Ten Emerging Risks Facing The Franchising Sector

By Greg Nathan posted September 9, 2021
franchisee satisfaction

A franchisor client recently emailed me asking if I could share any insights on emerging risks facing the franchising sector. You'll find my response below in the form of 10 franchising sector trends. These aren't meant to be exhaustive but are certainly worth the consideration of all franchisors. Within every risk is an opportunity, so I have included some suggestions. Although some of these have been triggered by recent changes to Australian franchising laws, these may still be relevant to franchisors in other countries. Let's start with the more general trends.

#1: Merging of brands. Larger brands are continuing to buy up smaller brands. This often creates cultural challenges, especially with franchisees who feel they now belong to something they did not originally buy into. If a Founder has sold to a private equity firm, it is important they understand the franchisee mindset and the importance of maintaining a sustainable commercial model for all parties. Otherwise, this change can be traumatic and lead to internal conflict, disruption and distraction. The opportunity here is to manage the change process skillfully, be sensitive to identity issues, respect the investment and mindset of franchisees, and ensure robust two-way communication on issues that people care about. (By the way, our franchisor education programs are designed to address these needs).

#2: Supply chain disruptions. The pandemic has created supply problems for many industries, slowing down the ability of businesses to deliver products, and stretching thin the patience of customers. Some suggestions include thinking ahead in terms of alternative sources, be creative in modifying your product mix, and actively manage customer expectations. Create as much certainty as possible for customers through proactive communication, be fair with payment plans so excessive money isn't tied up in deposits, and ensure you provide those extra touches of care.

#3: Staff shortages. Another unfortunate consequence of COVID has been labour shortages. This is likely to continue for several reasons. Some workers may choose government subsidies over wages if the extra money from lower-paying jobs is not seen as worth the effort. This is especially true where staff feel harassed by customers, unappreciated, and/or nervous about being exposed to COVID. Many people are also reluctant to return to an office because they've tasted the benefits of working from home and don't want to give this up, or they need to be home to supervise or care for their kids. While it may seem simplistic, the opportunity here may just be for employers to be more empathetic and caring for the needs of their people. And, of course, offering a hybrid work model.

#4: Universal competition. As globalisation continues, the arrival of new competitors is harder to predict, particularly with products or services that can be purchased online. While unexpected competition often requires agility to adapt, making fast changes in a franchise network can be an oxymoron because you need to bring franchisees with you. As in our first point, change management requires deft handling of people's concerns and exceptional communication processes. The opportunity here is not to take the people issues for granted when implementing change. A great strategy with poor engagement will inevitably fail to hit its targets.

#5: Transition planning. A large proportion of franchisees entering businesses over the last 30 years have been baby boomers, and many are now looking to retire. Also, most franchisees in established franchise networks are now at a mature stage of their business life-cycle. So, issues around transition planning need to be proactively managed to avoid burn-out or rust-out. My suggestion is to assist mature franchisees with succession planning strategies. Some franchisors have excellent internal career programs for high achievers, enabling them to partner with older franchisees. Baby boomer franchisor leaders can also become a threat to their networks if they are not up to moving with the times in terms of technology and changing social mores, and/or creating a sustainable transition plan for the leadership of their group.

#6: Bouncing back. We are clearly operating in a multi-speed economy. While some industries and franchise networks have been doing exceedingly well, others have been stretched to their limits by ongoing lockdowns, and some of the trends mentioned above. Businesses that have done well will be challenged to keep the energy of their people up, while others are going to have their financial, emotional and cultural resilience tested. The opportunity here is for franchisors to practise strong corporate governance, careful strategic planning, the sensitive management of culture, and outstanding leadership. (Again, we can help here with franchisee presentations to help them stay resilient).

Trends linked to the Australian Franchising Code

Recent significant changes to the Franchising Code in Australia will also pose significant threats to franchise networks that are not vigilant or fail to do the right thing by their franchisees. 

#7: Transparency over rebates. The greater transparency now required by law over rebates is likely to create ructions in some networks. For instance, franchisees will not be happy if they feel their franchisor has been overly opportunistic in leveraging group-buying power to unreasonably maximise franchisor profitability at their expense. Franchisors need to clearly explain the logic, fairness and benefits of rebate arrangements for the long-term health of a network.

#8: Changes to franchisee rights. It will now be more difficult to terminate or apply restraints of trade to franchisees who are consistently non-compliant or out of fit with a brand's culture. Franchisees now also have greater rights to terminate agreements early, which could compromise the competitive position of a franchisor. The opportunity here is for franchisors to be more thorough with their recruitment practices, and to ensure they understand the science of managing expectations and maintaining healthy franchise relationships. This is particularly important in what has increasingly become a VUCA world.

#9: Joint employer liability. While franchisors in the USA continue to fight against joint employer laws, the Australian Government implemented these five years ago. Although these have not been as negative in their impact as what was initially projected, franchisors will need to keep a close eye on the HR practices of their franchisees to ensure they are not legally exposed, or the brand does not come into disrepute due to the inappropriate actions of their franchisees.

#10: Public naming and shaming. One recent inclusion in the Australian Franchising Code is a significant increase in potential fines to corporations. These can now be higher than $10 million or 10 per cent of a franchisor's annual turnover. Franchisors who don’t comply with changes to the Code, whether deliberately or inadvertently, could be targeted by Government agencies as a warning to the broader sector. The lesson here is that ignorance is no excuse and to make sure you are across these changes. By the way, while the legal contract needs to be taken seriously, franchisors need to also understand they have a psychological contract with their franchisees, which may contain even greater risks if broken. Remember, there is always a hungry media pack waiting to feed on the stories of franchisees who feel their good faith has been exploited. 

Franchisor Excellence Masterclass

If you're a franchisor leader who has found these 10 trends interesting, and would like the opportunity to explore these types of strategic issues with me and other franchisor leaders, registrations are now open for our next virtual Franchisor Excellence Masterclass. This is a valuable and convenient CFE accredited program that always receives excellent reviews from franchisor executives around the world. In fact, 95% of participants consistently rate this program outstanding in terms of content, processes and return on investment. The timing is convenient for Australian, New Zealand and North American franchisors. Click here for details.

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