Franchising as a tool for msme development in Nigeria
Business ideas are a dime a dozen, especially bad ones. Practically everyone you meet on the streets seems to believe that they have that ‘special’ business idea that they’ve been holding onto for the right time when they have enough capital to make it happen. These business ideas cover the entire spectrum from the brilliant to the ridiculous, and in spite of this the remarkable thing about this is that it is becoming increasingly difficult to find business ideas that are truly unique. No matter what that idea is, there is a great likelihood that someone else has already had that same idea, and sometimes, another person may probably be on the way to making it happen. In other cases, another person might even have already tried it, failed and moved on to something else. What this means is that business ideas themselves are not unique, but the time, effort and creativity put into making those ideas come into reality is what makes them stand out. A good business idea, therefore reflects the effort, risk and immense resources required in starting a business on one’s own, building it into a recognizable and trust-worthy brand and shepherding it to success. But, what if all that stress isn’t necessary. What if there is a tried and trusted way of getting a new business on track with minimal effort and acquiring customers based on an already established reputation that would have taken your new business years to build? That sounds great, doesn’t it? Well, that’s the beauty of franchising.
By definition, a ‘Franchise’ is an authorization granted by a Government or company to an individual or group enabling them to carry out specified commercial activities. Franchising is one of three business strategies a company may use in capturing market share. The others are company owned units or a combination of company owned and franchised units. The popular McDonalds’ brand is a great example of a globally successful franchise. More than 80% of McDonalds’ stores worldwide are franchises. There are a variety of businesses that can operate using the franchise model, from restaurants to hotels to hospitals, fast food joints, schools, farms, airlines, departmental stores and many others. In Nigeria, hotels and fast food are perhaps the most popular franchises, but there are new and emerging chains of departmental stores and many other types of franchised businesses springing up all over the country, such as Best Choice, Slot, Sleek Cosmetics amongst others.
Franchising allows a new business to conveniently acquire existing customers from the originating business thereby positioning it to gain market share through brand affiliation. For instance, in the case of Mr. Adewale, a businessman experiencing initial startup problems in his local pastry and confectionary business. After months of trying unsuccessfully to acquire customers, he carries out a survey to determine the best fast food partnership to enter into that also has a great reputation in the market place. Mr. Adewale, after much deliberation with his team, then that decides to partner with Mr. Biggs by buying into their franchise. As Mr. Biggs does not have an outlet in that area, this becomes an opportunity to establish their presence in the area and also share in the profit generated by the new entrepreneur. By simply granting Mr. Adewale’s application to join their franchise and sell his products under the Mr. Biggs’s label and by adhering to the specifications and standards that are in line with the Mr. Biggs brand, Mr. Adewale’s business, under the Mr Bigg’s franchise will have a new lease on life and make it easier to be profitable. In the end, Mr. Adewale will be able to leverage on Mr. Biggs’ brand to attract customers and make a profit that he would have been unable to make on his own as a new and relatively unknown brand and still have enough for himself after giving the agreed percentage of the income generated to the parent company. By doing this, all parties involved in the partnership were able to gain from the arrangement, including the customers who have been given access to Mr. Biggs standard and quality of confectionaries in an area where it never existed before.
Beyond the realm of the hypothetical, there are real benefits to franchising both on the side of the corporation (or franchisor) and the individual businessman (or franchisee). Firstly, franchising provides the franchisee with a brand identification that is difficult to attain single-handedly. Secondly, it provides the franchisee with a tried and tested method and procedure of doing business that the franchisee may never have developed on his own. It also provides an already laid down structure for marketing and distribution of goods and services that would be difficult to develop independently. In a society like Nigeria where company reputations are highly valued, operating under a trusted brand name puts one ahead of the competition in many ways. Franchises also offer ongoing support, training, operational assistance and supervision. Perhaps the biggest advantage of franchising is the simple fact that it works and it is profitable. In 2015, around 92% of all UK franchisees reported profitability over the last 12 months.
