Do you have a big idea, dream or passion that you want to turn into a business? Have you always wanted to start your own company, but feel worried about how you’ll grow it in the future? Are you eager to help others realize their dreams? Then franchising may be for you.
According to the International Franchise Association, the total number of franchises in the U.S. stands at about 800,000. They employ 9.1 million people and contribute $552 billion to the GDP. Franchising, in other words, is no small business.
Franchising can help business owners expand quickly without spending an exorbitant amount of time, money and resources in order to scale. Here, six successful entrepreneurs share their stories of why and how they franchised their businesses, and what franchising has done to help them achieve their life purpose.
Galen Welsch, 29, is the cofounder & CEO of Jibu, a social enterprise that provides opportunities for entrepreneurs in underserved, emerging market communities to own businesses – and help solve the water crisis. Jibu has scaled a network of locally-owned, financially independent and self-sustaining franchises that provide safe drinking water to their communities while offering job skills training and employment.
Within two years, Jibu has grown from two pilot shops to 190 franchise locations in three countries: Kenya, Rwanda and Uganda. Through the combined efforts of franchisees and microfranchisees, Jibu has sold close to 30 million liters of safe drinking water, introduced fortified porridge as a health-improving supplement, attracted 150,000 daily consumers and created 568 jobs.
While living and working in Africa, originally as a member of the Peace Corps, Welsch “became convinced that eye-to-eye partnerships with local entrepreneurs are necessary to solve the world’s pressing issues, such as lack of safe water.” He cofounded Jibu in the belief that a socially-just business model can transform lives, turning scarcity into abundance. Doing this is, Welsch feels, his life purpose.
“Social franchising, with its profit-driven model and ability to quickly scale, coupled with impact goals, is the best way to systemically bring change to communities,” Welsch said. “In developing markets, in particular, franchising provides the structure and tracks to run in but also relies on true local ownership. Typically, microfinancing and other mechanisms do not provide enough of the tools needed for business growth and success, while other traditional NGO interventions do not give true fiscal ownership to locals. By combining the franchise model with asset financing, we are able to provide the balanced ingredients needed for emerging market success.”
To others interested in franchising, Welsch offers this advice, “Have the grit and courage to build the plane as you fly it, and the humility to recognize that success is made up of millions of failures and pivots.”
Jibu Board member Dr. Litalien is the founder and principal of Franchise Well, a specialized consulting practice supporting franchise companies, prospective franchisees and nonprofit organizations interested in the franchise sector. His article “Franchise Outlook for the US in 2017,” recently published in Franchise Asia, offers an insightful analysis of changes in the franchising sector.
Prepare for Change
Franchising in the U.S. has enjoyed decades of consistency on numerous levels. Franchisors and franchisees acted predictably, marketing for franchisees was one dimensional, and the regulatory environment was generally stable. Now franchising in the U.S. is in the midst of the most disruptive period it has known. Welcome to the new normal in franchising…a period of constant change.
Every aspect of franchising is on the table and there is no end in sight. The number of companies using the franchise model has exploded with over 3,500 actively pursuing a slower growing pool of candidates, according to FranData. State regulators have stepped up activity and oversight of registrations, increasing franchisor costs and seeking to shift the model towards franchisee empowerment. Broker networks seemingly exceed the pool of candidates, offering to find the right “fit” for every prospect and exacting 50% or more of the franchise fee for doing so. The National Labor Relations Board’s pursuit of independent contractor business models sent shockwaves across the franchise sector last year, sending many franchisors into panic- mode to revise their manuals and evaluate their practices, and it persists in 2017.
An unparalleled generational shift, led by almost 100M millennials further isolated franchisors and franchisees, both struggling to figure out how to effectively communicate. Yet, the value of the franchise model has never been higher as financial firms have developed a penchant for the annuity-like returns. Valuations have risen to questionable proportions creating more winners and losers, and the pool of strong acquisition targets is diminishing which is exacerbating the market. For franchise companies in the U.S. and those interested in coming to the market, here is a deeper look into a few of the most pressing issues top keep in mind.
