laws in 2007 which will be further discussed below. www.franchisee k . c o m

FRANCHISE CHINA

FRANCHISE CHINA II. Current Legal Framework and Franchising Structures in China In May of 2007, MOFCOM replaced the Franchise Measures (2005) with the Regulations on the Administration of Commercial Franchises (“Franchise Regulations”). The Franchise Regulations, together with the MOFCOM-issued Administrative Measures for the Information Disclosure of Commercial Franchises (“Information Disclosure Measures”) and the Administrative Measures for Archival Filing of Commercial Franchises (“Archival Filing Measures”) currently govern franchising structures in China and set out the following requirements: 1. Definition and Applicability Scope of Commercial Franchises Article 2 of the Franchise Regulations states that the regulations are applicable to all investors engaged in commercial franchise operations in China “Commercial Franchise” is defined in the Franchise Regulations as “business activities whereby a franchisor, through execution of agreements, allows a franchisee to use operational resources, such as a trademark, logo, patent, know-how and others which are owned by the franchisor [refers to legal (not natural) persons], and the franchisee conducts business under the unified business model in accordance with the provisions of the contract and pays franchise fees to the franchisor 1. 2. Qualifications and the Two-Plus-One Rule Franchisors must own a well-developed business model, and be capable of providing continued operational management, technical support, business training and other services to the franchisee. Additionally, franchisors must own at least two company-owned stores for a period of at least one year 2. Noticeably missing is the phrase “in China”, which allows for new foreign entrants to immediately commence franchising activities in China. 3. Filing Requirements Within fifteen days from executing the first franchise agreement, the franchisor must file with MOFCOM 3, specifically i) if the franchising activities take place within a single province, autonomous region or municipality under the central government (Beijing, Shanghai, and other major cities), then with the MOFCOM of that province, autonomous region or municipality under the central government; or ii) if franchising activities take place in more than one province, autonomous region or municipality, then at the national level MOFCOM. Thereafter, the relevant MOFCOM will have ten days to properly file all completed filings 4, and publish them on its website 5. However, it is necessary to note that the franchisor must, within 30 days of any change potentially impacting the filing, apply for an alteration of its filings.6 w w w. f r a n c h i s ee k .com

Franchisors must file the following: 1. Basic information about the commercial franchise; 2. Distribution information of franchised stores in China; 3. Franchisor’s Commercial Prospectus; 4. Copy of business license or enterprise registration; 5. Copies of certificates of trademarks, patents and other business resources related to franchise activities; 6. Sample franchise agreement; 7. Franchise operational manuals; 8. Marketing plan; 9. Written undertaking evidencing franchisor’s complies with the Qualifications and the Two-Plus-One Rule; 10. Certificate evidencing compliance with the Two-Plus-One rule, issued by the city level in China and, for franchisors using space outside of China, business certificates translated, notarized and authenticated by the Chinese embassy; and, 11. Other documents as required 7. Completed filings may be cancelled in the event of any of the following occurrences: 1. Franchisor’s business license was cancelled by the competent registration authority because of illegal operations; 2. MOFCOM receives a court order regarding the cancellation of the filing due to illegal operations of the franchisor; 3. Franchisor was discovered to have failed to disclose material information or provided false information; and, 4. Franchisor itself cancels the filing. 8 4. Disclosure of Information The following materials must be provided to the prospective franchisee 9 a minimum of thirty days prior to the signing of the Franchise Agreement 10: 1. Basic information on the franchisor and franchise activities: a. Franchisor’s name, address, contacts, legal representative, general manager, registered capital, scope of business, and the number of regular chains including their addresses and phone numbers; b. A brief introduction to the commercial franchise activities of the franchisor; c. Basic information on the archival filing of the franchisor; d. If the franchisor’s associated company provides products and services to the franchisee, the associated company’s basic information must also be disclosed; and, franchise focus 9

FRANCHISE CHINA

FRANCHISE CHINA e. Information on any bankruptcy and/or application for bankruptcy of the franchisor or of its associated company in the preceding five years. 2.

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Basic information on the business resources of the franchisor a. Information available on registered trademarks, company logos, patents, proprietary technologies, and business methods, etc; b. If the owner of any of the above-mentioned business resources is the associated company of the franchisor, then the basic information of the associated company must also be disclosed (the franchisor is also required to explain how to manage the franchise system upon termination fo the license contract); and, c. Information on the business resources of the franchisor (or its associated company) in relation to litigation or arbitration. Basic information on franchise expenses: a. If the type, amount, criteria and payment method of fees collected by the franchisor or on behalf of a third party cannot be disclosed, then the franchisor must explain the reason for the non-disclosure; if the fee collection standards are inconsistent, then the franchisor is required to disclose both the maximum and minimum standards, and explain the reason thereto; b. The collection thereof, return conditions, return time, and return on investment; and, c. If the franchisee is required to pay a fee before the Franchise Agreement is concluded, then the franchisor must explain in writing the use of the fee and the conditions and method of return. Information on the prices and conditions of the products, services and equipment provided to the franchisee. a. Whether the franchisee must purchase products, services or equipment from the franchisor (or its associated company), including the prices and conditions thereof; b. Whether the franchisee must purchase products, services or equipment from the suppliers appointed or approved by the franchisor; and, c. Whether the franchisee has the discretion to choose its own suppliers and the standards for the selection of its suppliers. Information on the continuous provision of services to the franchisee. a. Detailed content, manner of provision and implementation plans for professional training, including the training location, approach and duration; and,

b. Details regarding technical support and a catalogue of the operation manual of the franchise including the number of pages therein. Methods and content of guidance and supervision over the franchise activities of the franchisee: a. The franchisorâ&#x20AC;&#x2122;s methods and content of guidance and supervision over the franchise activities of the franchisee, the franchiseeâ&#x20AC;&#x2122;s obligations and consequences for failing to fulfill them. b. Whether the franchisor is jointly liabile with the franchisee for complaints by and compensation to consumers, and how to share such liability.

Information on the investment budget of the franchise: a. The expenditure fpr the investment budget may include the following: initial fee; training fee; real estate and decoration fee, procurement fee fpr equipment, office supplies, furniture, etc; initial inventory; water, electricity and gas fees; fees needed to obtain licenses and other governmental approvals; and working capital; and, b. The statistical source and estimation basis for the above-mentioned fees.

Information on franchisees within China: a. Information on the present and estimated number of franchisees, geographical distribution, scope of license, and as to whether or not they are subject to an exclusive regional license (if so, details of the scope thereof must also be explained) b. Information on the evaluation of the performance of the franchisee, the actual or estimated average sales volume, costs, gross and net profits of the franchisee, the source of the above-mentioned informationduration of and franchise networks involved (if the information is speculative, then the franchisor shall explain the basis for its speculation, and specify that the actual performance of the franchisee may differ from its speculation.

Abstracts of the franchisorâ&#x20AC;&#x2122;s financial and accounting reports and of the audit reports in the last two years audited by the accounting or auditing firms.

