The dramatic morphing, scaling back and, in many cases, shutdown of franchising due to social distancing is going to end soon. Now is the time to plan how to scale your franchise system back up.
By MSA Worldwide
We are living through unprecedented times, with an uncertain timeline for when any sense of normalcy will return. The government’s guidance for re-opening parts of the economy has continued to change as circumstances on the ground change; it may be summer before we begin to see some franchise systems open again for business. Since the shutdown we have been in close contact with our franchisor clients on how best to re-open their franchise systems when the time comes, and want to share some of that guidance with you.
Our clients have, of course, been staying in close contact with their franchisees, especially those where the franchisees have remained open in some capacity and have continued to stay in touch with their suppliers. While franchisee recruitment has been impacted, franchisors are still working with franchisee candidates in their pipeline. Some are dealing with new franchisees that have signed but are considering changing their minds. All of them are actively working through the issues of determining their best approach to turning their franchise systems back on when the time comes.
Few of us have ever experienced turning an entire franchise system back on, and none of us have ever done it after a national business interruption like we are going through now. We have identified a few critical learnings:
- There is no one-size-fits-all approach to re-opening franchise systems. Franchise systems differ in industry, size, resources, leadership, maturity, geography, culture, customer profiles, regulations, economics, and relationship between the franchisor and the franchisees. Fungible solutions and best practices adopted by others are not likely to work for everyone, even in the same industry subset. Solutions will need to be contextual.
- Franchisors are going to need to feel their way a bit, and be nimble in making decisions quickly as issues come up. It is expected that decision making will need to be pushed down more than normal to the field level in many situations, as local solutions to products, supply chain, and staffing may come up.
- Perhaps most important is that while franchise agreements were never designed as a management tool, they most certainly were not written to deal with system closure and restarting a franchise system. There will be some risk, and business judgement; moral suasion and communications are likely more important than the rights and obligations provided for in the agreements.
When the United States opens for business again, it is expected that it will only be on a market-by-market, region-by-region basis, and not on a national scale. And, if the rate of infection in New York, Louisiana, Florida, California and Washington State are our guide, we can expect it to take place in smaller, more rural, less dense, middle-of-the-country markets first.
When franchising re-opens for business, it won’t be immediately back to business as usual. Covid-19 has hurt all of us in franchising, including franchisors, franchisees, employees, and suppliers. For some individual franchisees and franchise systems, even with support available from the CARES Act, franchisors may likely see a shrinkage of locations as franchisees (and possibly a few franchise systems) will not be able to survive – even in the short run.
Anticipating Recovery Demand
The recovery demand is not expected to be uniform. There will be considerable pent-up demand, but it will be different by industry. And while the Covid-19 disruption may have been relatively short, how people regard some products or services may have changed. For example, industries that rely on getting groups of people together in a confined space – such as boutique fitness studios, live event producers, and other indoor entertainment venues – may take longer for the public to re-engage with as we learn more about the lasting effects of the COVID-19 virus. It is expected therefore that the speed, depth, and uniformity of the recovery is going to be challenging for some companies.
Companies in the stay-cation segments (i.e., haircare and other personal grooming) are expected to be able to open sooner and recover more quickly, as may pet grooming and residential and commercial cleaning systems. Others, including those targeted at business travel, may take a bit longer to come back because people may remain cautious about coming into close contact for a period of time. Additionally, this period of social distancing has made video conferencing and other virtual interaction methods more common, and will likely lead to many who had avoided them in the past to adopt them more going forward.
Making planning somewhat difficult are concerns over whether there will be any lingering COVID-19 recommendations that will become regulations. If that occurs, it may impact business sales and costs. Our clients are most concerned with potential regulations about customer separation that may impact sales at restaurants and other types of businesses where consumers are generally close together in a confined space.
Each franchise system will need to determine where they fall into this changed demand paradigm as they do their planning. Most of our clients are not expecting a return to business as usual quickly, while others are expecting a surge.
Franchise System Assessment
All of our clients are focused on the economic health of their franchise systems, and especially that of their franchisees. Each is looking at the CARES Act and Payroll Protection Program, with some considering a requirement that franchisees take the loan packages available. We have also had discussions on a variety of temporary solutions including short-term changes to fees, decreased or deferred payments on required inventory, and other methods to lower or postpone immediate expenses.
For many franchise systems of lesser size and financial capability, the impact of the closure has caused them the same financial pain as it has on franchisees, and maybe more. Franchisors are expecting that they will incur costs that were never expected before the shutdown, and it is crucial for franchisors to also come out of this period in decent financial health. Adjustments in franchisee support, franchise sales efforts, and corporate growth all are likely to be needed, and a priority list will need to be established for where those adjustments can and should be made.
In regard to the existing pipeline of franchise sales, going forward we expect that some franchisors will examine more closely their approach to how new franchisees finance their businesses, their system’s requirements for capitalization, and some of the riskier approaches franchisees may have taken. Discussions are happening with some franchisees who have not yet opened their locations and are now having second thoughts about their future with the brand. The terms of the franchise agreement will certainly shape many of these conversations, with analyses of Force Majeure terms, potential refunds, and other items being discussed. As always, a business relationship is at its best when it can be governed by a strong shared culture and mutual understanding, but in times like these the specific terms of the agreements will have a major impact.
