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Franchisor Concern: Will My Franchisee Compete With Me?

By Manuel V. Siggaoat, CFE

Managing Director, Francorp

As a consultant, I talk to several people a week who are thinking about expanding their business through franchising. For sure, there are many advantages if done correctly. After all, franchising has already helped many companies grow. However, one of the most common fears would-be franchisors have is whether or not they are just teaching franchisees the business know-how that will eventually be used to compete with them.

“What if I train my franchisee and he uses that knowledge to put up his own business and compete with me? Am I digging my own grave with franchising?”

This is a valid concern. To be honest, I have seen cases where this has happened. I have seen franchisees, disgruntled and disillusioned with their franchise investment, put up a competing business and go head-to-head with their franchisor.

However, this is something that is preventable. Here are some safety nets to discourage franchisees from turning against their franchisor.

 

1. Include a Non-Compete clause in the Franchise Agreement

A Franchise Agreement should include non-compete provisions within the contract. Basically, this provision states that the franchisee should not put up or invest in a business that competes with the franchisor’s business. The franchisee is bound from doing so (a) while the franchise agreement is in effect, and (b) some years after the franchise agreement has expired.

 

While including a non-compete provision will help, it is not enough. I will not go into details but there are several ways a franchisee can circumvent this provision. So in other words, a non-compete clause is a necessary but insufficient provision – it should be found in a franchise agreement, but by itself will not prevent franchisees from competing with a franchisor.

Besides, non-competition provisions are not in effect forever. They expire a few years after the end of the agreement.

 

2. Give Continuing Value

A better way to keep franchisees from competing with a franchisor is by providing continuing value. This means that aside from use of the name, the franchisee benefits from products and services that the franchisor provides during the course of the business.

 

2.1 Proprietary Products

Not teaching franchisees everything about the business is one way to keep them from using what they learn against you. The franchisee is dependent on the franchisor to supply proprietary products and services. Proprietary means those relating to the ownership of the brand or business. These are usually related to the franchisor’s intellectual property, like recipes and branded merchandise.

Instead of giving the entire recipe to the franchisee, franchisors may provide ready-to-use sauces, mixes, marinades, etc. to the franchisee. For retail concepts, franchisors provide branded merchandise, meaning those products that contain the brand’s logo.

Since these are proprietary items, they are available only from the franchisor and cannot be bought in the open market.

 

2.2 Killer Support Services

Franchisors are supposed to provide ongoing support to franchisees. For the purposes of this discussion, killer support services are those that are so outstanding and very critical to the franchisee’s business, yet very expensive or difficult to do on his own (in the computer industry, a killer app is a software so compelling it makes consumers want to get the hardware just to be able to use the software).

For example, a topnotch business intelligence software that provides data for making critical business decisions at the unit level can be a source of competitive advantage. Since it may be very expensive to install on his own, a franchisee would be discouraged from scaling this high barrier to entry.

A world-class marketing program is another example of a killer support service. Especially if the program is highly effective and brings business to all units on a consistent basis.

If franchisees rely on these killer support services for their business but find it difficult or very expensive to replicate on their own, then a franchisee will stay within the fold.

 

3. Keep Franchisees Happy

There are several legal and structural ways to keep franchisees in the system. But I’ve seen that the best way to keep franchisees from competing with their franchisors is by keeping them profitable and happy. If a franchisee is profitable and is happy with the relationship with the franchisor, he would not think about bolting the system and putting up a competing business. He may, in fact, even invest in an additional unit, become an area franchisee, or encourage other investors to become franchisees themselves.

Financial and strategic planning for the franchise business is therefore very crucial. The franchisee fees, royalties, markups, advertising contribution and other fees charged by the franchisor should be well within reason. Considering expected sales and relevant expenses, the profits and return on the franchisee’s investment should be attractive. The way a franchise is structured should result in a win-win arrangement, where both franchisor and franchisee benefit.

Sometimes, not all plans come to fruition, though. As the saying goes, the best-laid schemes of mice and men often go awry. The most well-thought-out business plan may not work because of unforeseen circumstances. What is important when that happens is how the franchisor will go the extra mile to help the franchisee cope with the crisis, or how fair his exit strategy for the franchisee is.

