Wake Up Call

Fairfax media are currently running a series of articles that make serious accusations of unfairness against one of Australia’s largest franchisors, RFG, with claims the franchisor has ruthlessly focused its business model on its own commercial interests, at the expense of franchisee profitability. The articles also cite evidence of systemic franchisee misery in many of the brands under the RFG umbrella. First let me acknowledge I have a vested interest in this story, as does every franchisee, franchisor and supplier who makes their living from the franchising sector, and is proud of how it contributes to local communities and the economy.

The phenomenon of brand damage is well known in franchising — where the reputation of franchisees who do the right thing by their brand and customers, is tainted by a franchisee who does the wrong thing. Similarly, all of us who work hard to improve the sector will be deeply disappointed and troubled by the allegations in these articles, and the subsequent damage to the reputation of the whole franchising sector.

On the positive side, this is a wake-up call. It’s time the issues raised in these articles were aired and faced. But let’s not assume the majority of franchisees across Australia feel their franchisors exploit them. In fact the opposite is true. Our extensive research at the Franchise Relationships Institute (FRI) shows that 81% of franchisees across the sector believe their franchisor acts fairly.

Understanding the psychology of fairness

The upheaval generated by the Fairfax articles provides an opportunity to review the important role of fairness in franchising. Fairness is a deeply ingrained human quality, hard-wired into our consciousness. We expect others to behave fairly and do the right thing in relationships, sport and business. And when they don’t we probably feel outraged. However the reality is, for all sorts of reasons — ego, greed, insecurity and psychological problems — people sometimes behave badly. We have all seen examples where people, even those we know, can cheat, bully, abuse and take advantage of others. Unfortunately, if these people are in leadership roles, their businesses also start behaving badly and we get a toxic culture.

Let’s be real. We are going to find examples in all human institutions, including franchise networks, where power is abused. Some franchisees, franchisors, advisors, and dare I say, journalists, will occasionally cross the line that separates looking after one’s legitimate interests, from exploiting an opportunity for personal gain at the expense of others.

Revisiting the obligations of franchisor

To help manage the creative tension between legitimate opportunity and opportunism, Australia’s Franchising Code of Conduct includes an obligation by franchisors and franchisees to act in good faith. Let’s define this as being fair, honest and well-intentioned in delivering on your obligations. For franchisors, this means providing credible leadership, and offering franchisees a proven business model that delivers a reasonable return on their energy and investment. The assumption is of course they work hard and apply the model.

To deliver on this obligation, franchisors need to also work hard to keep their business models competitive, relevant to customers, and profitable for their franchisees. There is still a lot of work to be done here. Data from thousands of surveys conducted by FRI show that a third of franchisees do not feel optimistic about their future in their franchise. This is mainly driven by concerns over margin compression and a lack of profitability. Many of the pessimistic franchisees in this research also believed their franchisor was self-serving. Perhaps it’s time all franchisors reflected on the health of their franchise networks — culturally and commercially — and asked themselves this important question: “Would you invest as a franchisee in your own network?”

If you are wondering why franchisors should care about franchisee optimism or satisfaction, consider that franchisees who feel more optimistic achieve 15% better business results. And franchisees who feel supported, are not just easier to work with, they deliver a better customer experience, and are more likely to pro-actively promote their business in the local community.

8 strategies to help solve this dilemma

So what to do? Here are eight things franchisors can and should be doing to protect their brands, guarantee the sustainability of their franchise networks, and ensure the majority of their franchisees are satisfied.

1. Monitor the profitability of all franchised units using an agreed chart of accounts. If a franchisee who works in the business is paying you or the landlord more than they are paying themselves, you have a fairness problem.
2. Have a formal remediation program for franchisees who are not profitable after a reasonable ramp up period, including identifying the causes and solutions. Be tough on franchisees who don’t commit to following the agreed action plan.
3. Measure franchisee satisfaction annually using a valid instrument, and share the findings back to your network. Use the findings to build on your strengths and address legitimate weaknesses.
4. Set an agreed target for unit level profitability and franchisee satisfaction, and make these corporate KPIs. It’s also a good idea to link these two metrics to the franchisor team’s remuneration.
5. Ensure your leadership team understands you are in the franchising business, as well as the other industries you operate in. They also need to understand what’s important to franchisees, and have the expertise to deliver relevant, effective support.
6. Ensure your marketing strategy is primarily designed to drive customers to franchisees’ businesses. Also equip franchisees with the skills to maximise the value of every customer interaction, and the tools to drive sales in their local communities.
7. Deliberately create a franchisee-centric culture where the franchisor team appreciates the hard work and commitment of franchisees, and shows through their actions they genuinely care about franchisee success.
8. Before making major decisions that impact on stakeholders, ask yourself the following questions: Is this legal? Is it fair? Is it good for our ​brand and customers? Will it improve franchisee profitability, and if not, what is the justification?

Speaking of stakeholders, one of the most successful turnarounds of a large franchisor public company in recent years is Popeyes Louisiana Kitchen, a 2,600 strong network led by CEO Cheryl Bachelder. Her secret was to treat the franchisees, not the shareholders or even customers, as the most important stakeholder in the business. She argued that if franchisees are successful, everyone else, including shareholders, will reap the benefits. Her book, Dare to Serve, published in 2015 is a must read for all franchisors. (Check out the case study here).