Mention the words franchise and computer dealer in the same sentence and many people will give you a look of incomprehension. The words stir memories of failed franchises such as Entre and Computerland, and the assumption is that franchises and computer dealers just don't mix.
Although there are franchises in the dealer channel, it is hard to think of any off the top of the head - and there lies the fundamental problem.
Franchises work, but not well enough to make small companies into big ones. It's a case of small companies perhaps pretending to be bigger than they are by using someone else's name. Although this may seem a simplistic view of the franchising market in the dealer channel, it isn't far from the truth.
START WITH A HEART
It's a well-accepted view that franchising is an easy way to start a business - the British Franchise Association (BFA) certainly thinks so.
The UK franchise industry was worth u5.9 billion last year - a seven per cent increase on 1994 figures, according to a joint National Westminster and BFA survey. The proportion of franchises reporting profitable results in 1995 also increased, from 87 per cent to 90 per cent. 'More companies are choosing to use franchising to grow their businesses,' says Brian Smart, director of the BFA. He adds that there are 25,700 individual franchised units giving the sector a total employment figure of 220,000.
The survey says 84 per cent of franchisors believe that the performance of their business will improve within the next 12 months. Franchisees are also in a confident mood: 79 per cent forecast improvements in their businesses throughout the year. Most of this optimism seems to be in the South East and London, an area which accounts for 32 per cent of the UK's franchise units.
The survey notes that awareness of franchising is on the increase. Take-up of franchises is growing and attendance is blossoming at franchising trade exhibitions. This suggests two things: first, that franchising must work; second, that more people are looking to self-employment as a means to make a living. 'One in five franchises said redundancy was the catalyst that sparked their decision to set up in business through franchising,' says the BFA report.
Although an increasing number of individuals set up a franchise for 'personal fulfilment' and just 'to be their own boss', for others franchising is nothing more than a club for cottage industrialists. There is nothing wrong with that, but it does suggest that few people make much money out of operating as a franchise.
'It is usually the franchisors that make all the money,' says Chris McAuley, MD of Chase Technology. McAuley used to work as a sales and marketing manager at a distributor called Millbank and saw the setup at many franchises.
'Franchisors would get the regular income from name leasing, stationery and so on,' he says.
Acquisition-hungry Chase recently bought storage specialist Interface, adding it to previous acquisitions The Last Word and SIS Solutions. 'If you want to grow your business, whether you go for franchising or acquisition depends on your business objective,' says McAuley. It also depends on how much ready cash you have, but McAuley's point is that franchises tend to be smaller affairs, more content with life in the not-so-fast lane.
'A franchisee can set up for life but will never be a big hit,' he says.
'Big franchises such as Entre struggled in the 80s, and that was when there were 30 per cent margins for hardware. What chance do they have now?'
While this point rings true for many dealers, franchisee or not, there is a point to McAuley's spin. Small firms looking to grow on limited resources tend to look either for a bank loan or for a franchise deal.
McAuley suggests that companies which can't get any bigger, either because of a lack of resources or because of local market size, must look to be acquired.
He offers an example. 'Chase is looking to buy a training company which hasn't got a London base and has exhausted its local market. Chase has a London base and that would be available to the training company to use.
Without acquisition, that company would never have been able to get into London and its lucrative training market.'
One important aspect has to be considered. Most franchisees get into the business because they want to be their own boss and not have to fall into line with the rules and regulations of a corporate. McAuley argues that acquisition actually appeals to businesses that have been around for a while and whose owners have tired of the idea of being their own boss. For a business looking to expand, acquisition and franchising are options. The trouble with setting yourself up for acquisition is finding the buyer. The advantage of franchising is that it's ready and waiting to take on companies at any time.
Advocates of franchising tend to play on the ease with which companies can get involved and the ease with which they can make good money. But it boils down to which market you're in. It doesn't take a genius to realise that selling groceries is entirely different from selling IT equipment.
But while franchises such as Spar uphold the recognisable and popular front of franchising, other names tend to be a little more elusive. 'It's not the way forward,' argues McAuley, suggesting that names are elusive because the system doesn't work in the IT industry. He has a point, but there are those who argue otherwise.
The counter-argument stems from the lack of high margins in the IT industry.