10. Information on any major litigation or arbitration involving any franchises of the franchisor in the last five years. a. Major litigation or arbitration refers to litigation and arbitration involving litigation fees of more than RMB 500, 000; and, b. Basic information as to the location of the litigation or arbitration and the judgment or award must also be disclosed. www.franchisee k . c o m

FRANCHISE CHINA

FRANCHISE CHINA 11. Information on any record of major illegal operations of the franchisor and its legal representative. a. Where either the franchisor or its legal representative has been imposed with a fine, by the competent administrative law enforcement authorities, exceeding not less than 300, 000 but more than 500, 000; and, b. Where the franchisor and its legal representative have been subject to criminal penalization. 12. Franchise Contract a. Sample franchise contract; and b. If the franchisor requires its franchisee to sign with the franchisor (or its associated company), other franchise contracts (sample contract shall be provided at the time of contracting). Note that where the franchisor is found to have concealed or provided false information, the franchisee may rescind the Franchise Agreement. 11 5. Franchise Agreement Although franchise contracts are in practice comprehensive and lengthy, the Franchise Regulations require certain clauses be provided in the relevant franchise agreement: 1. basic information on the franchisor and franchisee; 2. content and term of the franchise; 3. types, amounts and payments of franchise fees; 4. specific content and manner of provision of operational guidance, business training, technical and other services to franchisee; 5. quality standards, quality control measures for the provision of products and services by franchise operations; 6. promotions and advertisements of products and services of franchise operations; 7. arrangements for consumer rights, and assignment of liability in franchise operations; 8. amendment, rescission and termination of the franchise agreement; 9. liability for breach; 10. dispute resolution; and 11. other matters as agreed upon between the franchisor and franchisee 12. The Franchise Regulations also require the contract contain a clause setting out the time period during which the franchisee may rescind the agreement (post- execution of the contract) 13. Unless otherwise specified, the initial term of the contract must not be less than two years. 14

Advertising and promotional fees collected by the franchisor must be used specifically for such stated purposes and accounting thereof should be provided to the franchisee within a timely basis 16. The franchisor is required to report annually, by March 31, the status of each franchise agreement. 17 6. International/Cross-Border Franchising International or cross-border franchisors must file, in accordance with the Archival Filing Measures. 18 7. Penalties Penalties for the violation of the Regulations are as follows: 1. Failure to meet Qualifications (see Item 2): confiscation of illegal income, and fine of RMB 100,000 to RMB 500,000; 2. Franchising by individuals (natural person): confiscation of illegal income, and fine of RMB 100,000 to RMB 500,000; 3. Failure to complete Filing Requirements: order time limit for rectification and fine of RMB 10,000 to RMB 50,000, and where franchisor fails to file within the time limit a fine of RMB 50,000 to RMB 100,000 and public announcement; and, 4. Failure to provide Franchise Agreement thirty days prior to the signing or failure to disclose or concealing information relevant to the franchisee: fine of RMB 10,000 to RMB 50,000, or where serious RMB 50,000 to RMB 100,000 and public announcement thereof.

1 Article 3, Franchise Regulations 2 Article 7, Franchise Regulations 3 Article 8, Franchise Regulations; Article 6, Archival Filing Measures 4 Article 9, Franchise Regulations 5 Article 10, Franchise Regulations 6 Article 7, Archival Filing Measures 7 Article 8, Franchise Regulations; Article 5, Archival Filing Measures 8 Article 11, Archival Filing Measures 9 Article 21, Franchise Regulations; Article 4, Information Disclosure Measures 10 Article 22, Franchise Regulations; Article 5, Information Disclosure Measures 11 Article 23, Franchise Regulations 12 Article 11, Franchise Regulations 13 Article 12, Franchise Regulations 14 Article 13, Franchise Regulations 15 Article 16, Franchise Regulations 16 Article 17, Franchise Regulations 17 Article 19, Franchise Regulations; Article 8, Archival Filing Measures 18 Article 17, Archival Filing Measures 19 Article 33, Franchise Regulations

8. â&#x20AC;&#x2DC;Grandfatheringâ&#x20AC;&#x2122; Provisions Companies already conducting franchising activities have one year to file according to the Franchise Regulation. 19 III. Conclusion China represents a tremendous opportunity for international franchise operations. Although there are numerous challenges and complexities in establishment and operations, the recent legal changes have largely liberalized the franchising market for foreign investors. In combination with the current rates of economic growth, the timing is ideal for foreign franchisors to explore opportunities in the Chinese market. For further information, please contact: Gregory Sy, Vice-chair, International Practice Group Tel: 86-10-6517-1188 Email: gregsy@grandall.com.cn

Further, where deposits or other fees are required prior to execution of the franchising agreement, provisions for the use and refund of the same must be expressly stated therein 15. w w w. f r a n c h i s ee k .com

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FRANCHISE LEGAL

Buying a foreign franchise A case for due diligence by Manzoor G. K. Ishani, MA, FCILS, FRSA, FInstCPD, FSALS Solicitor

As with other forms of commerce, franchising has now become truly international. However, unlike other forms of commerce, the emphasis on uniformity in franchising sometimes makes some franchise concepts less recognisable as having their roots abroad. Thus a brand usually thought of as being of local origin, may emanate from a foreign country. The converse is also true in that there are a number of franchise concepts which may give the impression of being foreign, when in fact they are not.

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FRANCHISE LEGAL

FRANCHISE LEGAL To complicate matters further, a series of mergers and acquisitions and the evolution of multi-nationals means that franchises which were previously thought of as being owned by a franchisor in one country are in fact owned by a franchisor in another country. For example, Burger King is no longer owned by an American franchisor. At the end of the day, does it really matter who the owner is if the concept is right, the system works and there is a demand for the goods and or services offered by a particular franchise? Whilst the consumer may not care about the origins of a particular franchise, anyone proposing to invest in a franchise should, whether they are acquiring the rights for the whole or only a part of their country or simply to operate a single outlet in their local retail area. This article is concerned with the pitfalls of acquiring rights to a foreign franchise concept for use in one’s own country. The two principal vehicles for acquiring such rights are the development franchise and the master franchise. In a development franchise, the foreign franchisor grants rights to you for the whole or only a part of your country enabling you to open outlets under the terms of a franchise agreement direct with the foreign franchisor. Where development rights are granted only for a part of your country, this is usually referred to as an area development agreement. It is common for the grant of such rights to be exclusive to you, and it is common for such agreements to contain a development schedule which both parties agree. This development schedule specifies the number of outlets which you must open within a given period of time. In the writer’s experience, taking the United Kingdom as an example, the negotiation of a development schedule is often the most fraught when dealing with US franchisors. US companies almost invariably fail to appreciate the difficulties which face businesses in the United Kingdom in terms of acquiring the right retail premises. Even where US companies have entered the UK market themselves, they have been wildly overoptimistic. Not surprisingly, there is a tendency for their expectations to be based on the rate of growth they have achieved in the United States. Indeed, in one particular case, one of the largest and most successful (in their market sector) US retailers who attempted to enter the UK market themselves, as opposed to via a developer or master franchisee, failed. Their internal development plans called for the opening of 300 retail outlets in the UK within 2 years! They shunned all advice to the contrary and insisted that they had done it before elsewhere and could do it in the UK. In such circumstances, you have to be resilient in resisting unrealistic development schedules and the writer would go so far as to say that unless the foreign franchisor is willing to accept a reasonable development schedule, then you should walk away. It is probably true to say that there have been more failures than successes of foreign franchisors trying to enter the UK retail market. With regard to a master franchise, this is the same as a development franchise but with an additional right for

