| MAIN FEATURE >
Franchising: businesses branch out
Written by: Jason Hovet
Photo by: Vojtěch Vlk
While global brands are often looked
upon as faceless corporations, a lot of them are in fact run by local
entrepreneurs. In the Czech Republic, franchising has boomed in recent
years, helping smaller businesspeople to excel. It's time to put
a face to a name.
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Petr Myška: McDonald's
Bleeding ketchup
In the burger business, McDonald's founder
Ray Kroc used to say, someone must have "ketchup
in their veins" to succeed. Fifty years after
its start - and now with more than 30,000 stores
in 100 countries - McDonald's still demands this.
Although A GLOBAL mega-brand, the chain is actually
one of the world's largest franchise sytems, the secret
behind its international reach. In the Czech Republic,
for instance, there are currently 21 franchisees operating
42 shops, or some 60% of all locations. Petr Myška,
who operates three McDonald's here, compares franchisees
to local entrepreneurs. "[McDonald's] restaurants
should be involved in the community," he says,
adding many promotions "reflect the tastes of
the operator." As an avid cyclist, Myška sponsors
a bike race for neighborhood kids.
Myška was certainly a favored candidate for franchisee. Starting with
McDonald's in 1991, he worked his way up the company hierarchy and spent
time abroad learning the business. By 1998, Myška was able to take over
his first store - in Prague-Ďáblice - under a Business Facilities Lease
(BFL) program, which requires a minimum investment of CZK 1.5 million
(compared to a CZK 15 million investment for a straight franchisor) and
is designed for those with a deeper knowledge of the business. "Somebody
out of the system must go through training for six to nine months," Myška
says. "I was lucky that this was all behind me."
Having a well-known brand and marketing support, Myška finds franchising
to be a "comfortable form of entrepreneurship". He likes the
corporate assistance and the supply chain in place. "You can focus
on what you need to do," Myška says, mentioning some supplier horror
stories he hears from other restaurant owners. Even with McDonald's country
sales topping CZK 2 billion, Myška is quick to point out that franchising
is not a get-rich-quick scheme, but rather "a long-run business." He
adds: "In the end, it's still quite a hard job." Not a problem,
though, for someone with ketchup in their veins.
Jason Hovet
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IN A GLOBALIZING WORLD, where the big get bigger, it can be tough
for small business owners to stay in the game - and even more difficult
to get in. It could take years to build brand awareness and a customer
base, only to have a venture fail in the end. With entrepreneurship
comes risk. So it's no surprise that many today are opting for a
lighter version of entrepreneurship: franchising, which has grown
much more quickly in the past five years than in its first 10 years
on the Czech market. "The growth of franchising has been triggered
by small and medium entrepreneurs," says Aleš Tulpa, a franchise
and business consultant and former president of the Czech Franchise
Association (ČAF). In the future, Tulpa thinks franchising will become
even more important to entrepreneurship. "In the case of small
and middle entrepreneurs," he says, "it could be the only
chance to be competitive and remain on the market with continuously
growing competition."
Currently, almost 100 franchise systems operate on the Czech market,
according to information gathered by ČAF. Between 1999-2003 (when
data was last put together by ČAF), the number of franchisees, or
those who hold franchise licenses, grew more than five-fold to 752
from 143. In the same time, the number of franchise units, or shops
and offices, mushroomed to 1,450 from 130. Impressive numbers indeed,
but more interesting is the diversity of franchise operators today.
Traditionally the domain of restaurants like McDonald's, or retail
names such as Yves Rocher, franchises can be found today in interior
design, car leasing, or even real estate.
Mutually beneficial
There are several reasons for franchising's rise - chief among
them is a better understanding of what it is. "Historically
a big problem [behind slower growth during the 1990s] was franchising
wasn't well-known," says Jaroslav Tamchyna, head advisor at
FranKey, a consultancy. He says a lot of his work is explaining
the franchising process. Financing is also easier to obtain now
- which is important when investments can run as low as CZK 15,000
and all the way up to CZK 15 million, although an average investment
is around several million crowns. With backing from a tested, well-known
international company, banks are more likely to lend to smaller
entrepreneurs, which is a big advantage to franchising. Petr Myška,
a McDonald's franchisee, puts it another way, saying that at any
negotiations, "McDonald's is my partner."
