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136
2014-11-06T22:37:36+11:00
TRENDS
What is the greatest danger to the growth of the franchise sector? ANDREW TERRY Professor of Business Regulation, The University of Sydney Business School
R
ecent well publicised reports of the disappointing performance of McDonald’s over the last 12 months (a marked fall in US and global same-store sales and profits down 30 percent) do not signal the end of franchising. Alan Bennett expressed it this way – although not in the franchising context: “I saw someone peeing in Jermyn Street the other day. I thought, is this the end of civilisation as we know it? Or is it simply someone peeing in Jermyn Street?” Given that McDonald’s woes are attributed to more agile competitors, perhaps better attuned to changing consumer demands and better placed to respond to them, it would seem to be the McDonald’s model rather than the franchise model itself which is under pressure. Franchising fortunately does not face any dangers in the Herman Wouk “run around in circles, scream and shout” sense. Griffith University’s Franchising Australia 2014 Survey indeed records the very healthy state of the Australian franchising sector which is in a better shape than two years ago despite the economy operating at below full capacity over this period. Franchising is without any shadow of doubt a significant, proven, effective and efficient business expansion strategy which is practised in Australia by over 1100 franchises systems through almost 80,000 outlets for the benefit of franchisors, franchisees and consumers as well as the economy more generally. Over its short life franchising has seen off a number of real and potential dangers, including bad practices, bad press, under-regulation, over-regulation, lack of understanding, awareness and education, and has emerged as a strong and viable business model. There is nevertheless a more subtle danger, although that is too strong a word, which I believe confronts the franchise sector. The Chinese word for crisis is a combination of the characters for danger and opportunity, and it is the opportunity end of the equation that interests me. And no doubt McDonald’s CEO Don Thompson. Franchising is a cookie cutter model. The McDonald’s experience simply reinforces that the cookie cutter must be constantly re-assessed and tweaked to accommodate the dreams and aspirations of a changing consumer demographic. The proposition that all businesses, nonfranchised as well as franchised, need to provide what their customers want is of course not rocket science. Changing direction for a franchise system, especially a system of the sheer weight and size of McDonald’s, is nevertheless not without complications. Thomson has already outlined fundamental changes to the business model to better accommodate the personalised and localised experience its customers are seeking, a demand which has been more effectively exploited by newer competitors. A recent article in the Financial Times (Neil Munshi, Eating their lunch, 25 October 2014) asks “Can McDonald’s reinvent itself
by abandoning a 60 year old formula?” It is perhaps ironic that standardisation and uniformity, the basis on which franchising has been built, provide a real challenge to its ongoing march. Gen X and Gen Y, the increasingly significant market segments, are demanding personalised experience, both as consumers and as entrepreneurs. The McDonald’s experience highlights the demands of today’s Gen X and Gen Y consumers and the difficulties of balancing standardisation with customisation and localisation. Less well documented is the challenge that today’s Gen X and Gen Y entrepreneurs pose for franchisee recruitment: the demand for much greater autonomy and freedom and the opportunity to express their individuality within the confines of the franchise system.
The McDonald’s experience highlights the demands of today’s Gen X and Gen Y consumers and the difficulties of balancing standardisation with customisation and localisation
The short history of franchising has been characterised by innovation. Its capacity to reinvent itself to accommodate changing circumstances and market conditions is a major factor in its increasing influence. The recognition by an icon such as McDonald’s that it needs to redevelop its model is simply an example of franchising’s ongoing development. Changing demographics provide exciting opportunities for those systems able to embrace them. The manner in which they work through the challenge of balancing standardisation with customisation and localisation will be massively interesting.
NOV/DEC 2014 | 136 | WWW.FRANCHISEBUSINESS.COM.AU