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Franchising: red flags and opportunities

Homegrown and international franchises are increasingly stepping up their presence in Africa to tap into opportunities driven by the rising population and spending power. Food brands, for instance from the US, UAE, South Africa and Zimbabwe, have used local entrepreneurs to launch in a number of African economies.

A Subway outlet in Tanzania.

A Subway outlet in Tanzania.

Established brands offer entrepreneurs a well tested toolkit that helps them ensure quality, train staff and control in-store operations, as well as support in marketing. Franchising also enables entrepreneurs to largely avoid the time-consuming, costly process of building and promoting a totally new brand. However, it does not guarantee anyone an easy ride.

When considering buying a franchise, Christopher J. Bak, says entrepreneurs should make sure they have the financial capacity to meet the development requirements of the franchisor. Bak is the CEO of Liberty Eagle Holdings, an East Africa franchise holder for US brand Subway. He operates three stores in Kenya and six in Tanzania.

“The franchisors do not give you any money to set up your stores – that is your responsibility. Most franchisors want to know that you can open up a number of stores quickly, otherwise it is not worth their while to open up the market.”

Gavin Bell general manager of Kuku Foods Kenya (franchise holder of KFC in East Africa) explains it is crucial for entrepreneurs to weigh up their investment against the kind of support they will be getting from the franchisor, beyond financial. And he warns that over-leveraging is likely to lead to failure.

“If you start having to pay too much interest to the bank to be able to survive, it quickly becomes very difficult. So investment is very important,” Bell cautions.

When shopping for a brand, Bell advises entrepreneurs to study the business model of the franchise they are pursuing. “There are different business models. The McDonald’s model for instance is more based on real estate and capital gain from real estate than it is selling burgers, whereas KFC is about selling chickens.”

Value local knowledge

While brands are generally expected to be strict to ensure quality and consistency, fast food franchise boss Azam Samanani warns that if a brand does not value local knowledge and expertise, it is not worth investing in. Samanani is the managing director of Hoggers Limited, the Kenyan franchise holder for South African brands Debonairs Pizza, Steers and Ocean Basket.

“I am not interested in a brand that doesn’t believe that the needs of the Kenyan and East African customer are unique, and require local knowledge and expertise. If necessary, we can build our own brands, but we are fortunate to work with international companies, like Famous Brands and Ocean Basket, who bring a tremendous amount to the table while also recognising the importance of our local market expertise,” he continued.

“There is no one size fits all for our market, so the first thing we look for is how flexible and open the brand is to making things work for everyone.”

Bell illustrates the importance of local knowledge, narrating how in KFC local teams have helped introduce to the menu new products like ugali, the staple food in Kenya which is now sold in KFC outlets in Lesotho, Zambia and Malawi.

“It makes a difference because people can resonate with the brand. They take ownership of it; it’s our KFC and it sells ugali.”

Don’t rely on expats

Samanani explains that when selecting brands Hoggers also focuses on brands which have the broadest appeal to all segments of the Kenyan market, rather than only the expatriate market.

One example of how this served the company well is with the recent security troubles in Kenya where expatriates have changed where they eat, and even left the country.

“As a policy we don’t build businesses on expats. What happens if tomorrow an embassy decides they are going to pull out its people? Our investment in Ocean Basket is substantial and it doesn’t begin to pay off for years. I am not going to build that business model on a potentially volatile segment.

“Where is the population and economic growth? It’s not in expat families who come in rotations. It’s in Kenyan families who are working hard, who are increasing their spending power and are increasing their appetite for luxury goods.”

Samanani adds that brands which are “relatively obscure” and not recognisable among Kenyans are of little value to his company.

“For us the maths make sense to bring an established brand when it is well known, does something in a unique way, fulfills an existing market opportunity, and is sensitive to the unique needs of our market.”

Emerging market background important

Bell warns entrepreneurs in Africa to also be careful when dealing with brands that do not have a history of doing business in emerging economies.

“You have to make sure that whatever franchise you are bringing in is applicable to the market, is relevant to the market, and the price point is going to be accepted in the market. To go and franchise a Michelin star restaurant from London or California, and trying to make that work here, you would be at the wrong extreme. It most likely won’t work.”

He adds that entrepreneurs should look for brands that offer support, but stay away from those that may be “over mothering and stifle you in conducting your business”.

After the deal is sealed

Samanani advises entrepreneurs to make sure the franchisor is aligned with their interests. Besides paying royalties, a franchisee may also be required to buy certain raw materials from the franchisor. This earns the franchisor additional income and also gives them control over quality.

In addition, Samanani says it is important to ensure that, as the relationship evolves, the franchisee is allowed to source certain materials locally, provided they can demonstrate that quality and consistency are always maintained.

“With our Steers and Debonairs Pizza business, for example, initially we were bringing in finished sauces [from South Africa] which proved to be quite expensive. However, today, under careful supervision and quality control, we now produce all of our sauces in our own facility, importing only the secret spice ingredients,” says Samanani.

“By enabling this local production, the franchisor may make less money from selling us finished goods, but it enables us to bring our prices down, open more restaurants and make more profits, which in turn means more royalties for them. A brand that isn’t ready to have that business conversation is a problem for us. You should only deal with someone who understands that sometimes you have to give here to get there.”

He notes that the franchisee and franchisor need to work as partners and seek win-win outcomes.

“You can be running a restaurant that is actually losing money, while still being responsible for paying royalties. In such a case your interests are not aligned with the franchisor,” he warns.

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