André Léger, Komerční banka's (KB) vice-president of marketing,
readily admits that the loan process "is easier for franchisees." KB
is currently the only bank to cater specifically to franchisees
through its Franchising Program, which it introduced in 2003. "We
wanted to be the first on the market," Léger says, adding
that franchising should grow notably in coming years. (KB only
works with franchise systems that are members of ČAF, where European
franchising rules are observed.)
Similar to any loan program, the scheme is unique in involving
the franchisor in the process, as well as in taking into account
the nature of the franchising, which KB's parent, Société Générale,
has experience with on the French market. "KB needs to understand
the nature of franchising," Léger points out, "since
all parties - franchisor, franchisee and lender - have a stake
in its success." So far, results have been positive - the
program now has dozens of clients.
While most applaud KB's work, others quietly grumble that there
could still be much improvement in financing options for franchisees.
Still, the majority agree it's a step forward. "When a second
bank starts [servicing franchisees], I hope that'll be the start
of a wave," says FranKey's Tamchyna. Tulpa agrees that options
could be expanded. "Alternative sources like venture capital,
business angels, leasing, and factoring definitely show slower
development here than in other countries," he points out.
Expansion tool
Another growth driver for franchising is its acceptance among Czech
businesses. While originally foreign concepts dominated the market,
today expansion among Czech concepts is higher than foreign ones.
To Tulpa, this might be partly out of survival. "Competition
has grown on the Czech market," he says. "Consequently
the quality of Czech franchise systems has had to improve." Just
as well, a number of Czech firms hope to use franchising as a
competitive advantage abroad. "Czech franchise systems now
consider expansion into EU countries, like Austria, Germany,
Hungary and Poland, more often than before," Tulpa notes,
pointing to EU accession as a reason why. One example is Pietro
Filipi (see sidebar, p. 20). While abandoning franchising plans
on the domestic market, the Czech fashion manufacturer and retailer
has used the concept to build a presence in three other countries.
Those involved in franchising say it's a win-win situation for
both parties. "A franchisee is completely setup in a proven
concept and does business in the name of a strong brand," Tulpa
says, listing some areas they benefit in: purchasing, logistics,
marketing and brand recognition. For many people, the loss of the
flexibility - for example in the supply chain - in entrepreneurship
might be a disadvantage. However, to most franchisees the disadvantages
are outweighed by the advantages. "You lose some freedom,
but that's part of it," admits Nenad Tutumovič, director of
the company that runs the interior design franchise KA International
here. McDonald's Myška concurs, calling franchising a "comfortable
form of entrepreneurship." He stresses the importance of company
support. "You can do what you need to do," he says, adding,
unlike other entrepreneurs who live and breath their business, "you
can live a distinct way of life," with more free time for
recreation and travel. Similarly, when times are especially difficult
to business, franchise systems are sometimes there to help. For
example, one of Myška's shops is sitting next to new construction
on the Prague metro, thus slowing business, and McDonald's has
helped in different forms, such as lower rents. "They don't
resolve things for you, but they won't let you fall down," he
says. "They want the business to do well."
In the end, franchisees need that same strong interest in the business
to be successful. "McDonald's doesn't accept people who look
at franchising only as an investment," Myška warns. Situations
like that don't usually work out, as Tomáš Karpíšek, owner of Ambiente
Restaurant Group, another Czech franchise, found out after ending
a contract with one franchisee who was very hands-off in one of
his restaurants. "It was a good experience because we found
out that we need someone who is not only an investor but also a
full-time manager," he says. An investment, Tutumovič reminds
potential franchisees, still must be made in franchising. "Somebody
should be ready to take a financial risk and work on their own," he
insists. "Franchising is still entrepreneurship."
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Joey Sheridan: Hertz Lease
Driven to grow
Joey Sheridan was no newcomer to the car business
or franchising when he brought Hertz Lease to the Czech Republic
one year ago. For 10 years he worked in the family business,
Sheridan Motor Group - since 1915, one of Ireland's largest and
oldest motoring companies - and was a boardmember at Archer Sheridan,
the subsidiary which operates Hertz Lease in Ireland and, now,
here.
