Turning the Franchise Business Back On

The dramatic morphing, scaling back and, in many cases, shutdown of franchising due to social distancing has eased. Now is the time to plan how to scale your franchise system back up.

By Michael Seid and Kay Ainsley, Managing Directors, MSA Worldwide

We are living through unprecedented times, with an uncertain timeline for when full normalcy will return. The government’s guidance will continue to change as circumstances on the ground change; many franchise systems are once again fully open for business, while others remain susceptible to evolving restrictions due to COVID-19. Since the initial shutdown, we have stayed in close contact with our franchisor clients on how best to re-open their franchise systems, and want to share some of that guidance with you.

Our clients are, of course, in close contact with their franchisees, especially those where the franchisees remained open in some capacity during the shutdown and continued to stay in touch with their suppliers. While franchisee recruitment remains somewhat impacted, franchisors are still working with franchisee candidates in their pipeline. Some are dealing with new franchisees that signed before the shutdown but subsequently considered changing their minds. Franchisors continue to actively work through the issues of determining the best approach to fully reopening their franchise systems.

Few of us had ever experienced turning an entire franchise system back on, and none of us had ever done it after a national business interruption. We have identified a few critical learnings:

1. 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 need to be contextual.
2. Franchisors need to feel their way a bit, and be nimble in making decisions quickly as issues arise. It’s 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 come up.
3. 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.

We have seen that the re-opening of business in the United States occurred on a market-by-market, region-by-region basis, depending upon the rates of infection and hospitalization in different markets. Should there be another severe wave later in 2022, we might expect to again see region-by-region restrictions.

We are still not fully 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 saw a shrinkage of locations as franchisees (and possibly a few franchise systems) were not able to survive – even in the short run. We have also seen some industry segments grow during the pandemic, such as delivery-model quick service restaurants and home improvement franchises.

Projecting Recovery Demand

The recovery demand is not uniform. There is considerable pent-up demand, but varying by industry. And while the major period of COVID-19 disruption is in the past, how people regard some products or services has 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 – are taking longer for the public to re-engage with as we learn more about the lasting effects of the COVID-19 virus. It’s expected therefore that the speed, depth, and uniformity of the recovery will continue to be challenging for some companies.

Companies in the stay-cation segments (i.e., haircare and other personal grooming) have been largely able to open sooner and recover more quickly, as we also see in pet grooming and residential and commercial cleaning systems. Other segments, including those targeted at business travel, are taking a bit longer to come back because people remain cautious about coming into close contact in tight quarters. Additionally, the period of mandated social distancing made video conferencing and other virtual interaction methods more common, and those methods continue to be popular now that social distancing has eased.

There are still concerns over whether there will be any lingering COVID-19 recommendations that will become regulations, since that might 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 did not expect a fast return to business as usual, while others projected and have experienced 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 looked at the CARES Act and Payroll Protection Program, with some considering a requirement that franchisees take the loan packages available. We 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 caused them the same financial pain as it has on franchisees, and maybe more. Franchisors expected to incur costs that were never expected before the shutdown, and it was crucial for franchisors to come out of that period in decent financial health. Adjustments in franchisee support, franchise sales efforts, and corporate growth were largely needed, and a priority list had to be established for where those adjustments were 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 in the past. Discussions are still 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 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 was expected that viable locations might close, we 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

Communications during this time 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, franchisors understand that there will be challenges due to unanticipated situations. Trust in franchise system leadership, and the inclusion of franchisees in making some decisions, is essential. Franchisors agree that messaging needs to remain positive, supportive, and both serious and lighthearted as appropriate. A continuous stream of “The Sky Is Falling” pronouncements eventually becomes 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 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 important to planning and execution. In some cases, their role temporarily expanded to make localized decisions, including some related to brand standard flexibility.

One client examined executing their re-opening similar to how they would 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. Gathering information quickly allows 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 uniform or on a total system-wide basis, a strategy needs to 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 was severely disrupted by the shutdown, and some workers have not returned. That is an unfortunate truth. There is also significant competition by every business seeking to fill their employee and management gaps, impacting labor rates.

Most franchisees seem 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 necessary to determine recruitment needs.

Customers 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 continue to work with our clients on variations for soft openings and train-the-trainer programs for franchisees. Where online approaches can be provided, we expect these will lessen but not eliminate the problem. However, regardless of the approach, each system needs to examine both training and the impact openings may have on brand standard execution.

Supply Chain

Some supply chain flexibility is expected, as it is understood from our clients’ discussions with their suppliers that they also experienced disruption. Some items may not be available during the re-opening, especially those with a shorter shelf life. Pricing from suppliers has also been impacted by the effects of the pandemic on the global supply chain.

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.

Brand Standards

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. 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 may also reduce some franchisee stress. It’s important to identify that any changes to these processes are temporary, and that the franchisor will continue to re-evaluate such changes as the business environment continues to adapt.

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, this requires creativity, planning, 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 mseid@msaworldwide.com, or Kay Ainsley, Managing Director at (770) 794-0746 or kainsley@msaworldwide.com.