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you to sell franchises. In a development franchise you will have the obligation to open all the outlets yourself, whereas under a master franchise arrangement it is common for you not only to own and operate outlets yourself, but also to franchise others to do so. In these circumstances you would become the franchisor of that particular concept within the territory allocated to you by the franchisor. Although franchising has enjoyed an explosion of growth internationally in recent years, there are nevertheless very few franchisors whose system and reputation are so well established that you could be forgiven for feeling you can proceed without undertaking a due diligence exercise. So what should a due diligence exercise involve? There are 3 golden rules:1. Never accept anything at face value. 2. Never make assumptions (the fact that it is successful in Holland does not mean that it will succeed in your country). 3. Never be afraid to ask searching questions. In the last few years there has been a marked increase in franchisors seeking to expand internationally. Some have a sound base from which to launch their franchise internationally whereas others have an eye to the main chance. They come in all shapes and sizes and a wouldbe investor is more likely than ever before to encounter a greater sales pitch. We are constantly being reminded that one of the most valued possessions of franchisors is their reputation and so far it has generally been safe to assume that franchisors will not do anything to damage their reputation.

Manzoor Ishani is a Senior Consultant Solicitor with Sherrards (Solicitors), a commercial practice advising franchisors and franchisees in the UK and internationally (Tel: +44 (0)1727 832830; e-mail mgi@sherrards.com; www.sherrards.com). He has specialised in franchising for more than 30 years and is a former member of the Legal Committee of the British Franchise Association and is co-author of “Franchising in the UK”, “Franchising in Europe” and “Franchising in Canada”, and has helped UK companies franchise into more than 27 countries.

However, in terms of international franchising, different rules apply. It is true that franchisors will jealously guard their reputation locally, but when it comes to franchising abroad, franchisors generally consider themselves to be less affected by adverse publicity. To take the example of a US franchisor, if its proposed entry into a foreign market fails, its US operations and reputation are unlikely to be affected. The foreign market is too far away for any failure to directly affect that franchisor’s reputation in the US. It is therefore tempting for US franchisors to be less particular with regard to whom they sell rights to in a foreign country than they would in their home market. This naturally leads to the less fastidious franchisors making optimistic and even unreasonable claims about the chances of success for its concept in the foreign market. Providing the franchise fee is sufficient to make it worth its while, a commercially aggressive foreign franchisor may be more willing to take a chance that if it fails, it will be able to sustain the failure and who knows, after a year or so it could always have a second crack at the same market! The moral of the story is that although in certain essentials, international franchising is no different from domestic franchising, there are significant factors which distinguish it from domestic franchising to make it worth your while to investigate your proposed purchase thoroughly.

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Franchise Focus International provides news and advice on all aspects of franchising. Whether you are new to franchising or have been involved for many years, Franchise Focus has something for everyone.

Articles are written by franchising professionals worldwide and include legalisation, business news and new product showcases. Regular features include:• Finance • Law • Employment Law • Business Services

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RETAIL ADVICE

The changing face of retail Internet vs. the high street by Priyadarshini Sharma

In this article we will explore how shopping (on-line and offline) is changing as a result of the evolution of the internet and the consumer. We will examine both sides of the equation viz. how traditional high street retailers are going online and also how traditionally â&#x20AC;&#x153;directâ&#x20AC;? businesses are going offline.

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RETAIL ADVICE

We will look at emerging trends in consumer behavior and how these trends are forcing retailers to re-look at their business models. Offline to Online There is a trend emerging wherein traditional retailers are choosing to go online. Typically this is not a complete shift but managing a two pronged demand generation model. The reasons for this emerging trend are two fold – and can be viewed from the business perspective and the consumer’s perspective: From the perspective of the business, it makes sense to go online because: • They can have access to a global customer base, with very little investment • The internet is “Interest driven” so cost per contact is lowered • Internet is time independent, the store can operate 24/7 • Less chance of default as all payments are made upfront. • For businesses with a smaller foot-print (especially service specialists), they have the option of having a Brand touch-point – a “Virtual Showcase Store” which can be used as a Portfolio showcase, for advertising new product launch information etc. 18 franchise focus

• They can have “Dynamic Pricing” where the customer demand dictates the price of the product. (e.g. E-Bay) • There is zero carrying cost* on the internet and the business can make (or purchase) and ship items as and when they are ordered. *Incidentally, this zero carrying cost for internet sales is leading to the emergence of what Chris Anderson refers to as “The long Tail”. Essentially Mr. Anderson points out how the traditional retailer cannot carry a very large inventory of items (due to constrained shelf space and high carrying costs). But with the emergence of the internet (and online shopping), the retailers can actually have all items in “Virtual stock”. And even those orders that are only placed once or twice a year can be fulfilled by virtue of this, wherein the retailer only acquires the product concerned and ships it when there is an actual order – thereby eliminating carrying costs of slow moving SKUs. This ability to carry virtual stock has led to the phenomenon known as “The long tail” where the tail refers to these seldom sold SKUs which in isolation don’t make up large numbers but when put together can mean high sales (and profits) for the retailer. www.franchisee k . c o m

RETAIL ADVICE

RETAIL ADVICE As a result of the internet the consumers have also evolved over a period of time. They are no longer passive participants of the marketing world, but are choosing to be more active in this space. The following looks at how the consumer behavior has changed in this internet era: Consumers today are more: • Empowered • Informed • Proactive •

Suspicious

• And Smarter From the consumer perspective, traditional high street shoppers are also choosing to shop online, the reasons for this are: • High speed internet - Faster access to the world at the click of a mouse • Wealth of information available on the net – specifically user generated content which can help consumers make their choices. • Secure connections and payment options now available • Ease in doing spec and price comparisons across brands. • Convenience - Time and resources saved by shopping online The above developments are leading to the emergence of virtual retail rivalling the traditional high street. Examples of traditional businesses (hitherto thought of as “Touch & Feel” intensive businesses) going online include: • Clothes shops –are going online and accessing the global market– Examples are Gap, Banana republic, Abercrombie & Fitch • Groceries – Again a traditional business, now going online. Companies like Cold Storage in Singapore and Fresh Direct in the US offer online shopping and home delivery (at a time convenient for you) for a nominal charge.

Online to Offline

matter how secure the transaction. Given the above, the high-street retail has a very large role to play in the consumer’s relationship with businesses and brands. Therefore no consumer centric business can afford to ignore the high street completely – Much as the internet and the consumer behavior has advanced, there is still a critical role that high street retail plays. Traditional retail is said to have three key defining characteristics: 1. It is a connector – It brings together like minded people (at both individual and a community level), Creates a common bond and conversational currency, helps in knowledge and experience sharing. 2. It is an experience forum – This is where consumers interact with (and experience) the brand. It makes the ordinary seem extraordinary by virtue of presentation 3. It is a change agent – By making “conscientious consumerism” chic, it acts to promote local companies and fair trade, and also brings to the fore global issues like climate change and AIDS. Interestingly, where the internet leads to the generation of the “Long tail” hence reaping rich rewards (profits) for the online retailer – in the same way the high street retailer can enjoy the rewards of the “short-fat tail”! The “Short-fat tail” refers to the concept of carrying only the top 3-5 items of any number of product categories. In the retail context this phenomenon emerges as “Curated Consumption”. The consumers today are spoilt for choice with an ever increasing array of variations, flavours, colours and so on in every single product category. In this scenario the time saving option would be for someone else to do the thinking and presenting a edited version of the choices available – essentially guiding the consumers on what to buy, experience, wear, read, eat & drink and so on. And this is where the Short-Fat tail fits in – by narrowing down the choice to a more comprehensible list, the retailer (Curator) makes the choice easier for the consumer – and therein lies their Unique Selling Proposition.