While the office products dealers and computer dealers have long been on a collision course, there are those that believe the PC dealer cannot win. Office products dealers with their 30 per cent margins and staple diet of high-turnover consumables can afford to compete strongly when it comes to selling IT. 'With the 30 per cent margins, office product dealers are more cash rich and have a broader customer base and can therefore approach PC sales from a different standpoint,' says James Wilson, MD of XPD Business Consultants. XPD runs what Wilson describes as a pseudo-franchise, under the name of Office Point.
Strictly speaking this is not a franchise, it is more of a marketing and buying club where members can elect to either use the Office Point name or their own. It's more flexible franchising and is a piece of cake, says Wilson. The scheme, which was set up two-and-a-half years ago, has 320 members and membership is growing at 38 per cent a year, according to Wilson.
Much of the attraction of the scheme is that XPD can slice up to 30 per cent off product buying prices for its members, while offering them marketing support through items such as a catalogue. As the largest customer of stationery and office consumables supplier Spicers, XPD finds that good deals on office products are not a rarity, and it is this that supports Wilson's belief that office products dealers are in the best positioned to take over the next generation of PC sales.
In the US, office products and computers have long been sharing shelf space and have fuelled much of the argument concerning the future of the traditional PC dealer. It is no coincidence that franchising is also successful in the US. Compared with the UK, US franchising is positively booming in the computer industry. Crispin Coulson, marketing manager at Text Systems, suggests that basic business cultural differences lie at the centre of this boom. 'It has a lot to do with the US market being more entrepreneurial,' he says. 'I've never thought of it in terms of the UK PC environment.'
TIE AND DIE
Coulson says that Text Systems has been offered the opportunity to join an office franchise but that 'it's not our bag'. 'The problem with franchising is that you're tied down to what you can do. In consumables it's harder because you want to shop around a lot to try to get the best price from a range of suppliers,' he says.
This is a big stumbling block for most people and if the franchisor doesn't get it right, the problems can be felt right down the line. Like anything there is an element of risk, but the risk is minimal compared with going it alone.
Although Text Systems believes it is better suited to shopping around on its own, there are companies that would rather someone else did the buying for them. In this case, the franchisees may be guaranteed a regular 25 per cent discount while shopping around may get 30 per cent one month and 15 per cent another month. Whether a firm goes one way or the other not only depends on the business objectives, but the resources that company has to deal with all the buying itself.
Franchising is a difficult card to call in the UK. Its past failures have helped soil the term and perhaps frightened many potential franchisees and franchisors off the premises. It may yet have its day in the dealer channel. But while a lot of its ideas make common sense, especially for small businesses, the fear is that it isn't flexible enough to cope with rapid changes that tend to occur in the IT industry.
Perhaps that is the problem. A fast-moving industry where new technology keeps pushing prices down the slide is not the ideal place to have restrictions on buying patterns. At a time when everyone talks about being fleet of foot and moving with the times, perhaps franchising just isn't agile enough.
Its only real way forward is through the pseudo route. But even that could do with a few stretching exercises.
THERE IS LIFE AFTER FRANCHISING
Joining a franchise will not kill your business. If everything goes terribly wrong, there is still life after franchising. When Computerland went down, dealers such as Ashok Rabheru's company Genesis survived without the help of the Computerland name.
The important thing is that the business is sound enough anyway and that the franchise is only an aid to either growth or establishment. It may help a particular aspect of your business to grow, in consumables for example. It may not be the answer to a quick and easy path to success, but it will in most cases help.
The British Franchise Association offers guidelines for anyone interested in franchising. Formed in 1977 by a number of leading UK companies, the BFA sets out to improve standards and protect franchisees from potential disasters by accrediting franchisors which meet the necessary standards.
A European Community code of ethics is now in place to help protect all parties involved. The code covers four main points: Viability - A financial record showing a sound business Franchisable - A record of at least one successful franchised outlet and no significant record of failures Ethical - A franchise agreement and structure conforming to the European Code of Ethics Disclosed - Offer documents and brochures which reasonably represent the performance of the system.
The BFA has 150 franchisor members with more than 10,000 franchised outlets in their care. It also has more than 60 professional advisers in the form of lawyers, bankers, accountants and consultants.
The British Franchising Association - 01491 578050.
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