Promise of indigenous franchising

Published February 10, 2014
- File Photo
- File Photo

The franchising format has now become a very visible and accepted retail model locally. Even though skewered significantly towards the food sector there are signs of it making inroads in other retail segments; pharmacies, footwear, super/hyper markets, mobile phones/services, clothing, etc. A healthy trend since globally it has proven to be the most successful retail format.

In Pakistan it has served to provide some structure to what was previously a much disorganised sector. It has also acted as a catalyst for many positive developments, both economic and social. The economic aspect has resulted in considerable investment, development of associated industries, creation of a systemised supply chain, sustainable employment and considerable revenues for the government. While socially it has brought about the induction of female employees in what was largely a male-dominated profession, even in traditionally conservative areas. The layout of retail facilities, ambience and signage, has improved dramatically, with a spillover effect to the local retail landscape. There has been marked improvement in standardisation, quality, packaging and customer service. It has even inculcated a culture of queuing, which initially proved to be a serious obstacle.

Yet with all the positives, there are some concerns with how these international franchises have managed locally, especially as a function of time and growth. Initially there was a significant foreign investment, especially within the food sector. Whether through a lack of trust on part of the principals towards local political and economic circumstances, or issues with resident management this has been localised in its entirety. With the repatriation of franchise fees, royalties, store opening fees and prescribed import of key supplies this has tilted the balance in favour of substantial revenue outflow from the country.

For franchising to be truly effective in dissemination of its economic benefits, a majority of retail operators/owners need to be individuals.

Unfortunately, this has not taken place in Pakistan. With the exception of one international food chain and some local franchise concepts, the development has been almost entirely corporate in nature. This naturally implies a concentration of benefits to a few and creation of competitive barriers to smaller entrants due to economies of scale.

The focus of franchising, based on the success of global food brands, has mostly been confined to the food sector. Although, as mentioned earlier this trend has slowly started to change, yet the focus mostly remains product-based. A greater inclusion of services, with distinct competitive advantage, need to considered. The government can greatly facilitate this process through creation of advisory services and provision of small scale financing. Another area where the government can provide assistance is in creating more debt financing opportunities through allowing non-asset based securitisation like cash flow. With most typical retail operations there is a dearth of assets which can be used as collateral, yet significant cash flow on a daily basis.

On a more generic level there are some lessons to be learned from the typical development cycle of a given franchise, especially in context of food franchising. What usually transpires is that, as function of time, there is significant decline in the quality, ambience and service with a converse increase in prices. This usually arises out of cost focus where instead of rationalising cost the emphasis is on its curtailment. Agreed, a viable business strategy but which needs to be seen in light of its long-term repercussion — usually adverse. Food quality is compromised through switching to cheaper supply sources, service standards lowered through part time workforce with very little stake in the company, minimal amount diverted towards facility maintenance, holding and serving times for food product disregarded, energy costs cutting leading to uncomfortable ambience experience for the customers and similar thoughtless measures which are seriously detrimental to the business from a long-term perspective.

Conversely, if greater stress was placed on acquiring benefit of scale the resultant function would be enhanced profitability and sustainable growth. Little emphasis is paid to creating volume based supply chains, smart labour scheduling, non-traditional asset development in conjunction with integration of core functionalities to support this development, utilisations of low sales volume windows and other strategic initiatives to rationalise cost and enhance profitability.

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