To summarize, a franchisee can be a franchisor’s worst enemy or best business partner. It depends on how the franchisor structures his franchise and how he manages the relationship with the franchisee.

 

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Top Franchising Trends in 2015

TOP FRANCHISING TRENDS in the Philippines 2015
Noel Siggaoat
Managing Director
Francorp Philippines

At Francorp, we live and breathe franchises. Day in and day out, we help start-up and established businesses grow from one to many through franchising. In the course of doing franchise consultancy work for close to twenty years now, Francorp has been at the forefront of the latest trends in franchising in the Philippines. Below are the top three trends that will impact the Philippine franchise landscape in the next year or two, and beyond.

1. The Boom in Education Franchises

Education franchises have been around for many years now but in the last year or so, we’ve seen an explosion of education businesses opening their doors to franchising. In this category are pre-schools, math programs (computational or analytical), reading enrichment programs, professional review schools, specialty skills schools, to name a few. The origins of these concepts are both foreign and homegrown.

The demand for education in all its forms is a good sign for a country like the Philippines as it gains momentum towards developed-country status in the next decade or so. Another explanation for the growth in schools is the growing number of parents who don’t mind spending on development programs for their children, believing that these are complementary to formal education and will contribute to the child’s overall development. Of course, the growing young population is an important driver of demand for this segment.

This increasing demand for education makes enterprising Filipinos go into the education business as start-up entrepreneurs or as franchisees.

Recent Francorp clients in this category are the Canadian Tourism and Hospitality Institute (CTHI), Aloha Arithmetic, Readsmart Learning Center (formerly Infant Jesus Montessori), Explorations Pre-School, Mathemagis Singapore Math, and CMA Mental Arithmetic.

2. Use of franchising to reduce distribution layers

The traditional franchisor is the retail store or restaurant owner who goes into franchising to increase his number of branches. We are seeing a new breed of franchisors: Original manufacturers or master distributors going into franchising to reduce their distribution layers.

The Generics Pharmacy is one of the first to adopt this strategy. Instead of staying with the traditional system of supplying to distributors, who then supply to other distributors, or to stores and retailers, many manufacturers and master distributors are reducing the distribution channel by putting up their own stores directly and making these available through franchising.

Instead of being at the mercy of third-party retailers at the end the channel, these brand owners or master suppliers are controlling their own destiny by specifying how the store will look, how the products are marketed, and even the price at which these products are sold to the end consumer.

By cutting out the middle man, brand owners are able to lower the retail price of their products. Additionally, they are able to increase margins for those that remain in the channel.

Francorp clients who have adopted this strategy aside from The Generics Pharmacy are PR Gaz Haus, and Holcim Cement.

3. More complex franchise formats

For many years, franchise formats in the Philippines were the garden-variety Single Unit franchise. As the franchise industry becomes more mature, more innovative and complex formats are being employed.

Franchisors are now looking to add multi-unit formats like Area Development franchises and Master franchises to their offerings. Area Development franchisees are wholesale multi-unit owners who are given exclusivity for a city or province. Master Franchisees usually own the rights to an entire state or country and also have the option to sub-franchise to third-party investors. This is commonly used for international expansion.

Some franchisors are also offering Conversion Franchises, where independent store owners already in a similar business convert their stores and become part of the franchisor’s brand and network. Some franchisors go into Joint Ventures with their franchisees and are part-owners of the franchise store. In this set-up, they earn as a franchisor and a franchisee at the same time. Some franchisors, on the other hand, intentionally look for passive franchisees who are only interested in putting up the capital for the franchise unit; the franchisor himself will manage the franchise for an additional fee.

As franchising continues to grow in the Philippines, we may see more of these newer and innovative formats to meet the needs, capabilities, and goals of franchisors and franchisees.

Noel Siggaoat is the Managing Director of Francorp Philippines. An MBA graduate of the Carnegie Mellon University of Pennsylvania and a Certified Franchise Executive (CFE), he heads the firm’s consultancy practice. Noel has a diverse background in IT, finance, retailing, and franchising and has worked with companies here and abroad. He is a weekend athlete who has completed marathons, a half-Ironman, and other endurance events.

