If you run a franchise network long enough, you learn that the problem sitting in front of you is rarely the only problem you have.
A franchisee tells you margins are under pressure. Dig a little deeper and you may find they have stopped replacing staff, training has slipped and service standards are beginning to suffer. Sales start softening, which puts further pressure on the numbers. The franchisee becomes frustrated with head office, head office becomes frustrated with the franchisee and suddenly a cost problem has become a people problem, a relationship problem and a brand problem. I see versions of this far too often.
The 2023 survey undertaken by FASA (Franchise Association of South Africa) shows just how concentrated the pressure has become. Six in ten franchisors identified costs as a major challenge, while 45% pointed to franchisee-related issues and 42% to staff. Those are not three unrelated problems sitting in separate boxes. They are often the same problem moving through the business in different forms.
Franchisors get into trouble when they respond to whichever problem happens to be shouting the loudest. If costs are hurting, they look for savings. If a franchisee is struggling, they send in support. If staff turnover is high, they organise more training. All three responses may be necessary, but they only deal with what is visible. Unless the franchisor understands whether the real cause is weak unit economics, poor franchisee capability, management problems or pressure elsewhere in the system, the same issue is likely to surface again in another form. That is expensive in any business and in franchising, it can spread like wildfire.
You cannot cost-cut your way out of a weak model
Costs came through as the biggest challenge in the FASA research at 60%. Beneath that figure sit the realities franchisors and franchisees deal with every day: inflation, expensive rentals, a slow economy, escalating costs and lower margins.
Most franchisors know their costs have gone up. What concerns me is how many still look at the economics of their franchise model as though the assumptions made three, five or ten years ago remain valid when realistically they may not.
If rent, labour, electricity, stock, finance and logistics have all changed materially, then the economics of the outlet have changed too. That needs more than a yearly price increase and another instruction to franchisees to watch expenses.
Franchisors should know exactly where margin is being lost across the network. They should know which outlets are under pressure and why. They should be looking at supplier arrangements, product mix, labour models, rental exposure and whether some formats have simply become too expensive to operate in certain locations.
The FASA report points to smaller-footprint models and more flexible investment options as possible ways of containing overhead and labour costs. That kind of thinking is important because sometimes the answer is not asking a franchisee to squeeze another percentage point out of an already stretched business. Sometimes the model itself needs attention.
I would also caution franchisors against using expansion to disguise weak unit economics. Opening ten new outlets does not make five struggling ones healthier. Growth looks impressive until the support burden, closures or franchisee disputes arrive later. A franchise network is only as commercially sound as the businesses operating inside it.
Be far more selective about who you allow into the system
The second pressure point is franchisees themselves, cited by 45% of respondents. The FASA research goes further, identifying difficulties around finding franchisees with sufficient capital and experience, along with franchisees failing to operate to standard.
Some franchisee problems can be solved through better support, others were created during recruitment as franchisors often underestimate how costly the wrong franchisee can become.
There is a temptation, particularly when growth targets are involved, to focus heavily on whether a prospective franchisee can afford the investment. Capital matters, of course, but having the money to buy a franchise and having the ability to run one successfully are two completely different things.
You are looking for someone who can manage people, read the numbers, follow a proven system, make sound decisions under pressure and accept accountability when things go wrong. They also need the judgement to know when to ask for help.
The extremes are equally dangerous. You do not want the franchisee who believes every rule is optional and constantly wants to reinvent the business. You also do not want the person who expects head office to run the outlet for them.
Franchisors need to become comfortable with saying no to prospective franchisees who are wrong for the network, even when the cheque is ready. Once they are in the system, support cannot become a substitute for accountability either. A healthy franchisor-franchisee relationship should be strong enough to handle difficult conversations early, whether those involve standards, profitability, staffing, debt or performance. If head office only intervenes when the franchisee is already in serious financial trouble, good options have usually disappeared.
Stop treating people problems as somebody else’s problem
Staff came through at 42% in the survey, with franchisors raising staff training, turnover and retention, difficulty attracting qualified employees and retrenchments.
This is one area where I believe franchisors need to take a broader view of their responsibility. The franchisee may employ the staff, but the customer experiences the brand. If someone receives poor service, they do not walk away thinking, “That individual franchisee clearly has a recruitment problem.” They think the brand gave them poor service. That means recruitment, training and management capability cannot be treated as an outlet-level issue that head office only hears about when something goes badly wrong.
Franchisors should be giving franchisees practical tools for recruiting and onboarding people, clear job profiles and proper management training. They should also be paying attention to patterns across the network.
If one outlet has exceptionally high staff turnover, find out why. If several franchisees are struggling to recruit for the same position, investigate what has changed. If managers keep leaving, understand whether the problem is remuneration, workload, the franchisee’s management style or something in the operating model. These are business indicators that can expose wider problems in the franchise system.
One of the most useful things a franchisor can do is become better at spotting trouble before it appears in the profit-and-loss statement. A franchisee who suddenly stops engaging with head office should get your attention. So should deferred maintenance, repeated discounting, unusually aggressive cost-cutting, declining standards or persistent staff churn. Any one of these may be manageable, but several appearing together should tell you something is happening beneath the surface. This is where good franchisors earn their keep.
Franchise networks are built on replication, but running one successfully requires far more than making sure everybody follows the same manual. You need to understand how financial pressure changes franchisee behaviour, how franchisee behaviour affects staff and standards, and how those changes eventually reach the customer. Costs will remain a challenge. Some franchisees will struggle. Good people will leave. You cannot remove those pressures from franchising, but you can stop them from becoming a chain reaction that weakens the network. The franchisors who do that well are usually the ones who see the problem while it is still small enough to fix.
Larry Hodes is CEO of Grow Franchising, a division of Grow Business Coaching, and a board member of the Franchise Association of South Africa. He is also the founder and working owner of Arbour restaurant in Johannesburg.