It was quite surprising to see ’franchising’ suddenly feature so prominently in last month’s Forecourt Trader - and rather timely too. EKW Group has been involved in franchising for some 20 years, and it’s one of the few accounting practices officially affiliated to the Britsh Franchise Association (BFA). In fact at several recent meetings one question that’s been repeatedly raised is "why hasn’t the UK petrol industry gone down the franchise route?". Well there are several answers, but first some background.
The concept of franchising is simple. You have a successful product/brand and want to expand it across the UK, but don’t want to raise the capital to buy hundreds of shops. So you become a franchisor and offer your product/brand to individual entrepreneurs (franchisees) who want to run their own business in their own area, but with the backing of a national brand, marketing and your hard-earned expertise. The usual deal is that you will wholesale the ’product’ to your franchisees, and also charge a ’licence’ or ’royalty’ fee for using the brand name - typically based on the turnover of the franchise. Possibly there’ll be additional charges for training and marketing costs, and for ’auditing’ the network to make sure that the brand standards are properly maintained.
So, the franchisor gets to spread its product/brand without huge investment, while the franchisee receives the benefit of a widely-known and marketed brand, a fixed operating-model with support from someone who’s done this before, and the assurance that there’ll be nobody else within their clearly-defined local franchise area selling that same product/brand for a fixed period (typically five years). As a business model, it can work very sucessfully - compared with individuals starting their own business, properly set up franchised business start-ups are remarkably safer in terms of avoiding early business failure. At the bigger-end of the sector just think of McDonald’s, KFC, Dyno-Rod, Holiday Inns, Body Shops, Threshers etc, and you can see how succesful a concept franchising can be.
Is there a downside? Well, of course there can be. Franchises depend on brand, and if some of your fellow franchisees don’t keep up the high standards then your business could also be destroyed. Then there are those franchisors who really only make their money out of your up-front investment rather than from a share of the long-term success of the product. It should go without saying that any potential investor ought to obtain appropriate legal and financial advice before signing up for any deal - and a good starting point is to check out the franchisor with the BFA before doing anything else.
Now back to "why hasn’t the UK petrol-retailing industry used the franchise concept?" The answer is that it has, but without success. Remember Shell, Conoco and Texaco to name just a few, offering so-called ’franchise’ arrangements at various times since the late 1980s? Some even tried it twice. As to why it didn’t work, take your pick. Sometimes the basic figures were just wrong; then there was the problem that the oil companies usually introduced these franchises onto sites that they happened to own and charged the ’franchise fees’ alongside ’property rent’ leaving retailers very confused and feeling that the oil company was having its cake and eating it too.
But the really fatal flaw in these historic schemes was an inherent, fundamental, conflict with the true concept of franchising - competition from the same companies’ local networks. Imagine you’ve just signed up for the new ’wonder’ fuel and shop retail franchise in Leicester. You’d expect to run the only ’wonder’ site in the city and be able to set your prices without having to compete with another site selling ’wonder’ petrol just a few hundred yards down the road. Unfortunately, the oil companies never seemed to realise that a true franchise would have meant that they couldn’t keep their ’other’ sites within a franchise territory, let alone allow those sites to undercut their franchisees. If they’d been serious about franchising they’d have had to close all their other channels of trade within each franchise territory... a step too far for the oilers of the 20th century. With the oil majors of the 21st century mostly desperate to get out of retail, perhaps the time is now right for someone else to try a true petrol-retail franchise scheme.