But there are also questions that a potential franchisee needs to be aware of before jumping into a franchise. A potential franchisee must first ask questions like how much can be made after splitting the expected income between him and the franchisor. Another important thing to find out is the corporate culture that the franchisor works under. Do they pay their taxes? Do they have bad supply chain management? Do they run the risk of having negative public perception on them due to their mode of conducting business? Furthermore, operating within a franchise structure limits the capacity of the franchisee to make certain decisions and changes regarding the product. A franchise can be shut down in a moments notice if they contravene the standards of the franchisor. This will affect a business owners’ entire means of livelihood and also render his employees jobless. Also, in addition to the initial franchise fee, franchisees must pay ongoing royalties and advertising fees. These things can affect the franchisee in the long run and cause his business to suffer or even liquidate. We will further explore these factors in subsequent publications.
Even with the potential risks, there is little doubt that franchising is an option worth considering for any budding businessperson. As mentioned earlier, there are franchises already operating in Nigeria with varied degrees of success. There are also various seminars and conferences which help to make franchising opportunities known to the general public. As at 2012, the market size of franchising in Nigeria from the entire industrial sector was put at approximately $1.5 Billion. There are legal frameworks in Nigeria that protect the interests of both the franchisor and franchisee, though no official franchise-specific legislation appears to be in place. The Nigerian International Franchise Association (“NIFA”) is a trade association committed to the development and promotion of franchising in Nigeria. Amongst others, some of its stated goals include:
1. To educate potential investors and entrepreneurs in Nigeria on the fundamentals of franchising and its proven track record for success and growth in business.
2. To become a central clearinghouse for franchise companies interested in expansion into the Nigerian market by providing cultural orientation and briefing on local business practices, referrals to legal and financial professionals and other consultative services.
3. To advocate ethical conduct in all franchise transactions and to educate franchise companies, franchisees and the general public about the importance of developing and maintaining ethical practices in the conduct of business.
From the above stated goals of NIFA, it is clear that there has been some thought towards ensuring that franchising is developed and encouraged as a means through which owners of Micro, Small and Medium-sized Enterprises (“MSME”) can get a foothold in industries of their choice and begin to chart their way to success. However, it must be noted that more work needs to be done to inform Nigerians about the opportunities that exist in franchising and also enforce policies that will regulate the affairs of the franchisors so that they do not take undue advantage of the franchisees.
Having assessed the general state of franchising in Nigeria, it must be said that there are areas that can serve as quick wins in enhancing the practice. The agricultural sector is one area that desperately calls for more involvement from the private sector. There are endless opportunities for people to profit enormously from farming. Developing an effective marketing and distribution channel that can then be capitalized on by businessmen using the franchise model can further enhance this. In the more advanced countries, there are chains of stores like Tesco that have been able to take advantage of this type of operation. Tesco is said to have made a total global revenue of £56.91 billion in the last financial year, of which £2.3bn was profit. This style of franchise based on agricultural produce, distributed nationwide can be recreated in Nigeria. It would surely yield benefits in terms of employment, revenue generation and increasing food security in Nigeria. There are also many other examples of thriving franchises that can be replicated in Nigeria to ensure that smart MSME owners are never short of opportunities to invest in.
In summary, franchising allows large corporations and business people to benefit from each other by combining their strengths to generate a healthy profit; Opening a franchise is usually less risky than setting up as an independent retailer; Franchising allows an entrepreneur to go into business for himself but not by himself, meaning that there is a support structure that enables the company to succeed in a short period of time.
The Franchise system is already in existence in Nigeria, but a whole lot more can be done to enhance the opportunities for franchisors and franchisees to benefit. There are existing models from foreign companies that can be recreated in Nigeria with high potential for success.
As earlier stated, Franchising is not without its own risks, however, it is one sure way of growing a business without going through the painstaking, step-by-step process of developing a trust-worthy brand over a long period from the scratch.
MUNA ONUZO