The success of the franchise model has attracted an increasing number of entrepreneurs to bring literally hundreds of new offerings to the market annually, many from overseas, each ofwhich must compete for a modest pool of prospects. While in the past these new concepts could solicit a “franchise packager” to turn their model into a U.S. ready system, the results of that may not be as effective as a much more customized approach will be needed. The proliferation of the brokers provides these new franchise entrants with a “turn-key” solution to their franchise development needs, by identifying interested candidates and connecting them to a potential franchisor. While that seems simple enough, there just may not be enough quality candidates to go around in 2017.
Yet, those that chose to go direct to the market will find it increasingly difficult to attract prospects using traditional approaches such as trade shows, outbound campaigns and internal referrals. Franchise Development staff will need to put away their “shotgun” approaches and get out the “sniper rifle” to target prospects with the right characteristics for the concept. And, when a franchisor identifies a high-profile target, they will need to go after them with new fervor to ensure they choose them over the growing number of direct and complimentary substitutes. This year, renewed efforts should be placed on bolstering existing franchisees that are not realizing the full potential of their franchises to ensure systems are not losing ground on the market. This requires a fresh look at franchise support staff capabilities, their time spent with franchisees and what is in their “toolkit” to help close performance gaps.
The Widening Communication Dilemma
The most chronic issue facing franchising in 2017 is internal communications. Dramatic generational shifts are taking place as millennials, those ages 20 to 35, have entered the workforce and their mindset is significantly different than their predecessors. According to generational researcher and author, Jamie Notter, he suggests in his book When Millennials Take Over, they need work environments that are “digital, clear, fluid and fast”. Coupled with the growing diversity of franchisees (e.g. more women, more minorities, more veterans and more foreign owners) franchise systems must evolve their communication strategies to create more consensus, become more inclusive and promote more franchisee-to-franchisee engagement.
Furthermore, the franchise offers couched in the cookie-cutter model of the 90’s must now give way to innovative models including quasi-franchises and hybrid agreements. Also, the ‘Franchise Advisory Council’ and ‘National Ad Fund Council’ approaches should be revisited with an eye towards more franchisee engagement, more localization of the marketing and more monitoring on their impact on elevating brand value. More diversity in the composition of these groups is needed, along with more feedback loops from franchisees across the network to build consensus. As more millennials enter the franchise sector this year than ever before, it is critical franchise leaders prepare to embrace them as employees, franchisees and supply partners. Failure to do so could led to catastrophic results. Likewise, franchise offering documents and agreements should be reviewed to ensure they are timely and well-balanced.
As more diverse groups enter the franchise arena they desire transparency in all aspects of the offer, reasonableness in the agreements and fairness in the benefits from success. As regulatory bodies review franchise documents, they are increasingly looking for the same recipe. All too often, franchisors just “update” their offers annually with minimal changes. 2017 is a year for a complete rewrite of the offer, agreements and manuals.
Renewed Focus on Innovation
Historically, when a business reaches a plateau in their lifecycle they either reinvent themselves or fall into decline, which if left unchecked can lead to obsolescence as in the case of Blockbuster and Radio Shack. Franchise systems are reticent to embrace innovation given the rigidity of the model. Rarely do franchisees like or embrace change, and there is really no good time in the franchise lifecycle to require it. For example, when should a franchisor upgrade their software platform? It is a very disruptive event given new franchisees just figured out the old model and mature franchisees don’t want the investment cost or learning curve.
Consequently, franchising lags traditional company innovation cycles. In 2017 it will become necessary for more franchise systems to release the shackles on innovation, develop deliberate and strategic plans for advancing their brands, and renew many tired systems. The velocity of change in the marketplace requires much shorter lifespans for most products and services, and franchising will have to join this fray to remain competitive with Uber, Facebook, Zappos and the myriad of others that use innovation as a core differentiator.
Susan Reed, founder of Edge Dwellers suggests that franchise companies have a limited understanding of the strategic value of innovation. “Franchisors rarely understand how they stack up compared to their competition, thus they don’t know what type of innovation is needed to compete”. Prospective franchisees would do well to pay attention to the innovation activity of franchises they are interested in pursuing.