Sheridan, son of Sheridan Group's chairman, was tasked with expanding
the company's presence in eastern Europe - starting in Prague,
where Hertz Lease was also seeking representation. "Sheridan
Motor Group has held the Hertz Lease franchisee for Ireland since
1985," he says. "We saw an opportunity to develop our
international business in a growing economy." Starting the
project in November 2003, the car leasing and fleet management
firm opened for business near Ruzyně airport in September 2004,
although this wasn't as quick as anticipated. "Be prepared
for the project to take twice as long and cost twice as much," Sheridan
advises potential franchisees. "[With Hertz Lease] there is
a substantial upfront fee and periodic payments depending on the
level of sales." The Irishman says the high cost of acquiring
the franchise can be a disadvantage in a competitive market, like
the Czech Republic, but it's a bet worth taking. "You should
experience faster growth as the market will be, in some way, familiar
with your name," he says.
Although the basic setup and principles - like marketing or product
development - of Hertz Lease around the world are the same, franchise
holders still have flexibility to tailor the product to local tastes. "Any
company that tries to impose a stringent product on different markets
will not be successful," he warns. "We must adapt the
products to the demands of the customers and be flexible in our
approach." Currently, the group is working to meet its goal
of 1,000 leases within five years. "We are within our targets
for the first year," comments Sheridan. Also, sticking to
original plans, the leasing operation hopes to move the franchise
into Slovakia - and beyond. As Sheridan says, anywhere there is "potential
for growth in the market."
Jason Hovet |
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Aleš Pitro: Pietro Filipi
A fashionable strategy
After building a domestic franchise network of seven
shops, Pietro Filipi changed strategy and bought back the
Czech franchises two years ago. As both a fashion producer
and retailer, the brand needed a better way to manage its
stock levels. "It's hard to solve through a franchise
system," says Aleš Pitro, chief project manager at
Pietro Filipi.
Still, this hasn't discouraged the Czech company from expanding its franchised
shops into Slovakia (4), Poland (3) and Russia (2). Pitro says franchising
can be useful to international expansion, especially on the financial side. "It's
very expensive to invest into one's own retail chain," he says, adding
that "development [this way] is very slow."
Currently, about 20% of production is sold through franchises. "We hope
to double this number within the next 12 months," confides Pitro. To do
this, Pietro Filipi is looking east: from the southeast up to the Baltics and
Russia. Pitro says the firm searches out potential franchisees through franchise
associations, magazines and other representatives, but most often receives
queries through the company website. "Finding a partner is the hardest
part," Pitro claims. Experience in fashion retail is helpful, he says,
but one main requisite is somebody who has the capital, with investments amounting
to between CZK 2-4 million depending on the location and its size (shops run
between 150m2 and 250 m2).
Typical franchisees are 30-something entrepreneurs, or often married couples,
with some experience in retail. Once one shows interest, Pietro Filipi must
approve the location, then it helps design and supply the shop decor, implement
stock and sales control software, and hash out a business plan. "We try
to help as much as possible," Pitro says. "We know it's not easy
to establish a new shop." From there, franchisees are in contact with
the central office through weekly sales reports and monthly (or tri-monthly
in Russia) visits by company representatives. Franchisees also visit Prague
with the launch of new collections and typically buy 60-70% of the selection
for their home markets - another benefit of using local entrepreneurs to expand,
according to Pitro. "Franchisees definitely have a better knowledge of
the local market," he says.
Jason Hovet |
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Jaromír Bosák: Segafredo
In love with coffee
The first Czech franchisee of Segafredo opened an affiliate
on Na Příkopě street in 1994. Today this 22-year-old concern
has eight partners in the Czech Republic who operate 15 franchises
and sell 1.2 million cups of espresso a year.
Although Czech franchises account for only about 5% of
the concern's total sales in this country, the licensed cafés
fall under Segafredo's pivotal activities. Great demands
are placed on the franchisees, as besides their own café
operation experience they must have suitable space at their
disposal as well as the initial investment - about EUR 50,000.
The license itself costs EUR 20,000, and in addition the
franchisees pay 4% of their sales or EUR 5 / per m2 a month
to the parent company. "Expenditures are high, especially
at first," says Jitka Šmerdová, the owner of the Segafredo
café that opened on Malostranské náměstí in May last year.
In spite of this, and a general lack of management freedom,
she says that doing business under the aegis of a well-known
brand pays off. "Customers see the characteristic colors
and are drawn in, because they can imagine the high-quality
products and service," notes the franchisee, adding
that she's planning on opening another Segafredo franchise
on Old Town Square.
