No longer the dumb waiter
A new approach to franchises is gathering sway that treats the relationship less like a ’master and servant’ set-up and more like a marriage of equal sides. Giving franchisees more input can have its pitfalls, but brands are finding the benefits far outweigh the negatives.
Q&A with McDonald’s UK head of franchising Derek Rogers
Q How does McDonald’s manage relationships with its franchisees when it comes to its marketing messages/activity/campaigns?
A McDonald’s is founded on the belief that franchisees, suppliers and the company itself need to work together to create sustainable value throughout the entire system. In line with this belief, our franchisees are closely involved in every stage of our planning process, with representation on product development, marketing and operational committees. Every year, the company’s executive team spends time out on the road listening to franchisees and working with them to develop plans. This journey culminates in the presentation of a proposed marketing plan, which is voted on by all franchisees.
Q Is there much of an obligation for a company like McDonald’s to consult franchisees in this way?
A McDonald’s does not see franchisee consultation as an obligation, but rather a fundamental for business success. It’s part of our values and beliefs.
Q Do franchisees have the right to object
to certain group marketing messages or activity? Or are they just expected to toe the line?
A When the marketing plan has been approved by vote, it becomes the plan for our brand, so it’s important that it is executed consistently – customers do not make a distinction between different franchises of our restaurants. We work with our franchisees to understand their businesses and to enable them to deliver our shared plan.
Q Does McDonald’s provide all marketing material to franchisees as part of the franchise agreement or are franchisees required to pay a marketing fee?
A McDonald’s marketing programme is funded by a separate marketing co-operative, into which all restaurants contribute.
Case study: McDonald’s
The Big Mac has become synonymous with the McDonald’s brand, but few people know that the idea for the double beef patty burger came from a franchisee. It joined the menu in 1968 after being debuted by Jim Delligatti, one of the Golden Arches’ earliest franchisees.
McDonald’s franchisees are also credited with having come up with the Bacon and Egg McMuffin breakfast favourite, as well as the Filet-o-Fish burger. Such a history of franchisee involvement has cemented McDonald’s as a company where franchisees are crucial to the success of the business.
Even in its annual report, released on 26 February, the company acknowledges that it views itself primarily as a franchisor – 26,216 of its 32,478 restaurants worldwide are run by franchisees.
It claims to be a “credible franchisor”, that only introduces initiatives to the wider network once they have been tried and tested within the company stores. The brand states: “In our company-operated restaurants, and in collaboration with franchisees, we further develop and refine operating standards, marketing concepts and product and pricing strategies, so that only those that we believe are most beneficial are introduced system-wide.”
The company’s marketing plans are approved by franchisees in a vote. Arguably, something as major as the store refit over the past four years to give McDonald’s outlets more of a café-like ambience with fittings and colours changing to suit individual neighbourhoods, requires franchisees’ emotional support – and their financial support is a prerequisite. The success of this move in Europe and the UK contributed to an 8% increase in the company’s 2009 European profits, giving the company confidence to replicate it in its US homeland.
Case study: KFC
What went wrong
Since January 2010, fast-food chain KFC has been locked in a legal battle with its franchisees over its promotion of grilled chicken. A large proportion of its franchisees have objected to the heavy support given to this new menu option – aimed at health-conscious consumers. They feel more should be devoted to its core fried chicken products.
KFC’s US arm has gone on record to say it hopes to win the lawsuit against its franchisees, but it may have underestimated the strength of feeling against the marketing activity. The franchisees have sought a legal injunction to protect US franchisees’ rights in terms of marketing, which could have implications for all brands with large networks within the country.
Franchisees reportedly feel threatened that any say they have over further marketing activity will be stripped back through proposed changes to the company’s National Council and Advertising Co-operative, which currently consists of 13 franchisee representatives and four company executives. The franchisees’ legal complaint alleges that KFC has taken the position that it has the sole authority to make advertising and marketing decisions, which is against the charter on which the NCAC was first built.
KFC clearly believes that its new grilled chicken product warrants a large portion of its advertising budget. It has forecasted $1bn-worth of sales in the product’s first year of launch. It also aims to move its brand image away from being solely associated with fried food because of health concerns among consumers.
“The KFC experience appears to be mostly about a lack of consultation with local managers, who are rightly pre-occupied with the success of their business”
Andy Wheatley, Snowball
Despite rivals such as McDonald’s introducing a wide range of salads in their own attempts to gain the health-motivated market, KFC’s move appears to have taken franchisees by surprise. They failed to see the benefits, insisting that KFC’s signature fried chicken is still the key to the company’s long-term success.
Snowball marketing director Andy Wheatley puts the saga down to a lack of communication between the central brand and its franchisees. “The KFC experience appears to be mostly about a lack of consultation with local managers, who are rightly pre-occupied with the success of their business rather than the communication of a more healthy positioning from the masterbrand.”
He suggests that the brand should have better demonstrated the rationale for the move from the start. “Franchisees have a right to object to particular marketing activities because it’s their individual business and their bottom line. The KFC incident shouldn’t have come to that. Franchisees are major stakeholders. If they didn’t buy into the message, why did it go out?”
How the franchise system evolved
It was once clear who wore the pants in a franchise relationship: the central brand. Just 20 years ago, it was unheard of that a local franchisee would challenge the will of the almighty company. But as market sectors have become much more crowded, the nature of franchise relationships has evolved to be more open and collaborative.
Burger King EMEA vice-president of marketing David Kisilevsky explains: “Twenty years ago the market was easy to segment and our competitors easy to identify – McDonald’s, KFC, Pizza Hut. In the past few years, however, there have been a myriad of new entries to the market, such as Pret A Manger and Eat. This has brought more retail intensity to the local marketing dynamic.”
With 830 brands in the UK involved in franchising and 34,600 individual franchise businesses, according to the British Franchise Association, the model is seen by many companies as a cost-effective way to expand. While some franchisees will make up only a few outlets of a brand’s overall portfolio, others form the majority of their presence.
Whatever proportion franchisees make up of a company’s footprint, they must prove their worth to the central operation as savvy business people. Those which do this will reap the benefits, says Snowball marketing director Andy Wheatley.
“These days it is more of a 50/50 partnership,” says Wheatley. “Franchisees are now entitled to say: ‘Why should I be your franchisee? What support will you give me?’ As far as they’re concerned, they’re entering into an equal partnership with a company that requires the other half to provide a mutually acceptable and beneficial level of marketing support.”
Companies are increasingly establishing marketing councils for franchise representatives so franchisees can take part in strategic decisions, but Wheatley argues this is not as commonplace as it should be.
“More and more brands are using liaison strategies to speak to franchisees. It is not currently institutionalised but done on an ad hoc basis. More brands are setting up councils and that’s the way to do it. It’s all about showing respect, as franchisees are a critical part of a business,” he says. “In the next two to three years, the establishment of more formal councils will become more prominent.”
Top ten global franchises 2010
1 Subway – food retailing (sandwiches)
2 McDonald’s – food retailing (burgers)
3 Hampton Inn/HI & Suites – hospitality
4 Supercuts – hair salon
5 H&R Block – tax and electronic filing
6 Dunkin’ Donuts – food retailing
7 Jani-King – commercial cleaning
8 ampm Mini-Market – general retailing
9 Jan-Pro Franchising – commercial cleaning
10 Kumon Maths & Reading Centres – supplementary education
Source: Enterprise Franchise 500. The ranking is based on financial strength and stability, growth rate and size of the system; the number of years a company has been in business; the length of time it has been franchising; startup costs; litigation, percentage of terminations; and whether the company provides financing.