Looking at the sustainability issues facing individual franchisees and prioritizing an approach to their issues has been the major part of our discussions. Where it is expected that viable locations may close, we have had discussions on internal or external roll-up approaches to decrease the number of closures and mitigate the damage to the system as a whole.
Communications during an unprecedented time such as this will vary depending on leadership styles, and we have seen wide variations. The use of Franchisee Advisory Councils and Franchisee Associations is a frequent discussion, and the reliance on those groups can be useful. Regardless of planning, no one is anticipating that there will not be challenges because of unanticipated situations. Trust in franchise system leadership, and the inclusion of franchisees in making some decisions, is going to be essential. Everyone we have spoken to has discussed that messaging needs to remain positive, supportive, and both serious and lighthearted as appropriate. A continuous stream of “The Sky Is Falling” pronouncements will eventually become ineffective, but it’s important that franchisees, employees, and even suppliers see that the franchisor’s leadership is taking things seriously and thinking critically.
Dissemination of accurate information to the franchise system is especially important. We’ve had more than one client mention that the use of video conferencing and other communication tools that allow for some open dialogue between all stakeholders has been an effective way to keep everyone on the same page, and also to minimize the potential for misleading or dangerous rumors to be spread through the system.
In most cases it is recognized that the field staff have been playing and will continue to play an important role, as most have a uniquely personal relationship with their franchisees. It is also recognized that they are in the best position to gather some local information that will be important in planning and in execution. In some cases, their role may temporarily expand to make localized decisions, including some related to brand standard flexibility.
One client discussed executing their re-opening similar to how they would with any other change strategy, therefore bringing some sense of comfort and experience to an uncomfortable and unprecedented situation. The difference here is that most change strategies have a testing component built in, so that results can be measured before system-wide execution. While that will not generally be possible now, it is felt that gathering information quickly will allow for necessary adjustments so long as the correct measurement matrix is in place.
There have also been discussions on messaging and the best uses of the system’s brand fund on a more localized level versus a system-wide level. Because the system re-starts are not going to be uniform or on a total system-wide basis, a strategy should be developed for which markets should be targeted, on what schedule, and what specific type of messaging might be appropriate for that time period, both seasonally and related to where in this “recovery period” we are.
Labor and Training
Labor has been disrupted, and some workers will not return. That is an unfortunate truth. It is also expected that there will be significant competition by every business seeking to fill their employee and management gaps and that therefore labor rates may be impacted.
Most franchisees seem to be aware of the need to communicate with their laid-off staff and those whose hours and wages have been cut. Franchisees keeping their employees aware of what is happening in the business, plans for re-opening, and gathering information on their plans to return, is going to be necessary to determine recruitment needs.
Training will likely be a challenge. Customers will still expect the products and services they received before the closure to be delivered with the same efficiency, quality, and service levels they received before the shutdown. Franchise systems that typically have trained staff locally during unit openings may not have the infrastructure necessary to train the significant number of new workers that may be needed.
We are looking at variations on soft openings and train-the-trainer programs for franchisees. It is expected that where online approaches can be provided, these will lessen but not eliminate the problem. However, regardless of the approach, each system will need to examine both training and the impact openings may have on brand standard execution for a while.
Needing to have some supply chain flexibility is expected, as it is understood from our clients’ discussions with their suppliers that they also have seen disruption. It is expected that some items may not be available during the re-opening, especially those with a shorter shelf life. Pricing from suppliers may also be impacted.
Franchisees are taking inventory and putting their opening orders together. This should give franchisors the information necessary and allow them to determine acceptable supplier and product alternatives when required. Also, local sourcing in some systems may be used. Rolling out a limited menu of products or services may be necessary, and the appropriate messaging for such an approach needs to be developed.
The inability to re-open with a complete array of products or services will require substitutions and possibly LTOs (Limited Time Offers), or local substitutes. Variation from pre-COVID-19 offerings may leave some customers understandably disappointed. Some flexibility for local product sourcing in the short term may solve that problem. Giving field staff flexibility to make some decisions locally is seen as a partial solution in some cases (a risk in others), and it may also reduce some franchisee stress. It is important to identify that any changes to these processes are temporary and that they will continue to be re-evaluated as the environment changes around us all.
We expect franchising to emerge from this challenging time in good shape – and likely better than most – because of the strength of having locally-owned franchised businesses coupled with smart franchisor support. However, it will require creativity and planning to accomplish that. It will also require some time and patience.
We wish you the best of luck in reopening your franchise systems, and do let us know if we can provide you with any guidance and support.
MSA Worldwide provides strategic and tactical advisory services, primarily to franchisors, on a global basis. Call Michael Seid, Managing Director, at 860-523-4257 or email firstname.lastname@example.org, or Kay Ainsley, Managing Director at (770) 794-0746 or email@example.com.