The flip side of the above trend analysis is to look at traditionally direct (or on-line) businesses going offline and opening brick and mortar stores. A great example of this is Dell Computers who have recently launched their retail business after 24 years of going direct!

An example of this retailer tapping into the curated consumption market is the Japanese chain “Ranking Ranqueen” – where they stock the top 3-10 top ranking items (ranks based on sales data from big Tokyo department stores and independent research) in a bewildering array of categories.

Dell direct sales to Dell store in the USA

Ranking Ranqueen store in Tokyo

The fact is that as exciting and interactive the internet is, it cannot replace the “Human touch”. Going to a store physically, interacting with their staff and getting a feel for the products and services on offer is an experience that leads to positive brand connections. Also, despite this age of digital inter-connectivity, there is value that is still placed by consumers on having a personal relationship and a “face” to their purchase experience. The trust and guarantee that a consumer has with a face to face encounter cannot be provided by dealing with a nameless, faceless virtual retailer – no w w w. f r a n c h i s ee k .com

Priyadarshini Sharma is a Communication Strategist with EURO RSCG, Singapore. She has over 6 years of work experience in sales and brand management in companies like Pepsi and Samsung in India. She holds an MBA from Indian Institute of Management, Indore with specialization in marketing. She can be contacted at priyadarshini.77@gmail.com

In conclusion - Long tail or Short tail – the fact is that the retail environment is not isolated from the internet environment. The interactions of human nature and technology will lead to continuous developments in virtual and high-street retail – and these seemingly dichotomous platforms will become increasingly interdependant.

References: Chris Anderson – “The long Tail”

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FRANCHISE FINANCE

Franchising your business Find out whether franchising can be the right road to your success...

Business Format Franchising What is Business Format Franchising? In a nut shell, it is the granting of a licence by a business owner (franchisor) to another individual or company (franchisee) which entitles the latter to set up and develop their own business using the trademark, name, know-how and business systems of the franchisor. You can only franchise an established successful business and not an idea. Franchising is not the path to salvation for a struggling business and should only be considered by those who can demonstrate a viable business opportunity with a successful track record.

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FRANCHISE FINANCE

British Franchise Association (bfa) The British Franchise Association is the self regulatory organisation that oversees franchising in the UK and their web site www.thebfa.org is a valuable source of information. They It holds regular educational seminars across the country and their its franchisor guide sponsored by Lloyds TSB is a recommended read for anyone seriously considering taking the step into franchising. The bfa accredits membership to franchise systems and professionals that meet their its entry standards and who adopt an ethical approach to franchising.

Advantages Franchising offers the franchisor a number of benefits which need to be balanced against the disadvantages to help you move towards making an informed decision. You can expect franchisees to be highly motivated to maximise growth and profitability and they usually out perform managers employed to run outlets who do not have a personal financial investment in the business. Franchisors will provide a Head Office support structure but do not have the headaches of the costs and operational issues associated with running their own individual outlets. You can expand your business more rapidly using the capital of your franchisees. There are a wide variety of franchise opportunities available in the UK across a broad range of industry sectors. Potential investors are attracted to a tried and tested business model as well as receiving initial training and ongoing support. Once the franchisee network is well established other benefits may include brand recognition and the collective buying power benefits that a network of businesses can bring.

Disadvantages There are drawbacks. Up-front investment costs and management time can be considerable. Selecting suitable franchisees can prove difficult and it may take several years to recover your capital investment. You generate your revenue once the franchisee’s business is up and running from management service fees and possibly the mark up on any products or services provided. As you need to invest from the outset in the franchise infrastructure you will not be able to cover your franchise running costs until your network grows and generates sufficient fee income. The franchisor’s success is closely linked to the way the franchisees in their network operate their businesses. Enforcing the terms of the franchise agreement can be by time consuming and serious breaches may incur legal expenses. The reputation damage to your brand from a rogue franchisee can be considerable and the time and effort monitoring the franchisees performance should not be under-estimated. w w w. f r a n c h i s ee k .com

The key elements of a franchise Brand You must own your brand or intellectual property and ensure that it is protected with appropriate trade marks. You will have an obligation to your franchisees to take the necessary actions against those who damage the brand. Threats can come from other businesses that copy your brand or individuals within your network that operate outside the terms of the agreement and who could damage the reputation of the franchise.

System The system will have been proven over a reasonable period of time through operating your own business as well as demonstrating through one or more pilot operations that the business can be successfully replicated elsewhere with appropriate training and support. Any pilot scheme will allow you to fine tune the system and operations manual. The operations manual contains your know how and sets out the duties of the franchisee covering all aspects of the business.

Support A major attraction to investors interested in franchising is the provision of initial training, ongoing support and guidance from the franchisor. Most investors will have little or no experience of running a business therefore training and continuing support is essential. Franchisees will require more support in the early days establishing their business however they should also expect guidance and support from the franchisor throughout the life of the business.

Richard Holden Head of Franchising, Lloyds TSB Bank plc Tel: 07802 324018 E-Mail: richard. j.holden@lloydstsb.co.uk www.lloydstsb.co.uk/franchising Richard heads up the Lloyds TSB franchise team and is a regular contributor to trade publications and national press. He is on the panel of judges for the prestigious Franchise Marketing Awards and regularly speaks at franchise seminars and exhibitions. Lloyds TSB are affiliate members of the British Franchise Association and proud to support the growth of ethical franchising in the UK. They have business bankers in all their local business centres and most branches. Lloyds TSB has more franchise specialists than any other bank in the UK and their business managers help around 100,000 businesses get started every year.

Agreement The franchise agreement needs to protect the franchisor’s brand, know how and network therefore it will be weighted your favour. It should at the same time be fair, reasonable and enforceable. All franchisees should be on the same terms and therefore the agreement should not be negotiable. It is advisable for the agreement to be drawn up by a lawyer with franchising expertise who is affiliated to the bfa.

Franchising – Is it right for you? The franchise relationship must be built based upon mutual trust and respect. The franchisor provides support and motivation to their network of franchisees and in turn benefits from their ultimate success through a share of the profits. The franchisor is likely to benefit from quicker expansion than they would otherwise be able to achieve. They will have less hassle from the involvement in the day to day operation of running outlets which will be the responsibility of the franchisee. There is no getting away from the fact that franchising a business takes a substantial investment in both time and money. franchise focus 21

FRANCHISE FINANCE

FRANCHISE FINANCE You need to look at the pros and cons and consider whether you have the required skills and attributes to develop your business through the franchising route. It requires meticulous planning before investing your money and making a commitment to proceed. Don’t just copy others make sure your business has a competitive advantage or unique selling point which will attract prospective franchisees. As a franchisor you must stay ahead of the game which means continual research and development of your products or services. You may encounter many challenges from underperforming franchisees, disputes and even terminating franchisees that seriously breach the terms of the agreement. Think long and hard – Do you have the commitment, determination and energy to face these challenges and maintain a positive outlook? If you have any doubts, then franchising may not be the right step for you. • Ask yourself the following – be honest • Are your goals realistic and attainable? • Do you have the patience, tenacity and self-discipline to succeed? • Can you develop and sustain relationships with many different personalities? • Are you ready to share some of your present independence by working with franchisees? • Is it the right time to develop a franchise? • Are you up for the challenge?