However, Segafredo managers aren't merely supervisors and
fee collectors. They offer their partners extensive service,
such as advice on choosing locations and an operational concept. "We
rent them espresso machines and other equipment for preparing
coffee, and branded chinaware. We produce the Nero espresso
especially for the franchisees," says Jaromír Bosák,
director of Segafredo Zanetti's Czech headquarters. New partners
go through basic training relating to the provision of services
and the technological procedures for preparing Italian coffee.
In the autumn Segafredo will open a bartending school in
the Czech Republic, where, among other things, students will
gain a working knowledge about coffee.
Bosák adds that another "bonus" for franchisees
is guaranteed exclusivity. "Within the framework of
the contract, we furnish them with territorial protection.
But the most important thing is to be in love with the Italian
coffee culture," he notes. "A person who puts his
or her heart into it is often far more successful than one
who does it just for the money."
Milan Duda |
Vojtěch Krátký:
RE/MAX
Rewriting the rules
A poster with a red, white and blue hot-air balloon
caught Vojtěch Krátký's eye when he was on a trip in
Germany. It was the logo of the kingpin of American real
estate agencies, RE/MAX.
RE/max IS the world's largest seller of real estate, with
5,700 international offices. Its logo, familiar in western
Europe, is instantly recognizable in the US and Canada
as well, where it rose solidly to number one. A property
listing in one city means worldwide access via the company's
website. Krátký bought a master franchise for the Czech
Republic, and since April has been leading a team of 12
in the country's first office, in modern premises in Karlín.
Krátký's concerns with the local residential market were
solved as a franchiser. With RE/MAX he claims he can offer
much more. "A strong brand with a great reputation,
strict ethical code, after-sales service, and a centralized
system of complaints," says Krátký, listing some advantages.
Compulsory training in the US gave the franchiser the necessary
expertise, and made the extent of company support evident. "The
most important aspect for me is the system of continuous
assistance, which responds to franchisee's real needs in
real time," he says.
There is considerable flexibility - franchisees can open
a prestigious address or work from home. As such, initial
investment is hard to quantify, but Krátký says it is possible
to open an office including a franchise fee for slightly
more than CZK 500,000. "You have a significantly higher
chance to succeed compared to doing a business yourself.
Among other things, you don't have to repeat mistakes that
someone else has already made," notes Krátký.
For those considering the franchise route, Krátký advises
choosing an industry that has shown growth. "When
buying a franchise, see who is selling it and what they
have achieved," adds Krátký. "It's important
that the concept is time-proven and the franchisor is a
leader in the industry."
David Friday |
Nenad Tutumovic:
KA
The right design
It only took a visit to a franchising exhibition
to convince Nenad Tutumovic to bring the interior design
brand KA International to Prague.
WITH MORE THAN 480 SHOPS in 43 countries, the Spanish
company KA was obviously a tested concept. So after contacting
an investor, who also knew a few things about interior
design, the two partners initiated business. They spent
the rest of the year researching the Prague market and
visiting with one of the newest KA franchisees in Hungary
before meeting company officials again at the beginning
of 2005. From then, it was another three months of securing
a space, making the necessary renovations to it, designing
the layout, and training staff before opening in July.
The final two aspects above are where the advantages of
franchising come into play. "The head office was very
involved," recalls Tutumovic. The pair got help with
the shop design and product placement, as well as on- and
off-site training in Madrid. Prior to the opening, two
company representatives were on hand for last minute details.
Even today, the two say assistance is only a phone call
away. "We feel like we are in a partnership [with
KA]," Tutumovic says, praising KA's quick communication
in pricing or customer relations.
Still, both men are quick to remind that franchising is
still entrepreneurship - meaning hard work. "You're
the boss, so you are the one who makes it successful," Tutumovic
points out. While some point to the loss of freedom asssociated
with franchising, Tutumovic thinks the advantages far outweigh
the disadvantages. "You can count on the strengths
of the franchisor," he says, listing the benefits
of purchasing, marketing skills, and sales methods. Financing
is another benefit: it's a lot easier to get a bank loan
to finance the CZK 1 million to CZK 2 million investment
with a strong, international brand behind you. You also
have the franchise system's experience to draw on. "You
know from the beginning what to expect," Tutumovic
concludes. "It's easier to avoid mistakes because
they've already been made."
Jason Hovet |
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