Finding the Right Fit
Franchisee selection has been widely discussed over the years, but in the current fever-pitched arena to secure new franchisees, it has become easier to rationalize accepting a broader array of candidates. While the pain of such a decision is not quickly felt, given the decade or longer average lifespan, it can be debilitating over time. This year franchisors should be even more discerning when deciding who to let into the network as an insurance policy on support costs, underperformance, closed units and reduced overall valuations.
The reliance on broker networks can eat up much of the upfront fees franchisors once enjoyed, but the lifeblood of any franchise organization is the long-term royalty stream, and that come this year to gain a fuller understanding of what drives success within their concept and be guarded against allowing candidates into the network that don’t demonstrate those factors. This takes tremendous discipline in an environment where candidates are harder to come by, financial owners want growth, and high valuations are driving decision-making. Likewise, franchise prospects are in the best position ever to leverage their status when considering a franchise. It’s a buyers’ market in the U.S. and high quality candidates should not be reluctant to “negotiate” all aspects of the offer.
Rising Above the Ordinary
This year in franchising will likely produce a widening group of winners and losers, and require franchisors and franchisees to be willing to accept change to reflect the dynamic marketplace and leverage opportunities. Too often, however, change is not made because of a lack of confidence in what change is needed. The franchise sector would do well to take some time in 2017 and plot an effective change management course for the future. Franchise systems that do it effectively in 2017 will rise above the ordinary.
Jibu recently hosted an East African exploratory visit for impact investors including PeakChange, one of Jibu’s earliest and most catalytic investors. Here are key takeaways of the East African investment landscape shared by Emily Winslow of the PeakChange team:
In May 2017, PeakChange spent a whirlwind week in East Africa. The immediate purpose of our trip was to engage with Jibu, one of our direct portfolio investments, while our long-term goal was to deepen our understanding of the impact investing and social enterprise landscapes in Kenya, Uganda, and Rwanda.
Our team had most recently visited Kenya in February. And, PeakChange has taken several investor trips to the region over the last couple of years, including Investors’ Circle investor trips. I taught in Ghana following college graduation, and I toured the continent for half a year from the Indian to the Atlantic Oceans. The entire PeakChange team has had separate as well as shared experience in Africa. During this visit, we met with entrepreneurs, engaged with local stakeholders, and got to know the capitals of each country a bit better.
We believe that effective impact investment requires more than just the commitment of capital. Devotion of time, resources, experience, passion, and other applications of attention is necessary to optimize financial, social, and environmental returns on investment. Especially when it comes to investing in developing countries, there is no substitute for first-hand experience. Support for social ventures that deliver solutions to the world’s most pressing problems requires you to get out of your home/office, go to where the action is, and step away from your computer while you’re there. When making impact investments in places like East Africa, getting to know the people, culture, environment, history, political and business contexts is essential.
A week may not seem like a long time, but here are my 7 takeaways from 7 days:
1. DO THE STAKEHOLDER TRIP.
Almost a dozen people traveled from the U.S., Europe, and India to see Jibu’s budding operations first hand in Uganda, Rwanda, and Kenya. The itinerary was fast paced and packed with franchisee mixers, in-store visits, team meetings at Jibu HQs, warehouse tours and a stakeholder roundtable discussion. We were able to ask entrepreneurs face-to-face how becoming a Jibu franchise owner had changed their lives (almost all for the better) and, by sampling the product for ourselves, come to understand why customers would want to drink Jibu water over the competition (spoiler alert: it’s designed to taste better). The trip allowed investors and stakeholders to understand the business and its operations through firsthand experiences, thereby informing strategy discussions and generating more sophisticated feedback.