How much will it cost? As each business is individual there is no set cost for franchising a business. Some franchises are more complex than others and will require more time and professional support to get them ready to launch. The profits from the pilot operation maybe able to support the franchise programme however if they don’t it will take time to recruit franchisees and for them to generate sufficient fee income to cover your franchise operating costs. In some instances it can take several years for franchisors to achieve profitability and you need to be realistic about your franchisee recruitment objectives. If you are tempted to take short cuts to reduce your capital investment then think again! Potential investors will thoroughly research a franchise opportunity before making a commitment. Banks will not finance the prospective franchisee unless they are happy that the franchise is viable and has been set up in the right way. It is essential that professional advice is taken and a feasibility study and development plan has been produced before proceeding. Development costs will include market research, the successful operation of a pilot unit, professional consultancy fees, operations manual, training programme, support structure, brand protection and legal costs. Recruiting franchisees is usually an expensive process. You will need to design and produce a prospectus to attract suitable investors and variety of advertising may be required to recruit franchisees. The Internet has become a major recruitment tool however exhibitions, trade magazines, local and national 22 franchise focus

press and recruitment agencies are also worthy of consideration. Following up enquiries, eliminating unsuitable candidates and selection interviews are time consuming and need to be built into the budget. The selection of suitable franchisees is vital as the future of your business and reputation depends on it. A franchisee may not necessarily require previous industry experience as you will be providing the appropriate training and support however they must have the right skills, attitude and sufficient capital to invest in the business. Don’t compromise on your selection criteria to meet your growth objectives.

Income The initial franchise fee covers the cost of the recruitment and training of franchisees and it should not be a major profit line for the franchisor. Your profits will come from the management service fee or sometimes a mark up on the goods and services supplied to your franchisees. The management service fee is usually a percentage of the franchisee’s gross turnover although in some cases a fixed monthly fee maybe charged. An advertising or marketing fee is often built into the agreement as the franchisee’s contribution to the national advertising of the brand. These funds should be held separate from other fees collected and accounted for so that the franchisee network understands where the funds have been spent. How do you know what level to set your initial franchise package fee and the ongoing fees you will charge? This is where it is essential that you receive expert advice from a bfa affiliated franchise consultant. With the franchise there should be a balance between the franchisor’s income and the ability for the franchisee to make a decent living from the business. If there isn’t that mutually beneficial relationship then the franchise will not work.

Professional advice Before deciding whether franchising is the right step for your business it will be advisable to you should carry out careful research. Attending a bfa franchisor seminar and purchasing their guide is a good starting point. It is essential that you receive expert support from a consultant with is experienced in developing franchise business as they can offer practical guidance and advice. The franchise agreement should be drawn up by an experienced franchise lawyer who is affiliated to the bfa. This is an important document which will be tailored to your specific business and sets out the terms under which you are licensing your franchise opportunity. Your accountant should also have a good understanding of franchising to be able to advise you initially and as your franchise network develops. The bfa also accredits accountants that have demonstrated their expertise and experience in the franchise sector. For a full list of professionals affiliated to the bfa visit their web site. Speak to a bank such as Lloyds TSB that has a specialist franchise unit such as Lloyds TSB who and can provide you with practical advice and financial support. The bank will also consider a finance package for your franchisees to help them set up their business. www.franchisee k . c o m

Exceptional people wanted Look around and you’ll recognise the importance of the cleaning industry in modern life. It’s essential for the smooth running of virtually every industrial, commercial and public sector undertaking in the country. The business potential is vast. As the world’s largest commercial cleaning franchisor Jani King has lots to offer: • An attractive franchise proposition with a guaranteed level of income. • A nine week training and support programme designed to encourage the rapid growth of a sustainable and profitable business.

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• An experienced and competent HQ support team that offers practical hands on assistance as your business grows. • Contracts and sales leads provided by a national salesforce. If you are self-motivated, hard-working and have the desire to succeed, a Jani King franchise could be the new challenge you’ve been searching for. Contact us today on 020 8481 4300 or visit www.janiking.co.uk

FRANCHISE ADVERTISING

Is Biggest always best? What to Look For in a Franchise Advert, Does Size Really Matter? • There are an estimated 371,600 people employed in franchising, up 6,800 jobs on 2005. • Over the last ten years revenue per head within franchising has improved by 20% compared to the UK economy which has seen a 16% improvement. This highlights one aspect of the efficiency of the franchising business model which is attracting large corporate brands. • 93% of franchisees claim to be profitable NatWest/British Franchise Association (BFA) Survey 2007

Whether you have discovered franchising through newspapers, an acquaintance, a franchisee who you know (maybe you have used a franchised service or shop), or by popping along to a franchise exhibition with a friend, we would like to welcome you to the wonderful and varied world of franchising! Like most people you probably, or possibly, discovered franchising, initially, via your daily paper and now you want to go further. 24 franchise focus

Is Big Beautiful?? Should you look at the biggest most colourful ads because these represent a company that is obviously willing to invest a lot of money in attracting the right person (you??) or should you look at the small ads as this shows you companies that are careful and prudent with their money and will invest it carefully all of the time? Neither a very small proportion of these two assumptions are true a very small amount of the time. When you, as a potential franchisee, first looked at the adverts in the franchise sections of your newspaper (or even in specialist franchise magazines) what do you see?? Well a lot of adverts for a start, and some will appear more attractive to you than others, but which one is offering you the best franchise opportunity; as we said before, is it the slick, well designed ‘corporate look’ quarter page; the one representing a name you know from everyday life; a new brand name or is it the simple lineage advert?

Your Personal Franchise CV Well, really, the sensible thing to do (now that the franchising fires are smoldering in your soul!) before www.franchisee k . c o m

FRANCHISE ADVERTISING

FRANCHISE ADVERTISING you trawl through the vast array of tasty opportunities displayed before you really need to compile a ‘Franchise CV’. This should list your skills (manual or administrative) and your interests; just because you have always worked in admin doesn’t mean that you aren’t a keen gardener and therefore one of the gardening franchises like TruGreen, Jim’s Mowing, or ProLawn Care, to name but a few, may be of interest to you. Based on your ‘Franchise CV’, the daunting task of choosing the one for you looms ahead of you. Where do you start, in your newspaper, in a franchise magazine or online??? The answer is simple, if you are serious (and the fire is now leaping into life) you should look at them all, gleaning as much information as possible in order to make an informed choice; this is a long term & financial commitment that should not be taken lightly.

Don’t Restrict Your Search… We all, naturally, will gravitate towards the familiar, a name we know from the High Street or our every day life, which is no bad thing and this does guarantee us some level of security we may not feel by venturing into the unknown. A large, well established, corporation will have looked long and hard at franchising themselves before making the leap, there are, however, hundreds & hundreds of franchise opportunities in the UK, so the variety on offer is incredibly varied. Unless you have already decided on your route into franchising, our advice would be to treat them all the same, when you begin your voyage of discovery; compare the attributes of each without a bias towards the ‘well known name’. Some of the names you are not so familiar with may be ‘big in franchising’ and have a large network of franchisees, so give both sides of the coin serious thought and consideration without ruling out one route or the other.