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Franchising Continues To Grow New Industries

Noel Siggaoat
Managing Director
Francorp Philippines

At Francorp, we live and breathe franchises. Day in and day out, we help start-up and established businesses grow from one to many through franchising. In the course of doing franchise consultancy work for close to twenty years now, Francorp has been at the forefront of the latest trends in franchising in the Philippines. Below are the top three trends that will impact the Philippine franchise landscape in the next year or two, and beyond.

1. The Boom in Education Franchises

Education franchises have been around for many years now but in the last year or so, we’ve seen an explosion of education businesses opening their doors to franchising. In this category are pre-schools, math programs (computational or analytical), reading enrichment programs, professional review schools, specialty skills schools, to name a few. The origins of these concepts are both foreign and homegrown.

The demand for education in all its forms is a good sign for a country like the Philippines as it gains momentum towards developed-country status in the next decade or so. Another explanation for the growth in schools is the growing number of parents who don’t mind spending on development programs for their children, believing that these are complementary to formal education and will contribute to the child’s overall development. Of course, the growing young population is an important driver of demand for this segment.

This increasing demand for education makes enterprising Filipinos go into the education business as start-up entrepreneurs or as franchisees. Brands such as the Canadian Tourism and Hospitality Institute (CTHI), Aloha Arithmetic, Readsmart Learning Center (formerly Infant Jesus Montessori), Explorations Pre-School, Mathemagis Singapore Math, and CMA Mental Arithmetic have all started to franchise.

2. Use of franchising to reduce distribution layers

The traditional franchisor is the retail store or restaurant owner who goes into franchising to increase his number of branches. We are seeing a new breed of franchisors: Original manufacturers or master distributors going into franchising to reduce their distribution layers.

The Generics Pharmacy is one of the first to adopt this strategy. Instead of staying with the traditional system of supplying to distributors, who then supply to other distributors, or to stores and retailers, many manufacturers and master distributors are reducing the distribution channel by putting up their own stores directly and making these available through franchising.

Instead of being at the mercy of third-party retailers at the end the channel, these brand owners or master suppliers are controlling their own destiny by specifying how the store will look, how the products are marketed, and even the price at which these products are sold to the end consumer.

By cutting out the middle man, brand owners are able to lower the retail price of their products. Additionally, they are able to increase margins for those that remain in the channel.

Aside from The Generics Pharmacy, Francorp has helped develop brands such as PR Gaz Haus, and Holcim Cement to grow through franchising.

3. More complex franchise formats

For many years, franchise formats in the Philippines were the garden-variety Single Unit franchise. As the franchise industry becomes more mature, more innovative and complex formats are being employed.

Franchisors are now looking to add multi-unit formats like Area Development franchises and Master franchises to their offerings. Area Development franchisees are wholesale multi-unit owners who are given exclusivity for a city or province. Master Franchisees usually own the rights to an entire state or country and also have the option to sub-franchise to third-party investors. This is commonly used for international expansion.

Some franchisors are also offering Conversion Franchises, where independent store owners already in a similar business convert their stores and become part of the franchisor’s brand and network. Some franchisors go into Joint Ventures with their franchisees and are part-owners of the franchise store. In this set-up, they earn as a franchisor and a franchisee at the same time. Some franchisors, on the other hand, intentionally look for passive franchisees who are only interested in putting up the capital for the franchise unit; the franchisor himself will manage the franchise for an additional fee.

As franchising continues to grow in the Philippines, we may see more of these newer and innovative formats to meet the needs, capabilities, and goals of franchisors and franchisees.

Franchise Talk is a content partnership of ABS-CBNNews.com with Francorp Philippines. For more on master franchising & to meet foreign franchise brands, attend the How to Franchise Your Business Seminar on Jun 13 & 14 at Franchise Asia 2015 in SMX Convention Center Mall of Asia. For more information contact franchisetalk@francorp.com.ph or visit www.francorp.com.ph for more information.

Noel Siggaoat is the Managing Director of Francorp Philippines. An MBA graduate of the Carnegie Mellon University of Pennsylvania and a Certified Franchise Executive (CFE), he heads the firm’s consultancy practice. Noel has a diverse background in IT, finance, retailing, and franchising and has worked with companies here and abroad. He is a weekend athlete who has completed marathons, a half-Ironman, and other endurance events.

