Be your own boss? Maybe

Franchising, once seen as the easy way to be an entrepreneur, can be a risky business. By Roger Trapp

Franchising is often presented as a low-risk way for would-be entrepreneurs to set up in business. But, according to a new study of the business concept that has taken the world by storm in recent years, it is not always as successful as is generally supposed.

This is because, suggests the author Stuart Price, franchising goes against most of what is currently preached by management gurus. At a time when they are urging companies to be flexible, adaptable and responsive, franchising "places excessive stress on uniformity and conformity," he says, in explanation of his book's title, The Franchise Paradox.

Mr Price, a consultant specialising in the food and drink industries at KPMG Management Consulting, adds: "How can franchisers enforce standardisation, rather than encourage innovation, and also simultaneously expect fewer failures than independent businesses?

"No one would expect that a company which was prevented from using new ideas and entrepreneurial insight, would survive for long."

Instead of suppressing franchisees' scope for innovation, he urges companies to harness it. "As the pace of product alterations and change continues to accelerate, the capacity to manage successful innovation becomes a critical source of competitive advantage, sustainability and brand value," he says.

"In this environment, the importance of replication and standardisation would appear to offer only short-term benefits to brand value. In order to compete effectively and facilitate survival, the franchiser must harness franchisees' innovative capability in a positive way, by, for example, employing methods similar to strategic alliance."

Pointing out that franchisees tend to be entrepreneurial in their outlook, he says that their daily contact with customers puts them in a position to provide valuable feedback on their demands and needs and come up with ideas for satisfying them. Indeed, the book explains how such staples as McDonald's "Egg McMuffin" and "Big Mac" and the "value meals" offered by Kentucky Fried Chicken and Burger King were developed with the assistance of franchisees.

In addition to putting across this main message, Mr Price looks beyond the myths of an approach that has permeated virtually every service industry, including print shops, fast-food outlets, milk delivery and petrol station shops, to argue that all is not rosy.

While it is often claimed by the industry that franchises are financially five times safer than other small businesses, he points out that success rates vary from business to business - because of such traditional reasons as culture and decision-making.

According to his study of 1,600 UK retail franchises, 70 per cent of franchisers withdraw from the market within the first 10 years of being in business, while 50 per cent leave within the first five years. Though the reasons for withdrawal range from lack of sufficient capital to a perception that the business is not sustainable, the withdrawal rate has implications for those considering becoming franchisees, says Mr Price.

While he has high regard for some businesses, such as the fast-food operations McDonald's, KFC and Burger King, the print shop Kall-Kwik and the drain clearer Dyno-Rod, he stresses that the concept is not universally successful, and that investors - who can be required to put up sums ranging from pounds 50,000 to pounds 1m - need to be wary.

Moreover, those considering such a move need to realise that though advertisements for franchises often play on the idea of "becoming your own boss", becoming a franchisee is some way from genuine self-employment. While it fits the legal definition, the franchise concept's requirement of strict adherence to a variety of rules and regulations means that it is not self-employment "in the true sense", he adds.

Though he says that his research does not always make him friends in the franchise industry, Mr Price stresses that he is a "great fan" of the concept at its best, when "the hype about the franchising industry is absolutely true". But he warns that using specific cases to promote a whole industry is "misleading".

`The Franchise Paradox - New Directions, Different Strategies' (Cassell, pounds 65).