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COVID-19: Change catalyst or existential crisis for international franchising?

COVID-19: Change catalyst or existential crisis for international franchising?

Adapt and reinvent, and the future could still be promising for franchisors and their foreign investors, argues Sanjay Duggal.

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Over-communicate with stakeholders. Reinvent operations around health and safety. Negotiate abatement and deferment of dues with franchisors and landlords. Invoke force majeure with caution. Seek well-targeted contractual relief. Collaborate.

These are presently some common threads in the global COVID-19 franchising discourse. All of them solid, all of them logical. Interestingly though, the elephant in the room - sustainability of the current cross-border franchising model - gets little mention.

Apart from the globally established brands, international franchising (expansion from home-base to overseas territories) has seen more failures than success in recent years. Greed has ruled and farcical alliances have left a trail of closures and litigation in their wake. The big franchises with impeccable credentials haven’t been immune either, but they seem to publicly document their openings far more diligently than closures.

It does take two to tango and investors can’t be let off the hook for misguided adventurism. But ill-prepared franchisors with their dubious practices in luring international investors are more culpable any day. Without the infrastructure and thorough understanding of far-flung markets, these brands had no business seeking overseas expansion. Yet franchising regulation and investor naiveté offered them enough grey space to do just that. And they grabbed it with both hands!

Looking at the future

While the ravages of COVID-19 will decisively put paid to misadventures of the past, the world still needs ethical, relevant, commonsense franchising. Probably more now than ever.

Existing franchise marriages will have no choice but to work through the COVID fallout together. Failure to do so will just hurt both sides more, particularly the franchisee, many of whose daily cost meters continue to run.

But tomorrow’s prospective international franchise alliances have legitimate question marks hanging over them. And even as franchisors deliberate on future strategies, an imminent existential crisis for the international franchise deal is more than a mere possibility. After all, a perfect storm of economic, demographic and technological challenges has been gnawing away at international franchising relationships for years. And COVID-19 can finish the job in one fell swoop.

Unless ‘reset’ is pressed, that is.

As a constructive first step, franchisors with post-pandemic overseas aspirations would do well to closely examine present ground reality, and study widely predicted scenarios for the near term. No judgments, just stocktaking:

1. International franchising norms

With massive COVID-related layoffs having occurred and plenty more in the offing, many will be forced into entrepreneurship for their livelihoods. ‘Buying their own job’ by way of a franchise could be a good option, but most international franchisors don’t offer that choice to independent individuals.

Understandably, unlike the single unit franchises they sell in their own backyards, franchisors are compelled to do business with corporations when they go international. The reasons are myriad, from more capital, control and convenience, to accelerated brand expansion and revenue.

So even though the COVID lay-off victims are precisely the kind of people that franchising was originally invented for, in overseas markets, the same people are unlikely to have international franchised concepts as an option to invest in. The one thing that could work, i.e., sub-franchising through a master franchisee, is often messy business and therefore used selectively by franchisors overseas.

2. Stripped down brand experience

Be it retail, food, entertainment, personal care and the like, mandatory measures to prevent the spreading of infection strips franchised businesses of their core experience.

Then again, a franchise investment essentially pays for two things: a system of operations and a distinctive brand experience. With one of the two to be missing for a long time to come and perhaps diminished for good, investors will need very, very good reasons to put money into a franchise that stands essentially on one leg.

3. Accelerated move to the online space

Even though a growing amount of business has been moving online for years, COVID-19 has turbo-charged the e-commerce and delivery trend. But whereas physical goods generally travel well, experience is difficult to export to another’s doorstep.

So while the on-premise experience is stripped down by regulation, off-premise delivery inadvertently dilutes it. In the process, franchisees compelled to invest in significant infrastructure upfront will be hard-pressed to extract returns on assets.

4. Altered corporate perspectives

Then there’s the matter of corporations drastically rethinking their strategies… quite literally as we speak. These are the same type of entities that international franchisors prefer to do business with.

In recent weeks, countless executives across industries have emphatically committed to becoming far more lean, agile and selective than they’ve been in the past. This means they’ll be saying ‘no’ way more often than ‘yes’ to outside franchise propositions. And even though they’re prophesying about business bouncing back stronger and better, what they actually mean is more frugal, smart and hyper-focused. Not back to as they were.

5. A pervasive sense of skepticism and despair

Being dropped like a hot potato in crisis (even of COVID magnitude) despite sometimes decades of service to one’s employer can be life-shattering. The financial hit and emotional trauma not only debunk the myth of job security (which is an oxymoron if you think of it), but make one naturally disinclined to trust anyone or anything outside of oneself. Whereas shifting the locus of control is a healthy development, the resulting cynicism and caution will lead to individuals demanding more active involvement and control in all future business endeavors.

6. Consumers are forming new habits

It typically takes a commitment of 40 straight days to form new habits - 40 straight days that most people haven’t had in a long time. But with COVID-19 lockdowns giving them more than that, new patterns of thought, new consumption habits and new expectations for the future are emerging thick and fast - all of which will impact their business preferences in future.

7. Seizure of home-court advantage by domestic franchisors

Rest assured, domestic franchisors will seize the home-court advantage by outdoing their foreign counterparts in sheer value and return on investment.

Although this doesn’t absolve them of acting on critical areas common with international franchisors, they are better placed to preempt competition from previously formidable overseas competitors.

Franchisors would do well to embrace these realities and factor them into plans for the future. Here are key areas they should focus on:

A collaborative approach

Franchising is collaborative by nature and is supposed to epitomize the classic win-win relationship. But in recent times, it has been riddled with vested interests, short-term greed and frequent tugs-of-war between opposing parties. Moving forward, for a franchise proposition to hold sway in foreign markets, franchisors need to bring ‘co’ thinking to the fore: cocreation, co-marketing, co-branding (with sister or outside brands) and yes, collaboration. Essentially anything that facilitates ease of business and spreads the risk equitably is of value, and must be part of the new normal.

Simplify

Whether it’s their core offering, their systems or their support, franchisors must obsessively simplify.

Ironically though, simplicity is hard. Simplicity emanates from masterfully navigating and managing complexity, and then eliminating the unnecessary.

Modify

A common trademark, operational assistance and a minimum fee are central to a franchise business. Besides that, there is plenty of leeway in the nature of how business is actually done. This fact may have been exploited by the unscrupulous in the past, but the very same principle can be used to make franchises more investor-friendly and far-sighted now.

Undoubtedly, many international franchising practitioners had lost their way and it’s time for a major course correction. Their propositions need to be devised with leanness and agility at the front, middle and end, whilst accommodating immutable new ground realities (as addressed above) in parallel.

Otherwise, it’s hard to imagine how the international franchise deal, with all its baggage and uncertainties, can sustain in the dramatically different post-COVIDworld.

Ultimately, what the coronavirus crisis becomes for international franchising at large, remains in the hands of franchisors. Stick to the same thinking as before, and there’s an almost certain existential crisis in the making. Adapt and reinvent, however, and the future could still be promising - both for franchisors and their foreign investors.

Hope they choose well.

THE AUTHOR

Sanjay Duggal is the CEO of U.A.E.-based Stellar Eastern Franchising, which provides in-depth advisory on how to navigate the Middle East franchise industry

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