The ‘Printed’ Franchise Marketplace Let’s look at what publications or websites you may be looking at; if, for instance you are a Sunday Times and/or Times reader you will know that the majority of advertisers run lineage adverts so the decision as to which ad represents the best franchise is easier; there will, usually, only be a few boxed or ‘display’ ads and a smaller section to hunt through, so our advice would be to look at all the ones that appear to be offering you what you are looking for. From an advertisers perspective the bigger and smarter the advert the more noticeable it will be but, for you, that does not always mean that the opportunity will be of best suited to you. Smart advertisers will spend their money wisely, adapting their advertising for each different marketplace, what could appear as lineage in the broadsheets may be a full or half page in the franchise press – it will pay you back in spades if you thoroughly research your chosen franchise opportunity; don’t make any assumptions on the first version of their advert that you see. In titles such as the Daily Express, Daily Mail & The Daily Mirror there are far more ads to choose from but these are accompanied by either generic editorial on franchising or franchisee profiles of some of the advertisers so a good source of information for you. The Mail on Sunday has franchise industry editorial once a month with the advertising so again a good place to w w w. f r a n c h i s ee k .com

look. Other papers with a franchise section are The Sun (a monthly feature with editorial snippets on the advertisers), The Independent (Tuesdays with monthly franchise features) and The Daily Telegraph (Tuesdays).

The ‘On-Line’ Franchise Marketplace Ah the wonderful World Wide Web… we all go there for a variety of reasons and it will provide you with a wealth of research materials to aide you in your search. The on-line arena will provide you with large amounts of free advice and a wide marketplace to search through. Franchise advertising websites are popping into (and out of) existence on a daily basis but which ones are going to be most helpful? Well www.franchiseek.com, naturally, with its vast array of country specific sites, is a fantastic resource for aspiring franchisees as well as a number of other sites which can be found. Here are a few simple guidelines to help you to, hopefully, navigate your way through the franchise advertising marketplace:

ARC Media Associates Limited are an advertising agency who specialise in franchisee recruitment for a number of major franchisors, as well as being able to assist franchisees with their regional advertising needs. Fiona Corallini has been ‘in franchising’ since 1987 and she and her colleagues have a wealth of experience to draw on for established and new franchisors.

1. Think seriously about what you are good at in work or in your leisure time and even consider your interests and hobbies before deciding which route or routes you want to investigate. 2. Go online to the vast array of franchise websites to get information on franchises in your chosen sector(s) or (if you still haven’t fine tuned your decision) look at the market in general to help you. 3. If you are still trying to decide look for franchises that fit with your CV or skills & interests 4. Go to a franchise exhibition to talk to franchisors in your chosen field(s) to help you decide 5. Adverts with the key points of the opportunity bullet pointed are easier for us assimilate than the very ‘wordy ads’ and ‘usually’ mean that the advertiser has thought about getting the message across to you clearly and succinctly. 6. Does the advert show you what you need to invest – just because an advert doesn’t don’t be scared off. If the opportunity is attractive, and suits your CV, get in contact with them. 7. If there is website address in the advert, go on-line to learn more before either applying on-line or calling them direct 8. We do feel that speaking to someone will often tell you more than just asking for the information on-line or by post and trying to make a decision, these people do want to talk to you 9. Go to a franchise exhibition where your chosen franchise is exhibiting and talk to them face to face. 10. Ask if you would meet with other franchisees before signing on the dotted line, this can tell you a lot! 11. When you are ready to take the plunge always seek legal advice from a franchise specialist solicitor, this is your future and your money! We hope that you are successful in your franchise search and whether you ultimately go for a ‘Big Fish’ or a ‘Little Fish’ always go for a well established company with a good trading record. Remember in franchising that there is ample room for all sizes of business; make sure yours is one of the good ones. HAPPY FISHING! franchise focus 25

FRANCHISE FEATURE

Planning a franchise CRM system?

WiredContact is a browser based CRM solution used by over 45,000 companies worldwide. It can be installed and managed centrally on your server or one of our servers, and allows the Franchisor to assist the Franchisee in the running and development of their business without interfering. All users can have different levels of access and different views depending upon the record they are viewing. In this article we intend to save you time, trouble and a lot of money. Please accept that well thought out plans for CRM systems are few and far between, everyone without experience is an expert until it goes wrong and everyone wants a Rolls Royce until the find out how much they cost. What’s often missing is a realistic plan based upon the intended outcome. Technology has brought down the cost whilst increasing the scope of leading edge solutions. Usually the most expensive solution is not what you need, it may be simply what the sales person is pushing the hardest. Franchisors are special for a number of factors that separate them from people with “jobs” • It’s your money that’s going to be wasted if you fail to plan. • It’s your future revenue that will suffer if you don’t engage the correct skills and support staff. If you are planning a system then start with a well documented clear vision of the benefit you expect as 26 franchise focus

the end result and don’t deviate or get side tracked with details that fail to progress your plan. Write out your plan in a simple well established manner. What follows is an extremely successful methodology which has been simplified for this article. It cuts to the chase. If you have an additional £50,000 then by all means you can adopt another methodology, however you should also take on board that as your experience develops of what a CRM system can or should provide to your business then so will your expectations – and the cost. If you try and change tack each time you learn something new, your implementation will be prone to excessive costs and is guaranteed to frustrate you and delay the implementation. Change and flexibility is an important part of any plan and yes there will be learning curves in any project. The correct approach is to have clear review dates at relevant pre-planned intervals and to identify what constitutes a review point, for example when a process or a module fails. A well written plan will save you time and money, as well as having it checked by a technically able person on your payroll (preferably not your brother law or the guy who fixes your PC, unless they have experience of databases). If you are starting out, I would suggest you seek a person well grounded in SQL, HTML and perhaps ASP. These people can help keep you on track and keep you focused on what’s reasonable bearing in mind your www.franchisee k . c o m

FRANCHISE FEATURE objectives and your budget. Having a “confidant” to validate advice is invaluable and the sooner you have total control over the system the quicker your costs will be under control. This having been said I am reminded of an English Economist John Ruskin 1819-1900

• Accounts Integration may be required at a later stage but not within the first year Integration with other solutions may be required therefore open architecture is essential

“When you pay a lot, you lose a little money -- that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot -- it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better.”

• Current system requires duplicitous manual input of data and the process of generating reports takes too long.

Under no circumstance am I advocating DIY CRM, only that you pay for independent advice to validate what your chosen supplier is saying. One methodology that works well is the Structured System Analysis and Design Methodology (SSADM) A successful plan could be as simple as the one shown below, however the thought process and the component parts that produce such a document is not as simple. The guidance document that helped produce this output is available on request from admin@wiredcontact.co.uk .