2. GET TO KNOW THE LOCAL CULTURE, PEOPLE, AND ORGANIZATIONS IN YOUR GEOGRAPHICAL AREA OF INTEREST.
Africa is a very diverse continent. Each country has it’s own unique cultures and contexts. Therefore, the importance of making local connections and understanding local customs cannot be overstated. So, aside from our time with Jibu, we sought opportunities to learn more about each country’s culture and social entrepreneurship ecosystem. I was particularly grateful to learn more about the Global Livingston Institute’s work in Kampala. Through the guidance of Martina Namuddu, the Director of East Africa Logistics, I became familiar with the organization’s programs and initiatives, explored cultural attractions, and connected with local social entrepreneurs. In Kigali, Noel Ntabanganyimana, a colleague through one of our portfolio companies, ThinkImpact, was a great tour guide and took us to a peri-urban area to explore real estate development opportunities. The demand for affordable housing in Kigali is estimated at 344,068 dwelling units between 2012 and 2022. More than 60% are needed for low and middle-class affordable housing; and options are hard to come by in locations adjacent to urban settings, which are typically agricultural.
3. JOB CREATION IS VITAL, BUT FINDING AND RETAINING TALENT IS HARD.
The region has a disproportionately young population, where nearly 45% is under the age of 15 and almost 65% is below age 25. Beyond noting that each country in East Africa has a population pyramid that skews heavily towards youth, the details for each demographic and the implications for economic development are worth exploring. The population of Rwanda is relatively small and has been greatly affected by the genocide, leaving many people who are uneducated or undereducated and under-resourced to take advantage of economic opportunities. One stat I heard was that 80% of Uganda’s population was under the age of 25. I later verified this claim and came to appreciate that Uganda has one of the youngest and most rapidly growing populations in the world; its total fertility rate is among the world’s highest.
Most of the young entrepreneurs I spoke with had multiple jobs or side hustles with limited ability to focus attention on any one business and without resources to source capital for their various projects. I connected with Aireen Katongole, the Director of Talent and Recruitment at Staffable, a recruitment and training workforce accelerator in East Africa, who is dedicated to solving these employment issues. Opportunities exist. Figuring out how to best develop, engage, and retain talent in growing organizations remains a challenge.
4. CO-WORKING SPACES ARE THRIVING.
In Kampala, I visited a few co-working spaces with Martina. These types of entrepreneur ecosystems did not exist just a few years ago. For example, Nairobi Garage, one of the largest co-working tech hubs in Africa, was founded in 2013. In a region where power shortages are common and the internet can be spotty at best, the importance of a good office space cannot be overlooked. I was encouraged to see tech companies and social enterprises co-located in large facilities where they have room to grow and scale in their current space. In talking with the entrepreneurs, I found they perceive many of the same benefits familiar to co-working spaces typical in the U.S. Early-stage businesses and social entrepreneurs can greatly benefit from working in these types of environments by sharing resources, strengthening networks, and generating entrepreneurial hubs across East African cities.
5. HUGE OPPORTUNITIES ARE AVAILABLE FOR IMPACT INVESTMENT.
The combined population of four target markets for investors in East Africa (Kenya, Tanzania, Uganda and Rwanda), is estimated to be 225M by 2030. There are not a lot of investors competing for a place in these large and growing markets. If you are interested in investing in agriculture or energy, East Africa may be the place for you. Both sectors are growing and scaling due to the market for agricultural innovation and renewable energy. Rwanda’s robust business climate and track record of stable government make an attractive environment for impact investors looking for opportunities. The business environment in Uganda appears more challenging, but the economy is growing and improving over time. If direct investing isn’t your thing, there are plenty of incredible Development Finance Organizations and NGOs in East Africa that need support as well. Social businesses have challenges accessing funding and funding networks. Building and strengthening these relationships is vital for the impact investing space.
6. BUILDING BUSINESSES IN EAST AFRICA ISN’T CHEAP AND REQUIRES RISK TOLERANCE.
High financial returns and high social impact is an incredibly difficult target for early-stage social companies to hit. In the developed world, we take for granted that our roads are paved properly, when we order a product we can anticipate within a reasonable time frame when it will arrive, and that business norms will be followed. In African countries, we can’t make such assumptions. Furthermore, despite immense infrastructure challenges, market barriers, and unfavorable policy and regulatory environments, social ventures in East Africa must be commercially viable and present the ability to scale. Although most enterprises have built social impact into their business model, they don’t necessarily advertise themselves as social businesses; so we should look at what companies actually do and not just what they say.