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Emerging Trends in Franchising

By Sam Christopher Lim
Senior Vice President, Francorp Philippines

The secret to choosing a good franchise is finding businesses that are in sunrise industries. But choosing industries that are addressing long term trends and needs and not just short term fads is challenging even for the most experienced entrepreneurs.
From interviews with Samie Lim, the Father of Philippine Franchising, who correctly predicted the growth of franchising in the Philippines 20 years ago, and discussions with other entrepreneurs both locally and internationally, here are 3 trends that will shape the Philippine franchise market:

    1. Increased demand for work-life balance
      Keywords related to home – based businesses get over 17,000 searches monthly on Google, and it continues to rise. With more people looking for work-life balance, most have started to look for businesses they can start and run from inside their homes. This trend has already taken markets like Europe by storm where franchise shows have seen an increase in home – based franchises businesses. Companies such as Tutor Doctor from the US and Crest Clean from New Zealand are just some great opportunities that allow entrepreneurs to start a business, while being in the comfort of your own home.
    1. The rise of Retirement Resorts
      Aging is a fact of life. The stigma of retirement homes as pseudo prisons is now changing with the entry of retirement resorts around the Philippines. Here, parents and grandparents can relax and enjoy socializing with peers while getting the best medical care, should they need it. Retirement resorts such as Life Care from Cebu have been an early player in this segment.
  1. Tourism Boom requiring new services and workers
    With the Philippine targeting to double tourists to 10M by 2016, and the Philippines having some of the best tourist spots around the world, we can expect more tourism dollars coming into the country. With this, there will be in increased need for tourism infrastructure such as good quality branded hotels that deliver value and reliable service across the country. In addition, tourism schools such as the Canadian Tourism & Hospitality Institute have started to use international standard curriculums to train more and more tourism professionals to prepare for the influx of tourists.

Buying a franchise can be a very profitable investment, but it’s important to choose businesses that will benefit from long term trends in the country. This will assure you that your franchise business will be profitable for decades to come.

Franchise Talk is a content partnership of ABS-CBNNews.com with Francorp Philippines. For more on franchising, contact Sam Christopher Lim at franchisetalk.ph@gmail.com or visit www.francorp.com.ph
About the author:
Sam Christopher Lim is the Senior Vice-President for marketing & strategy at Francorp Philippines. He has over a decade of global marketing experience from Bangkok, Shanghai and most recently London. He is a multi-awarded marketer who graduated with distinction from Oxford University and was awarded with the Young Market Masters award. He is also currently Chair for ASEAN integration for the Philippine Franchise Association.

 

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The Next Kings (and Queens) of Kiosks

By Sam Christopher Lim
Senior Vice President, Francorp Philippines

There was a time in the not-too-distant past that the concept of a kiosk or food-cart was not considered to be big business. But when brands like Potato Corner, Fruit Magic, Candy Corner, and Andok’s began to gain in popularity, strength, and number, it soon became apparent that it was as valid a way to achieve business success as investing in a full-line store or restaurant. Now, a new wave is on the horizon and up-and-coming brands are aiming to take their place as the new kings of kiosks and carts!

The Lollicake Factory – Question: What looks like a cute lollipop but tastes like a moist and scrumptious cake? Answer: A lollicake from THE LOLLICAKE FACTORY! Actress LJ Moreno Alapag started this previously home-based business back in November 2010 after first tasting a cake lollipop in Long Beach, California while preparing for her wedding. When she returned to the Philippines and got a craving for a cake pop, she was dismayed to discover that no local bakeshops sold the novelty treat. As a skilled cake decorator and pastry chef herself, she decided to make her own, all the while applying her own special and unique style and taste. Word-of-mouth soon spread, and LJ’s “lollicakes” became popular enough that she was able to open her own storefront last September, 2011. Last year, THE LOLLICAKE FACTORY has opened itself to franchising, the better to help spread the love for exciting, fun, and great tasting lollicakes throughout the country!

