SPRING 2017 | PM magazine
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COST NAVIGATION BY A FRANCHISEE Joy Dukes, FMP, MBA Owner, Subway Restaurant
(LEARNING TO SWIM AND NOT SINK)
A franchise is defined as a right to sell a company’s products or services in a particular area using the company’s name. This article highlights the processes involved in setting up a franchise and how to manage the costs involved. Q1. How did you set up your franchise? At the initiation stage I created a franchisee typology which started with the process of creating a feasibility study for a business idea to answer questions such as, “What location would this kind of business work in? What is my customer base? Is there a need for the product or service you are bringing into the community?” I also analyzed the logistics, procurement, consumer relations, and financial planning for my operation. I was fortunate at that time, because several factors worked in my favor. I was at Morgan State University (MSU) where I opened my first franchise. I knew I had a great location, customer base and a dedicated audience. Those factors helped me obtain a capital (loan) that was needed to start the business. The beginning of my journey started with pre-work that included developing developing a business justification process to determine what type of business would match my desire to be an entrepreneur. In some respects, if you think of entrepreneurship, we often think of entrepreneurship as a person or an individual that comes up with something unique that fills a gap/demand and provides value to their community or consumer. For me, starting a business and having that entrepreneurial spirit, meant that I had to consider the fact that people, especially in the business world, often do not see franchising as though they are creating something new. As a part of my journey, it was important to maintain this entrepreneurial spirit even in the midst of doing something that was given to me. This meant accepting the terms of the franchisee structure that involved a brand, but still having an opportunity to exercise creativity and innovation to create a unique brand for my shop. I looked at what type of business owner I wanted to be, and I knew that I would be involved in the business as a business owner/operator. I understood that the cost of entry was not enormous in entering into a franchise model. The startup capital needed
would be something that was achievable and I could financially do this with my own resources and current credit positioning at that time, particularly in terms of getting a loan or financing by an external source. I wanted to start a business where the startup cost was low and I knew that the profit margin would be small. In understanding the cost dynamics, I wanted to build the business to be profitable while having the liberty to monitor and control it in some respects. The value chain had been worked out for me as a franchisee because factors such as logistics and procurement are already determined via the brand. Q2. What were the major challenges at the inception stage? Some of the major challenges I encountered in the startup phase or initiating stage included the buildout, which involved getting the physical facility constructed. One thing that Subway does for the franchise is the consolidated order. This includes placing one order which is comprised of all the resources you need for your store, that included construction materials, wallpapering, lighting, the sandwich unit, ovens, etc. All these items come in one pallet or crate of materials and is used for facility development at an estimated cost of $65,000. My first experience was challenging because my order was incorrect in the initial phase of construction. It was overwhelming because everything arrived at once. The coordination and logistics of getting the right material in the right place at the right time, and aligning it with the schedule of the general contractor posed a challenge. Once we had the facility completed structurally, another challenge we encountered was the process of getting the required licenses to start operating. There was little sensitivity to the cost of time an entrepreneur can lose by waiting to get all the required licenses from the government. This
also impacts the cost baseline because waiting to obtain the license impacts your ability to sell, which hinders loan repayment because revenue is not being generated during while you are not operational. Additional obstacles included setting up the human resources (HR) management system. Subway does not provide this function to the franchisee, they only provide the necessary tools to facilitate this process. Q3. What impact did some of the challenges have? Due to the standard purchasing size of materials and equipment provided to a franchise, there were cost impacts at the execution stage of the buildout for the structural facility. The estimated budget for the buildout of the structural facility was estimated at $90,000. The Subway franchise, requires purchase of their standard format regardless of the space (square footage) that was purchased even if the floor area left to be covered is small. As an example, franchisees must buy the whole pack of tiles which has high-cost implications to the budget and eventually leftover tiles are wasted. For my organization, this proved to be an overrun of about 2%, which is an accepted cost risk in the franchise world. Additionally, the inconsistency in the delivery of material for contractors delayed the startup phase. This impacted the scheduled completion date by a week and two days with a cost implication of having to pay back a business loan. This reduced the cash flow and delayed the business opening. The good thing is that I had budgeted for this