Investors rightfully have doubts about the ability for exits and the stability of policy initiatives. It appears as though investors will need to take a more hands-on role to support their investments in East Africa, including helping them with resources and business challenges beyond direct capital investment.
7. EAT THE FISH WHILE YOU CAN.
While visiting Jibu’s franchise and microfranchise locations around Kampala, we were fortunate to have lunch at a restaurant on the water. This was not my first time sitting on the shore of Lake Victoria, the first being a trip I’d taken to the region in 2009. Lake Victoria is one of the largest bodies of freshwater in the world and supports a growing human population of approximately 30 million. Over the last forty years, the biodiversity of the lake and its catchment has been compromised for a variety of reasons. The indigenous fish species variety has been reduced by 80%, and over 70% of the forest cover in the catchment has been lost. Although familiar with the area, my understanding of the environmental ecosystem and workforce challenges gave me a new perspective of the importance and fragility of eating the local fish with my hands as I’ve been able to do over the last decade. It’s an experience not to be missed, while you still can.
Peter Holt of the IFA’s Social Sector Task Force and Jibu Country Director Mark Mutaahi share a wealth of advice on franchisee development, regional expansion and stakeholder engagement in this intriguing blog:
LCSA Jibu Blog Entry Number Five
April, 13, 2017
Today, Peter offered a wealth of advice on strategies for stakeholder engagement, franchisee development, training, and the role of the corporate store.
Mark began by sharing with us an exciting event coming up — Jibu will be hosting their investors and stakeholders for a visit in May. Seventeen people will be traveling from the U.S. to spend a week in Africa, learning about and observing Jibu’s operations. Mark explained that they are busy planning the event, which will consist of executive-level meetings with himself and Galen (CEO), team meetings with the entire corporate staff, and interactions with the franchisees to discuss strategy, challenges, expansion possibilities, and other plans. While he is excited for the opportunity to reenergize himself and his staff, there is a lot to do before everyone gets there!
Beyond logistics, accommodations, and travel arrangements to sites in Uganda, Rwanda, and Kenya, Mark is busy working with Galen to plan their messaging. For himself and his staff, in the weeds of day-to-day operations, it can be hard to remember that Jibu is “bigger than water”. Even the physical aesthetics of the office are very water-specific, and Mark is working to push the vision beyond the product. While this will be important to communicate to the visiting stakeholders, it will also be a great occasion to revive and strengthen the mission to corporate staff and franchisees alike.
Peter has some key suggestions for Mark while planning Jibu’s Stakeholder/Investor Week. He reminds Mark that he should have four goals. These goals are applicable to any group meeting such as this, whether it’s with investors or even when holding a franchisee meeting.
1. Educate: One of the top reasons to plan a get-together like this! Mark should show the investors what they’re doing and how it’s working.
2. Motivate: When you are bringing people together, you want to remind them that they aren’t just a single unit; they are a part of this amazing international network that is on a sacred mission to change lives. This is an excellent opportunity to remind everyone how they are improving the lives of the people they serve. Investors in this type of business are looking for more than just a return on their dollar, so you must make sure you are reinforcing and emphasizing the mission and the power of what you are trying to accomplish.
3. Celebrate: Any time you have a gathering, it’s a great time to take a moment and celebrate your accomplishments. When you bring your franchisees together, you celebrate top performance, a new program, a store that has reached an anniversary. Each little individual victory echoes through the network, and is a hugely motivating factor for franchisees and stakeholders alike.
4. Make New Friends: With every opportunity, individuals at various levels of the organization can network and connect. You are doing more than presenting the data, and reinforcing Jibu’s mission, you are creating an experience for all of the group members. You are helping your guests connect with you, your corporate staff, the franchisees, and other investors, and how you make them “feel” will be as important as what they learn.
Peter emphasizes that Mark will be playing travel agent, host, and concierge while curating the perfect experience for their guests. For some of Jibu’s stakeholders, this may be their first time to Africa, so Mark will have to go out of his way to make sure everyone is comfortable. In the words of Maya Angelou, “No one will remember what you say. No one will remember what you do. Everyone will remember how you make them feel.” For the stakeholders, they are not truly investing in what’s on the spreadsheet, they are investing in Mark, Galen, and Randy — and the dream that Jibu offers!
