Operating a business in a competitive market place can be challenging at the best of economic times. Throw into the mix having to cope with extreme weather events spread over large geographic areas affecting accessibility to premises or services by customers and suppliers, repair bills for damage or destruction, continued payment of the usual business expenses, as well as mirroring issues for the business operators on a personal level and it is easy to see that being subject to a ‘catastrophic natural disaster’ can be overwhelming and devastating for those affected.
Support has been found for those affected, on a scale that has appeared to be largely unprecedented in most living memories. The franchise model, so dramatically tested recently, has largely proven itself to be the emergency services ‘tinnie’ for its members, evacuating the affected to the safety of an evacuation centre (the franchise network’s procedures, support and business acumen) permitting survival and, although badly affected, managing to keep the business dream alive, albeit for some in dramatically changed circumstances.
How have franchise systems responded, what can be expected going forward and issues that are likely to need to be addressed are now becoming clearer.
Franchise systems response
Characteristics and perceived benefits of franchising
According to the Franchising Code of Conduct a ‘franchise’ can be identified and is characterised largely by four factors:
- an agreement in written, oral form or implied; and
- in which one person grants the right to carry on a business of offering, supplying or distributing goods or services under a system or marketing plan substantially designed, controlled or suggested by another; and
- under which the business will become substantially or materially associated with a trade mark, advertising or commercial symbol owned or specified by the granting person; and
- under which, before starting one person pays or agrees to pay an amount such as: an initial capital investment fee, a payment for goods and services, a fee based on a percentage of gross or net income or a training or training school fee.
Anecdotally franchises are seen to be one of the best ways to become a small business owner, removing some of the trepidation about going into business for the first time.
Franchises generally are perceived to have:
- well known pre-existing brands, or concepts that are seeking to become well known marketplace brands;
- pre-existing and tested systems of operation that are continually refined and developed to meet changing market environments;
- economies of scale to assist in negotiating prices for securing supply of component products, reducing distribution costs across large geographic areas and technology acquisition to reduce costs; and
- market power to assist in securing and negotiating with owners of sites, employing mass media for marketing.
Disaster response examples
In response to the recent catastrophic natural disasters in Queensland, New South Wales, Victoria and now affecting Western Australia, franchise systems, often outside the terms of legal obligations in franchise agreements or stipulated by legislation, have been life preserver needed by what would be otherwise unsupported small businesses. Example responses include:
- Disaster planning in one franchise system saw head office relocate from a Brisbane CBD location to a flood free and uninterrupted power supplied location to maintain its communication links with its franchisees and assist protection and recovery efforts during and after the disaster. Keeping communication and server lines open and active provided an emergency response centre for the franchise system.
- Franchisees called neighbouring unaffected franchisees, or put appeals out on franchise intranet or social media sites to other franchisees and head office staff known to them from franchise system annual training or meetings, seeking and receiving extra physical assistance, more product supply or core ingredient supply, storage space or joint occupancy of premises for short periods of time, which gratifyingly was provided;
- Franchisors who had negotiated group insurance policies for property damage, business interruption or other policies are reviewing and seeking advice on terms, organising in some instances the claims submission and response process to cover damage and destruction caused by these natural disasters.
- Moratoriums for royalty or marketing payments, resetting of business budget targets or growth expectations are being actively considered on a case by case basis as damage assessments are being completed, and in some cases payments waived, reduced or otherwise suspended until a future time.
- Financiers are being approached by franchisees and franchisors to clarify to what extent relief from existing loan obligations may be acquired for those most badly affected and the extent of such terms.
- Systems that hold leases of franchise sites are discussing the time required to render a site capable of being occupied again, the repairs required and the terms of any rent abatement for sites suffering damage and destruction with landlords, or determining if termination of the lease is available. Other franchisors not holding the lease but having step in rights are considering closely the landlord’s responses to franchisees predicaments if premises are not accessible.
- Franchisors not directly affected have implemented donation policies to fund disaster relief from sale of products, dedication of profits for trading, gift voucher donation for services or special fund raising days.
- Suppliers to the franchise sector have also contributed financially with donations, pro bono services, sheer physical exertion and longer term support and issue identification awareness building.
Expectations going forward
Despite the support of franchise communities, access to government assistance, financial relief from financiers and franchisors, the reality is franchise systems will be affected. Franchises are businesses like any other and can expect to have to deal with some or all of the following:
- franchisees financially being unable to recover and seeking to negotiate exits from system, limits of liability, or having to apply for liquidation or bankruptcy;
- reduction in new outlet growth as efforts are directed to re-establishing affected sites;
- permanent outlet closures and latent lease and make good liabilities where leases are held by franchisors;
- increased personnel and corporate costs to manage response to these catastrophic natural disasters including the rise in corporate stores numbers and reduction in franchisee numbers; or
- increase in bad debt provisioning or delayed payment of obligations.
Managing these issues will not be as challenging as the life threatening experience of the natural disasters, but will potentially threaten the viability of individual franchisees, master franchisees, franchisors and potentially the systems themselves.
Coming out of the global financial crisis and tightened access to finance, preparing for and dealing with the likely outcomes of these disasters will require clear thinking, well understood legal and financial positions and management of the fundamentals of each system.
Issues that need addressing
As the urgency of disaster response dies down, medium to long term considerations will begin to have influence on conduct and responses.
Historically the 2009 survey produced by Griffith University’s Asia Pacific Centre for Franchising Excellence found that the causes of conflict in franchises are:
- lack of support from franchisors (16%);
- compliance with the system (11%);
- issues relating to franchise fees (10%);
- communication problems (9%);
- marketing issues (9%); and
- profitability (7%).
Clearly these are all matters which have the potential to arise as systems shift from short term relief mode to longer term operations. At present communication, interaction and goodwill are in good supply, the danger will arise as normal business operations are established with differing degrees for those affected.
Being alive to the issues, putting in place appropriate mechanisms to deal with issues to avoid escalation (documenting as appropriate) and if required with the assistance of independent mediators working through and resolving issues will need to be a focus for all systems. Insolvency, property, insurance, commercial and other issues will all arise. To date the support of franchise systems has kept the dream of small business alive for those affected. Keeping it all together going forward will require good advice, an ability in some instances to think outside the box, legal compliance with flexibility to avoid damaging the brands, systems or franchise business.
Many Australian franchises from varying States and Territories are being affected, more are jumping to assist, and as a nation we have shown that we are resilient. Franchising through its inherent creation of business communities is well placed to assist with the recovery and keep the dreams of many alive.