Although there are many advantages to a Franchise Business for both franchisees and franchisors, it is important to understand that both parties need to play different roles and have their own set of responsibilities they need to fulfill in order for the franchise system to work perfectly.
In this article we discuss the:
- Common causes of franchise conflict
- Possible Solutions
Common Causes of Conflict
1. Money Matters
A possible trigger for conflict emerges because the two groups make money in different ways. Understanding these differences helps franchisor and franchisee, not only avoid escalating disagreements but also to increase their levels of success.
At its heart, franchising is a business model in which one party (the franchisor) offers the rights of its business processes and brand name to another party (the franchisee), who uses it to sell products or services to end-users for a fee. The “fee” that the franchisee pays is usually calculated as a percentage of his or her gross sales. That means franchisor profits increase as the franchisee’s sales increase, leading franchisors to adopt policies to maximize sales at franchisee locations.
Franchisees, however, make money by generating revenues that exceed their costs. Therefore, they seek policies that maximize profits at their locations. The policies that maximize outlet-level sales aren’t the ones that maximize outlet-level profits, causing conflict between both sides.
In any industry, communication is key. Franchisors can provide a safe space for franchisees to air their suggestions and ideas and vice versa. A meeting can iron out conflicts while others benefit from what was discussed. Furthermore, contact a neutral mediator or franchise broker to join the meeting to keep the agenda objective for the benefit of all.
2. Product Quality Control
When a franchisee takes on a franchise, it agrees to follow the guidelines laid out to successfully replicate the franchisor’s success. Product quality is an area of concern. There is a wide spectrum as to how franchisors manage this.
Product Quality Control can be managed and can have conflict in 2 ways:
- Franchisors who insist that all products need to be sourced through them
- Franchisors who allow franchisees to source almost everything locally.
When all products are sourced from the franchisor, the quality of the product can remain consistent. However, conflicts can happen when the costs of goods are too high or when no economy of scale costs are passed on to the franchisees. This can place a lot of financial burden on the franchisee as they need to look after the operational well-being of the business as well. When franchise owners cannot make sufficient profit to maintain their business, they may not be able to sustain the franchise. If this model is replicated across the network, and franchisees cannot make sufficient profit, it can cause great harm to the franchisor even if they benefited from the increased revenue sources in the short run.
On the other end of the spectrum are the franchisors who allow the franchisees to source everything locally to help them manage costs. This means the franchisors would likely have given the formula to the franchisee. In a good case scenario, the franchisee faithfully replicates it and the quality of the product is maintained. However, if the franchisee is in total control of the product quality, the franchisor then has the added burden of doing very regular audits to ensure quality is maintained. If this is not diligently implemented, the inconsistent quality can damage the brand. Another major disadvantage of offering the franchisee too much IP knowledge is the open invitation for them to take the know-how and start their own brand.
To reduce conflicts, the franchisor can invest effort in designing its supply chain so as to hold on to its intellectual property whilst allowing the franchisees to have access to franchise-compliant products at attractive costings.
3. Marketing Support
Franchisors own the brand and usually need to keep investing in the brand at a global level. In order to do this, each franchisee contributes a percentage of revenue.
Often Franchisees complain that Franchisors do not offer enough Franchise Marketing support. The support that comes from the franchisor may be more brand awareness related and not as localised as the franchisees require.
The franchisor will run brand awareness strategies with the view to reaching more clients as a whole and on a macro level. Oftentimes, this is the result of pooling together all the contributions from each franchisee. Whilst the brand may get awareness, the franchisee may not get the direct benefits of this campaign.
They may also not have sufficient margins to dedicate additional investment into local advertisements if they had not planned for it.
To avoid a fight, it is important that the franchisor takes the lead and clearly explain the use of the nationwide fund and advise the franchisee to set aside some funds for their local ads. It is also important to give guidelines and ideas on promotional ideas that have worked for the brand so as to shorten the Franchisee’s learning curve. This way, the franchisor is able to plan its nationwide campaigns whilst still contributing to the franchisee’s ability to market at a local level.
4. Promotional Cost Conflicts
Another common cause is the use of buy-one-get-one-free discounts, which is common in retail businesses. Done right, a buy-one-get-one-free discount will bring more customers to a retail outlet, boosting sales. In principle, it should benefit both parties.
For the franchisor, an increase in revenue in the outlet is directly linked to a successful promotion which leads to higher royalties.
But for the franchisee, the discounting strategy might not boost the franchisee’s profits. If it does not boost the size of the average customer purchase, the franchisee’s Cost of goods and cost of operations could be raised so that any benefits of this promotional activity are eroded. This means that whilst the revenues grow, their profits could be lower than without running the promotional activity.
The conflict between the franchisor and franchisee is rooted in the economics of franchising. The franchisor wants the couponing strategy because it will make more money, while the franchisee may not want it because it may not benefit them financially. A clear presentation of the pricing strategy’s pros and cons can help both parties arrive at an amenable decision.
5. Other areas of possible concern
Extended Operating Hours
Sometimes, a franchisor may design initiatives that are intended to help a franchisee increase its revenue. For example, it is logical that if a store is able to stay open for longer hours, it would stand to make more revenue.
To the franchisor, the strategy makes perfect sense. If franchisees sell more at longer hours their revenue would increase. However, extending opening hours would mean an additional burden on manpower and also an additional burden on wages for the franchisees.
The difference between maximizing sales and profits also leads causes franchisors and franchisees to fight about adding locations. Even when an additional location cannibalizes sales at an existing outlet, franchisors are better off because the new establishment boosts system-wide sales. But it does necessarily benefit the initial franchisee, who might have the same cost of operations, but lower sales.
In order to navigate this tenuous franchisor-franchisee relationship, it is important that the franchisor develops the ability to wear different hats. Looking at the growth only from one view can lead to a very imbalanced relationship between both parties. It is important that the franchisor sets up a balanced franchise management process.
Communication is Key
Just like a husband-wife quarrel, if franchisors and franchisees enlighten each other, work thru the problem together, and move towards the same direction, the problem will be solved and can make them stronger.
There are many areas that franchisors need to take note of in order to anticipate potential pitfalls. A franchise is not simply about a franchisor sharing their know-how and collecting as many fees, nor is it about a franchisee getting everything from the franchisor paying as little as possible. Both scenarios cannot work. Rather, it is about striking a balance between the two so that the natural benefits of a well-designed system can shine.