Peter next suggested a great idea for franchisor-franchisee relationship building. In his own franchise network, a group of chiropractic care clinics called “The Joint Chiropractic”, the new Vice President of Operations received reports that the franchise owners wished that the corporate staff had a better understanding of what truly takes place in the day-to-day operations of the clinics. They had the feeling that corporate didn’t have a complete understanding for the difficulties they faced, and were making decisions without ideas about the day-to-day impacts they would have. To combat these concerns, the VP of Operations arranged an Employee Visitation Day.
For one day, the Corporate office shut down completely (besides some members of the IT team), and each staff member was assigned a clinic to visit for the day. They worked in a clinic from 10am to close at 7pm, performing basic functions and getting a lay of the land. Peter found himself processing patients, working with doctors, and they all felt it was such an interesting and successful experience that the plan on making it an annual event.
Mark thought this was an amazing idea, and said he was going to steal it and implement it right away. It would be really easy to do, and would be a great way to provide insights, perspective, and empathy, and build relationships across the teams. He thinks the franchisees will really appreciate it, and they have found that these types of engaging activities have measurable and sustaining impacts on energizing the teams. He’s asked us to keep him accountable — so we will be expecting a full report on the Jibu Staff Visit Day during the next call!
Critical Issue #1: Franchisee Selection Criteria/Critical Issue #2: Franchisee Development
Last call, Mark introduced his new Mystery Shopper program, and told us about the preliminary findings. To recap, staff members all identified someone who lived within each franchise zone of operation, and gave them money to buy their first bottle of water and report back on their experiences. Since then, Mark compiled the discoveries from the 17 mystery shoppers to evaluate and present.
Mystery shoppers were asked to report on several basic aspects of the shop experience, such as: Did they take your name? Did they bring the water to your car? Were they presentable and friendly? Did they introduce themselves? Did they explain how the business works? Did they explain the refill model? Did they explain how radically lower their prices were? They wanted to make sure that the stores were exhibiting basic standards of service, and knowledge about the brand and the business.
He shared the findings just yesterday at the monthly franchise meeting. This meeting was a little different, because he invited the store managers to join for the presentation. The reports from the mystery shoppers were presented to the group, with verbatim responses — and the results revealed a clear breakdown between what the franchisees were expecting and what they actually recorded from the mystery shopper visits.
On the positive side, many of the findings were really good. Most customers felt the staff were friendly and presentable, and everyone said that the stores looked clean and professional. However, there were some unexpected negatives as well. Many staff members failed introduce themselves and to provide crucial information about the service and refill model. They also failed to capture customer information — such as names and addresses — when the shoppers called or visited the store. This data is needed to build a sales pipeline and for projections and evaluations at the corporate level. Additionally, when it came to delivery, many stores were unreliable at best. Some took several days to deliver, and did not adhere to delivery instructions — one customer had the water delivered to their business after hours. Another staff member told a mystery shopper that their delivery guy was so unreliable that he’d be better off to just pick it up himself.
This meeting was a little tense for a couple reasons. First, corporate did not warn the franchisees or the store managers that the mystery shoppers were coming, and there is some disagreement about whether or not that was a fair way to approach it. Additionally, these findings were reported verbatim, with the store managers and the franchise owners, who are technically their bosses, together in the same room. Some of the employees felt like they were being thrown under the bus or publically shamed.
However, Mark’s team was able to turn it around into a really great meeting. They enlisted the help of a customer service expert who specialized in training, and spent the next two and a half hours role-playing different scenarios: How to greet a customer, how to handle a call, how to introduce yourself and the business model, and how to provide efficient and friendly service. They also, based on Peter’s advice from the last call, rolled out a two-week contest. Whichever store has the largest number of callbacks will receive a cash prize for the store manager — equivalent to half of their monthly salary!
This meeting left all the employees excited about the contest, and are reinvigorated to track the customer data. Mark believes that this will help solidify a happy message from corporate, make some strides in terms of service, and transform that into additional sales down the road. Peter agrees, and mentioned a similar contest his venture, The Joint, recently offered. For 16 of their chiropractic clinics, they tracked three specific metrics: new patients, conversions to memberships, and the attrition rate, or how many people drop out of membership. While the prize was nowhere near half of the manager’s salaries, they still offered cash prizes for each of the metrics.