Feasibility Report for XYZ Franchise

Current deficiencies

•

Mistakes are not easily identified

• Reports generated do not provide sufficient detail to benefit existing parties •

It is difficult to get leads to franchisees efficiently

•

Data cannot be accessed when in the field

• Current solution requires compulsory support from supplier • Current system requires vendor partners to customise at excessive cost • Sales and service opportunities are lost by existing system

User requirements • Control over access based upon changing rules controlled by franchisee but may include by record manager, by region or by product for example

Objective: To update CRM system for XYZ Franchise

•

Speed and simplicity of use

Contact:

•

Improved accuracy

Budget: Less than £3,000

•

Location independence

Start date: October 2008

•

Automatic capture of leads from website

Summary

Cost benefits/limitation

Responsible Director Bill Smith

XYZ Franchise need to have a centralised CRM solution to manage leads, projects and regions that empower franchisees to run their own business, whilst allowing the Franchisor to assist where possible in the provision of centralised services to add value, such as customer service to drive business back to franchisees.

Purpose of the system •

To help improve franchisee profit margins

•

To save franchisee administration time and costs

•

To be able to drive enquiries to franchisees

• To underpin our successful process for the benefit of the franchise • To capture leads directly from website into the database that are automatically available to franchisees in real time anywhere •

To help grow the Franchise

System scope • Needs to run on an existing users PC with no software locally installed to save support costs • Approximate budget of £130 per franchisee for software •

£2000 for development costs.

• Existing data for the system to be imported from MS excel, ACT! and other data sources w w w. f r a n c h i s ee k .com

About the author: Paul King started in direct Sales in 1983. In those days Sales worked on the principle that “some will, some wont, so what”. Fortunately sales and marketing is now a skilled profession and service is the most important element. Paul has run a UK wide User group for CRM fanatics since 1985 and has been personally involved in more than 10,000 successful CRM implementations. No matter what solution you go for, without training you may as well have no system at all. For the past 20 years Paul has been the Managing Director of a CRM Company with a highly skilled team of experienced CRM professionals.

• The new system will reduce the need for overtime payments in the data entry department • Will negate the need for Franchisees to develop their own system •

Will pay for itself through better customer services.

• The Franchise will become more profitable and therefore more attractive to new franchisees

Conclusions and recommendations The new CRM solution can run on the existing server in-house or can be hosted by supplier, this approach will allow the development of a customised application to meet users’ requirements. The development of the system should take approximately 2 weeks and can be achieved within budget. Selected software: www.wiredcontact.co.uk Tel 0208 099 3032 Price: £130 per user based upon 10 or more Integration costs: Web integration with database is free Bespoke customisation charged at £120 per hour allow 8 hours Cost of ownership: Own team and local suppliers will develop solution using html skills and limited SQL skills cost per seat should not exceed £300 after one year.

franchise focus 27

RETAIL TRENDS

Celebrity craze hits the menâ&#x20AC;&#x2122;s fragrances market by Diana Dodson

28 franchise focus

www.franchisee k . c o m

RETAIL TRENDS

Celebrity scents have been stealing the limelight in the fragrances market for the past five years but only recently has their popularity extended to the men’s category. In the UK alone celebrity signature scents have come to account for an estimated 40% of the fragrances market, a 2,000% rise in value sales on the 2004 figure according to UK specialist chain The Perfume Shop. With over 30 new brands coming onto the market in 2007, including fragrances from Kate Moss, Katie Price, Christina Aguilera and Gwen Stefani, the trend is showing no signs of abating. The UK is by no means the only market where celebrity fragrances are finding success. Indeed it has become a truly worldwide phenomenon in an age where the rich and famous are followed with an almost cult-like fervour. Using the celebrity as a brand, perfume houses have found a way of tapping into ready-made consumer groups with the minimum of time and investment, enabling them to keep pace in a launchintensive market where two years is the average shelf life for a new scent. Ubiquitous in the women’s category they might be but celebrity scents are only just gaining a foothold in the men’s fragrances market. Despite early adoptees of the trend including Antonio Banderas, Carlos Santana and Donald Trump, celebrity fragrances only gained serious attention in the male category in 2006 when Sean John Unforgivable stormed the global market to become the first celebrity brand to achieve top 10 status in the men’s premium segment. Since then, Intimately Beckham for Him has performed strongly in the UK and US, and perfumery shelves are fast filling up with yet more metoo launches. New York Yankees Captain Derek Jeter, KISS and Usher are just some of the stars that have sensed the opportunities in the fragrances market. Part of the reason celebrity scents have been late to take off in the men’s category is a general lack of supply. Early launches were small and under-funded and major introductions were saved for the women’s market. This is not surprising given that women’s fragrances generate US$20 billion globally each year (about twice the value of the men’s category) and with only around 50% penetration, continue to enjoy solid growth year on year. The women’s market is

w w w. f r a n c h i s ee k .com

a good testing ground for new developments, with women being generally more experimental than their male counterparts. Changing male grooming patterns, however, mean the average man now spends longer in the bathroom and a larger portion of his income on shaving products and toiletries. This has meant a boom in sales of men’s fragrances – the global market grew by over 50% in 2007 according to Euromonitor International’s provisional 2008 data – and a renewed interest in the category from manufacturers. Celebrity fragrances are generally targeted at a younger demographic too, and this may further explain their tardy uptake amongst men. Unlike other areas of the men’s grooming market and particularly skin care, hair care and shower products, premium fragrances have stronger appeal among older men. Teens and men in their early 20s tend to be more tempted by strongly-scented body sprays such as TAG and Axe (also branded as Lynx or Ego in some markets) that are cheaper and have racier images and associations with sexual success. In recent years companies have begun to realign their men’s fragrances with the younger set and celebrity scents may be seeing the benefits of their efforts. The men’s fragrances market is expected to reach US$13 billion by 2012, according to provisional Euromonitor International data, representing a 17% rise on the current figure. When inflation is taken into account, this suggests only a moderate slowdown on historic dynamism. Celebrity scents are expected to play an increasing role in sales growth. However, not all fragrance manufacturers stand to benefit from the trend. Of the big name players, Coty has the best potential, with a diverse portfolio of celebrity scents and a number two global ranking in the men’s premium fragrances market. Procter & Gamble, to a lesser extent, is also associated with the celebrity trend and has been pumping resources into its prestige fragrances business in recent years. Elizabeth Arden, on the other hand, will have more difficulty tapping into the trend without a top 10 position in the premium men’s segment despite being the creator of Elizabeth Taylor White Diamonds, the world’s most enduring celebrity fragrance.

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RETAIL TRENDS

Growth upturn

in the global fragrances market by Diana Dodson The fragrances market is among the largest within cosmetics and toiletries globally; with sales totalling US$30.5 billion in 2006 it is exceeded only by skin care, hair care and colour cosmetics. Historically, it has been one of the least dynamic markets, dragged down by declining unit prices, over-saturation of new products and low brand loyalty in key value countries including the US. However, fragrances put in a strong performance in 2006 (almost 6% growth in US$ fixed exchange rate terms) capping off a 3-year trend of growth acceleration. Feeding this is economic prosperity in the emerging markets, but also increased demand in the maturing, developed countries for which celebrity scents and youth-oriented fragrances are largely credited. Forecasts suggest these improved fortunes will continue in the mid to longer term. Here Euromonitor International explores the drivers and trends which are expected to buoy growth to 2011. The emerging regions are becoming increasingly important to the worldwide fragrances market. Latin America and Eastern Europe alone account for almost a third of global sales and almost doubled in value between 2002 and 2007 to an estimated US$9.3 billion. Their influence is also evidenced by the growing portion of global sales being accounted for by the mass segment. At US$18 billion, premium fragrances make up almost 60% of the market but it is mass brands that are contributing most to growth, both in percentage and absolute terms. Although there have been moves towards masstige and premium fragrances in Latin America, there is still a strong preference for mass brands right across the region, and they outsell premium perfumes in Eastern Europe too. Asia-Pacific, such an important driving force behind growth in other beauty markets, is less significant in fragrances. With predicted sales of around US$2 billion in 2007, the region accounts for less than 7% of the worldwide market and has historically achieved growth at below the global average. This is primarily due to cultural norms, where consumers prefer to be odourless and associate heavy scents with the masking of body odour. Japan, for example, is one of the wealthiest countries in the world yet annual per capita spend on fragrances is less than half that of Russia and three times lower than the figure in Brazil.

