The future of franchising in Asia

As franchising becomes more prevalent across Asia, what are some of the things franchisees and franchisors should look out for? Muneerah Bee finds out.

Economies all over the world have benefited from the franchise model and it is not a secret that franchising is a global success story that offers products and services in more than 300 business categories, including retail products, F&B, lodging, health and educational services, home services as well as IT services.

In 2015, there were 781,991 US franchise establishments, according to franchise directory Franchise Direct, compared to 770,835 in 2007.

Here in Asia, there have been more international brands entering Asia as well as Asian brands becoming more developed to become franchisors. Singaporean brands are also growing their brand regionally as a natural extension of their growth plans.

Overcoming limitations

However, several obstacles have often been reported during the franchising journey, especially if the focus on developing a holistic franchise system is incomplete.

As franchising is about replicating key success factors in a business to enhance the speed of expansion as well as to grow the brand footprint internationally, a key challenge is to ensure that what is being replicated is based out of sound business principles so that franchisees can benefit from the know-how, management experience, economies of scale and brand goodwill.

Hsien Naidu, director of Astreem Consulting, says: “Basic foundational key business drivers such as standard operational procedures like supply chain management, ongoing training, quality upkeep, customer service standards, franchisee management and ongoing brand renewal need to be in place and constantly updated so that the franchisee ecosystem can benefit from the franchise system as a whole.”

Close attention must also be paid to the franchisor-franchisee relationship management. Constant communication and expectation management are key to a successful partnership. “This means getting it right from the start. Franchisors do underestimate the complexity of getting franchisees on board properly at the start and this can lead to issues in expectation management later on in the relationship,” Naidu explains.

There are also external economic conditions to note. Franchisees in advanced economies such as Singapore, Australia and Hong Kong face different issues from those in developing ones such as Indonesia, the Philippines and Thailand.

For example, in a country like Singapore, key areas of investment, besides the set-up fees, are rental and labour. Naidu believes these two factors can easily add to at least 42% of overall turnover and this, in turn, puts pressure on the overall key metrics of the business. “Franchisees need to take in other considerations such as cost of goods sold (COGS), operational and franchise-related costs, and they need to be very vigilant about the establishment’s location and traffic flow.”

Patrick Mauser, founder and managing director of Asian Franchise Academy, notes that within Asia, there is still a misunderstanding about how franchise models actually work, and another hurdle to overcome is the franchise laws in some countries. “Even within ASEAN countries, different laws apply — with Singapore being the easiest to deal with and Malaysia one of the most difficult.”

Beating the competition

Given Asia’s diversity, there is no “one-size-fits-all” formula for franchise brands. Constant innovation, with clearly identifiable unique selling points, is crucial to stay ahead. “Franchisors need to learn to be more flexible with the franchise offering and understand that what works in one country may not work in another,” Mauser explains.

It is also advisable to calculate franchise fees correctly and they should not be seen as a major profit centre. He adds: “Very often, great brands out-price themselves out of the marketplace. Providing on-the-ground support to franchisees is critical and yet very often overlooked. It is fair to say that the main reasons for franchisee complaints are due to lack of support by the franchisor.”

To establish the brand in the territory, franchisors and franchisees should work together to build the brand as a whole. Naidu elaborates: “Most franchisors encourage franchisees to do their own ‘local’ mini marketing activities; treat the franchise business as their own, be active in thinking of activities and promotions that can help their business — and seek the franchisor’s support to make it more cost-effective and leverage their marketing expertise.”

It is also beneficial to constantly seek avenues to increase efficiency and leverage the franchise network. “Franchisors can negotiate better COGS and work to pass that down to their franchisees. After all, if the franchisees make money and know that their franchisor is constantly fighting for their well-being, they are more likely to support the franchise,” she adds.

Moreover, franchisors should be continually focused on innovating, building and managing the brand across the franchise system. Besides focusing on the everyday marketing and promotions of the brand, they also need to ensure that the management is looking to improve the overall management of the franchise.

Leveraging technology

To place both the franchisor and franchisee in the driver’s seat of their respective businesses and increase the efficiency of the overall franchise system, Naidu advises wrapping technology around the business: “Having a seamless dashboard that allows the franchisor to see how their franchisees are performing from information gleaned from the point of sale (POS), information about training from the learning management system (LMS), exchanging of confidential information on the knowledge management system (KMS), inventory management, and franchisee recruitment (lead generation and management) will allow the franchisor to manage the franchise system at one glance and zoom in to the areas that require attention.”

For the franchisee, the dashboard will allow them to access important information about their franchise, allow them to benchmark across the franchise system and manage their single business unit more effectively from their customised dashboard. “This also gives them the assurance that they are constantly connected with the franchisors, through regular updates and communication via the franchise management system,” Naidu explains.

While technology plays a vital role, especially in improving efficiency and workflow and creating brand and product consistency, it can never replace frequent and direct communication with franchisees. Mauser emphasises: “Keeping franchisees in the loop of any new development is key. Franchisees must be seen as the brand ambassadors and there is no substitute for frequent franchisee visits.

“Back to basics is called for.”

Room to grow

Naidu is confident that Asia will continue to welcome new franchise brands and it is good to keep encouraging the cross-pollination of brand diversity across the region. However, the key area of growth, especially in the developing countries, will prove to be a platform where a lot of middle-income individuals will start to fulfil their entrepreneurial dreams.

“Banks in the developing countries look upon franchising as a stable mode of growth and are often willing to fund these investments for the potential franchisees,” she shares.

Mauser also shares a positive outlook for franchising in Asia: “We see a bright future for Asian franchise brands. This is already evident in many malls where Asian brands outperform western brands.

“Asian retail and hospitality brands are innovative and creative. They have some amazing interior store designs and are not driven by initial franchise fees. With rock-solid business expansion strategies, a flexible approach, realistic franchise fees, we see no reason at all why Asian brands will not be successful globally. We believe that there are immense opportunities for Asian brands throughout the region and beyond.”