Is a franchise a good investment?
Prospective franchisees often ask this question. To answer it correctly requires additional information. Not only would we need to know the quality of the franchise and the state of the market it serves but also the questioner’s investment goals. This article explains.
Let’s start at the beginning
Modern-day franchising took off during the 1950s. At that time, the majority of companies wishing to expand their footprint offered franchises for two reasons. Firstly, their franchisees’ investments helped them to roll out their brands quicker than would otherwise have been possible. Secondly, they believed that franchisees, having made a sizeable investment, would generate better business results than employed managers.
They were right on both counts. However, franchising is not a static concept. As franchisors grew into multi-national corporations, their needs changed. Because many listed on their local stock exchanges to raise capital, their rate of growth was no longer dependent on franchisee funding. If anything, the need to deal with typical single unit franchisees tended to slow down their expansion plans.
A case in point
McDonald’s development over time provides a classic example. Ray Kroc’s first franchisee was a syndicate formed by a group of wealthy friends. They invested in a McDonald’s restaurant in the hope of making a quick buck but wanted no hands-on involvement with the business. They relied on salaried managers to operate it and were sorely disappointed with their investment.
Ray Kroc quickly recognised what the problem was. His next franchisee was a young man who was prepared to live in a building adjoining the restaurant. With the support of his wife, he managed the business hands-on 24/7 and produced sterling results.
Having found his blueprint for success, Ray Kroc insisted on owner-operators for several years. But in business as in life, change is the only constant. On the one hand, raising capital through franchising became less important for McDonald’s. On the other hand, some of the early franchisees were beginning to became restless. Their businesses were operating like clockwork and they had accumulated substantial financial reserves.
Human nature being what it is, they were looking for new challenges. Ray Kroc understood this and offered them the opportunity to invest in additional restaurants.
Because McDonald’s business is highly systemised and multi-unit franchisees were offered sites in close geographic proximity to each other, one franchisee could easily control several units. Subsequently, developments in IT made it possible for one franchisee to manage large territories, even entire countries.
But what about the role of the “owner behind the counter?” Surely, no IT system can replace that? True, but there is a way around that. Astute multi-unit operators offer store managers meaningful financial incentives linked to store performance. A promising career path within the franchisee’s growing organisation adds extra appeal.
Learnings
The McDonald’s story provides a definite answer to the question, “Is a franchise a good investment?”
- An individual with limited capital can generate above-average returns by investing in a single unit and exercising operational control.
- An investor with limited capital who does not want any hands-on involvement with the business would be better advised to invest his money on the stock exchange.
- An investor with access to significant financial resources can generate excellent returns by investing into multiple units of a well-selected franchise concept. Satisfactory business performance can be secured by offering managers generous incentives directly linked to performance.
The OBC Better Butchery opportunity
Tony da Fonseca, you have franchisees in all three categories, single unit operators, multi-unit operators and investors. How does this work for you?
Expressed in numbers, the bulk of our franchisees operate single units. Those who are proud to represent our brand in their territories and follow the system to the letter are doing very well.
Some stay single unit operators by choice and that’s fine with us. Those who want to spread their wings and have demonstrated that they have what it takes to move into multi-unit ownership have the opportunity to do so. We like working with people we already know and the number of our multi-unit operators is growing steadily.
Lastly, our expansion into Swaziland was done under an area development agreement. A private investment group put up the funding. They have a dedicated infrastructure for the development and operation of consumer goods stores and their store managers are incentivised to strive for optimal profitability.
The area developers’ first store in Swaziland is trading above budget, a second store is about to open its doors shortly and they have plans to set up seven or eight more stores in Swaziland within the next three years.
Indications are that the same investor will take our brand into Namibia as well.
From what you are saying, it sounds as if an OBC Franchise is an excellent investment?
I can confirm that without hesitation, provided of course that the investor abides by the rules of the game. One must also be careful to define the term “investor” correctly. Although a single-unit franchisee makes a sizeable investment in the OBC brand, we encourage them to take an active role in the management of the business.
We discourage anyone from investing in one of our stores then sit back and wait for the profits to roll in. Unless the investor has a committed business partner who is willing and able to operate the store hands-on, it’s unlikely to happen.
In our experience, for absentee investors to generate satisfactory returns, they must create an extensive infrastructure staffed by appropriately incentivised managers. Quite clearly, to set up this kind of infrastructure would not be viable for a single-unit franchise.
Tony da Fonseca, talking to you has been enlightening as always. Thank you very much for sharing your insights with our readers.
ABOUT THE OBC GROUP
The OBC Group operates over 60 state-of-the-art butcheries in South Africa. Earlier this year, the brand also moved into Swaziland. In addition to a wide range of meat, chicken, milk and cheese products the stores also offer a wide range of daily household necessities including a growing range of OBC-branded dry goods.
The company is a member of the Franchise Association of South Africa (FASA) since 2009. Its managing director, Tony da Fonseca, serves on FASA’s Executive Committee for many years. He was FASA’s chairperson for the period 2017/19 and is currently its immediate past chair.
Under Tony’s astute leadership, the OBC Group was named FASA Franchisor of the Year twice in a row and is the winner of several other prestigious business awards.
The OBC Group’s clearly defined target market, LSM 3 to 6, is far from saturated and expansion continues at a brisk pace. Click here should you wish to find out more about this exciting franchise opportunity. Alternatively, you may contact Robbie Capazorio, the group’s business development manager, by email: robbie@obcgroup.co.za.