A high churn rate characterises the most developed markets Western Europe and North America are the most significant value markets, accounting for almost 60% of global sales. Both regions are marked by competitive markets, high launch rates and short shelf lives for new scents. Despite these difficulties, companies are 30 franchise focus

succeeding in lifting value growth in Western Europe at least. Premium fragrances are driving growth in both Western Europe and North America but dynamism is, in the main, coming from the lower end of the segment and from discounting. In the US, for example, manufacturers are exploiting the migration of consumers towards mass retailers with innovative strategies to suit this channel. Elizabeth Arden introduced Curious Britney Spears into the mass channel with a 30ml bottle, bringing price points down to capture a younger audience.

Globalisation inspires new launches Innovation is central to the fragrances market where launch rates are high and globalisation, besides opening up new markets to international players, is providing opportunities for new product development. Rather than trying to convert new country markets to international trends, for example, some companies are creating brands tailored to a particular local market or ethnic group. In autumn 2007, for example, Disney launched a Pirates of the Caribbean cologne in the US, specifically targeting Hispanic boys aged 4-11. The reverse is also happening, with manufacturers taking a trend from abroad and introducing it into another market to stimulate new demand. The introduction of baby fragrances by premium brands such as Bulgari and Burberry in countries where there is no traditional usage, such as the US and UK, is just one example of this trend.

Appealing to the younger set As in the rest of the cosmetics and toiletries market, women are the primary consumers and women’s fragrances account for almost two-thirds of total sales. However, the men’s segment has seen a surge in demand in the past two years, the result of changing male grooming patterns, which mean the average man now spends longer in the bathroom and a larger proportion of his income on shaving products and toiletries. Manufacturers’ efforts to attract men away from inexpensive body sprays, through the introduction of new lines, partner scents and widespread advertising have also helped to spur value sales. Targeting the younger age groups, and teens particularly, is a more recent development and one which holds strong potential for premium fragrances. Today’s 1319-year-olds (of which there were approximately 860 million globally in 2007) have far more spending power than any generation before them, and are serviced by a teenagers’ products market worth almost US$250 billion globally per year, according to Euromonitor International estimates. Not only are they more affluent, today’s teens are generally more sophisticated consumers than ever before, boding well for premium fragrances. www.franchisee k . c o m

RETAIL TRENDS

RETAIL TRENDS Ralph Lauren, Christian Dior, Yves Saint Laurent and blah are just a few of the high-end fragrance franchises that have begun targeting a younger demographic. Valentino joined their ranks in late 2006 with the launch of Rock ‘n Rose, the aim of which is to inspire a new generation of young Valentino women. A year on and the fashion house has followed up with a line extension, Rock ‘n Rose Couture. Now Burberry has unveiled plans for a new youth fragrance called The Beat to update the label’s image with a more energetic, trendy edge.

No slow down in the celebrity trend Celebrity scents are the biggest phenomenon to hit the global fragrances market in recent years. By riding on an established image with a pre-existing consumer base, fragrance makers can cut back on marketing, an important saving in a launch-heavy sector that involves high innovation costs. Although it can be risky to rely on a celebrity’s image, too easily tarnished by today’s ubiquitous media, the trend currently shows no signs of abating. Thirty new celebrity scents hit the UK shelves alone in 2007. According to the UK’s The Perfume Shop, they account for 40% of the total market and have enjoyed a sales boom of 2000% since 2004. Celebrity fragrances are primarily positioned towards younger women and teens but increasingly manufacturers are expanding the trend to new demographics. Sarah Jessica Parker Lovely aims at the 30+ age group and Danielle Steele’s eponymous scent targets the older set. Men’s celebrity fragrances have become the latest area for innovation and Sean John Unforgiveable became the first to break into the global top 10 premium men’s scents in 2006.

Wellness trends to become a future source of innovation? The global fragrances market is set to grow by around 3% to 2011 to US$35 billion. While premium fragrances will remain the largest segment with steady growth of 2% a year over the forecast period, mass fragrances will be the more dynamic, with a CAGR of 4%, driven by new demand in the emerging markets. One area of the market that has been less well explored is the link between fragrances and wellbeing. Yet aromatherapy is a long-established notion and holistic beauty products are becoming a lucrative new niche. To date, attempts to tap into this trend have largely come from gimmicky novelties such as pheromone containing “love potions”. The House of Rose offers an anti-ageing perfume which claims to make the wearer appear six years younger, and Smiley, by Ora-ïto, purports to be the first ever anti-depressant fragrance. Perfumes based on food scents, so-called gourmand fragrances such as Jo Malone’s Pomegranate Noir, are the closest the mainstream market has got to the holistic trend. However, going forward this could become an important source of innovation and some big name players, including Procter & Gamble, have already declared their intention to better educate consumers on the aromatherapy benefits of certain scent ingredients. Diana Dodson, Cosmetics Toiletries1 Senior Industry FLAsia Ad 135 X 92 mmand (FranchisePage 1/28/2008 3:24:13 PM Analyst: diana.dodson@euromonitor.com

Coming years could also see the beginnings of what some industry sources suggest is an inevitable backlash against celebrity scents. Driving this will be consumers, as their growing sophistication makes them more likely to be persuaded by interesting scent combinations and innovative delivery formats rather than savvy marketing campaigns. However, manufacturers may also start pushing for this shift. Celebrity brands do not tend to have longevity, and in fragrances particularly, extending shelf life has become vital in an increasingly fickle market. C

There is some evidence that this is already beginning to happen, as speciality fragrances emerge as a fastgrowing niche. Le Labo, for example, is an ultra highend but unbranded fragrance range which was created as a reaction against mass-produced premium scents. Fragrances are mixed on site upon purchase and are only available in selected retailers and the company’s own “labs”. The proliferation of bespoke fragrances is further evidence of this trend towards exclusivity over broadappeal brands. CM

CMY

Even more compelling is the fact that some heavyweight scent brands are moving towards a narrower but highervalue consumer base. Procter & Gamble’s Vice President of fine fragrances, Markus Strobel, said the company would be aiming for “fewer, bigger and better launches”. Other firms, Bulgari and Gucci being just two examples, are taking tighter control over the distribution of their fragrances to keep them out of mass retail channels. w w w. f r a n c h i s ee k .com

Tel: Tel: (65) (65) 6467 6467 8385 8385 Fax: Fax: (65) (65) 6467 6467 8325 8325 Email: info@bizlink.com.sg Email: info@bizlink.com.sg

franchise focus 31

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