Inihauz Your Roast Specialist – It is said that the strength of a brand is measured in the loyalty of its customers. If that’s the case, then INIHAUZ YOUR ROAST SPECIALIST is a strong brand indeed. First established in March 2003 as D’Champ (Lechon Manok atbp) by Mr. Conrado Posadas, it grew over a period of ten years into six successful branches around Marikina City. During this time, Mr. Conrado’s son Arthur was an active participant in the business. When Conrado turned over the reigns of the business to his son in 2013, Arthur decided to take the business to the next level. With the help of his wife Lirio and his friends William and Sherielyn Riego, one branch of D’Champ was renovated with a new look, new concepts, but with the same great taste that made D’Champ so popular. Thus the first INIHAUZ YOUR ROAST SPECIALIST was opened, and it stood as a testament to the quality of their product that despite the change in name, they not only retained their previous patrons, but gained whole new ones with their expanded range of product offerings. Soon enough, the inquiries for franchising came in, and after consulting with experts, INIHAUZ YOUR ROAST SPECIALIST is proud to announce that it is now open for franchise!

With their entrepreneurial spirit, unique concepts & ideas and world-class advise from franchise consultants such as Francorp, these home-grown brands are continuing to grown and become the next Kings & Queens of Kiosks.

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The best business defense is a good franchise offense

By Sam Christopher Lim
Senior Vice President, Francorp Philippines

It is a well-known strategy in basketball that the best defense is a good offense. As dozens of global name brands sprout out in Metro Manila – the likes of Uniqlo, Cotton On, Forever 21, Miss Selfridge, Superdry, American Eagle Outfitters, H&M and Sperry Top Sider are taking prime spots high-end and mid-end malls. While a lot of local apparel brands have started to defend their market, some have taken the opportunity to prepare to go on the offense and look to expand into international markets.

The entry of international brands have challenged our local apparel outlets to level up and because Filipino consumers love design and quality which are both present in global and local brands, they are willing to purchase both. And with the growing consumer power and fashion-conscious outlook of the middle class, especially the young professionals, apparel will always enjoy capturing a sizeable chunk of the market.

According to the Euromonitor International Report, though online retailing of clothes is getting to be popular, buyers still want to go to stores and experience fashion for themselves. Department stores or boutiques are still the destination if one wants clothes, sportswear, and footwear.

Retail Franchise, Fashion Franchise, How to Franchise your business

With a rosy outlook in the fashion industry, many Filipino brands are confident about their prospects. One of them is Pois Belly and Kids which houses three fashion-niche brands – Pois, Belly Maternity, and Great Kids . Pois Belly and Kids is committed to building a world-class brand and continuously cater to the dressing needs of fashionable tykes and ‘tweens as well as expecting moms.

From a home business in 1999, selling a maternity line called Great Expectations to friends and family, it gradually expanded into girls’ wear. In 2004, in view of the demand for good quality and stylish fashion clothing for children, the Great Kids brand of apparel was conceived to cater to mini fashionistas aged 2-12 years old who look up to and want to emulate their stylish mothers. Great Kids was a hit for parents and their girls as the brand not only provides an extensive range of choices but also boasts of quality and comfort (clothes are mostly made of imported, high quality, breathable cotton and bottoms have adjustable waist systems).

Rowena Velasco, president, explains that in 2006, the brand Pois was conceptualized after much demand from loyal customers who have “graduated” from the Great Kids children’s sizing. Pois is a play on the English word “Poise”. Without the “e”, the name evokes curiosity and reflects a playful and yet sophisticated touch – apt for ‘tweeners who are enjoying the in-between years of childhood to womanhood. Pois is a range of pretty and fun fashion that reflects the light-hearted mood of the ‘tweens and teens.

Now, with the help of Francorp, Pois Belly and Kids is “poised” for greater growth through franchising. With over 33 stores, a franchise program developed by international experts and world-class franchise operations manuals, Pois Belly and Kids plans to continue expanding locally & internationally through franchising, Pois Belly and Kids will continue delivering a stamp of unique beauty and craftsmanship that only a Filipino apparel boutique can boast about.

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Entrepreneur Thought Leaders Forum

Franchise Seminar, Entrepreneur Thought Leaders

Entrepreneur Thought Leaders Forum

Hear from the country’s foremost movers and shakers in the fields of business and learn effective ways to grow your business.
Hear from Francorp’s Senior Vice President for Marketing & Strategy, Sam Christopher Lim, on how Franchising can grow your business and can help you take your franchise business global.

Saturday, Nov 29, 2 to 6 pm
Elements at Centris

Register today! http://www.entrepreneur.com.ph/ThoughtLeadersLive2

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