Peter said that those 16 stores, compared to a control group of similar stores, outperformed across the board, which translated to overall increased revenue for the company over the contest period. He praised this approach, because ultimately, all you are doing is motivating people to do the right thing — and pushed Mark to continue to come up with creative ways to encourage their franchisees.
Mark agreed, and also expressed amusement at how the franchisees think he doesn’t know what he’s talking about, however will hang on to every word of an outside consultant. Peter agreed that it is generally worth it to pay for someone to come for a day — and reminded Mark that the sentiment is universal: You are never a prophet in your own land. He recalled a regional developer who also ran one of the highest performing stores in the system, and had 20–30 franchisees in his region that he supported. All of those franchisees wouldn’t listen to his advice, and made excuses about his location as being the reason his store performed so well.
Meanwhile, other regional developers were paying him to travel across the country to work with individual units in their regions. It just takes an outside perspective sometimes for people to listen — third party verification is always good. You get stuck in the grind of the day-to-day work, forget that your unit is part of something greater — and a fresh evaluation often feels more credible.
Critical Issue #4: Regional Development/Expansion
Another topic Mark considered today was the role of the corporate store. As you may remember from the last call, the Uganda market is beginning to scout and research locations for the peri-urban areas extending out from Kampala. One of the ways they are contemplating facilitating this expansion is through setting up corporate stores in the expanded territory, as a way to display and evaluate the model. Mark’s question to Peter is: How much do corporate stores play a role in validating the model?
Peter answered flatly — none. Being a franchisor means running two parallel businesses — one is concept, and the other is franchising — and the two are quite frankly unrelated. He asserts that there are generally two reasons to run corporate stores: To serve as a training and testing facility, and/or because the unit economics of the business is such that it is profitable.
He clarifies that it is important to have the flagship or corporate store as an initial operating model — if you don’t have an operating model, what is there to franchise? Additionally, it is a good strategy for learning. But, you must keep in mind that the franchisees as a whole can run units probably 20% more effectively and profitably than corporate — so if the unit economics are not strong enough to justify that 20% loss, their needs to be other benefits. He adds that if Jibu is trying to prove this peri-urban model, and they have the time and the resources to set it up, they absolutely should. At the very least they can get it up and running, add in the experiences of the franchisees, and continue testing, training, and refining the system.
The last item that Mark wanted to discuss today was the role of Corporate as an “enforcer”. He is concerned that some of the franchisees might end up in violation of regulatory requirements in terms of employee income tax deductions based on how they choose to compensate their staff. , and wants to know what his responsibility is to inform and monitor this situation — how involved should corporate be, beyond the contracts?
Peter says this is a matter of discretion. In the corporate world, if the contract clearly states their adherence to regulations, anything above that is not within Mark’s role. The franchise locations are independently owned and operated businesses, and that type of intervention is not justifiable in the traditional model. If they are compromising the brand or the quality of the water, shut them down — the franchisees cannot do anything to threaten the Jibu organization. But Peter doesn’t view whether they pay their taxes as his responsibility. You can tell them that it’s not appropriate, but it’s not Corporate’s role to be the enforcer. If they are not compromising the model — not hurting the quality of the offering, not putting the staff at risk, not violating employment equal opportunity or harassment laws — it is not, in Peter’s view, Mark’s role to intervene.
On the next (and final) call, we should be able hear about what happens at the stakeholder/investor meeting, and get a recap of Jibu’s position and plans. It will also be interesting to learn of the results of the contest, and see if they continue the mystery shopping exercise to follow up on results. As the expansion unfolds, we hope to learn more about how the model works in a peri-urban setting, and see how Jibu chooses to address the enforcement issues from the perspective of a social enterprise whose mission is to create new entrepreneurs — they may have a different approach to guiding their business people than the purely corporate world. And, most of all, we can’t wait for a full report on Jibu’s first Staff Visit Day, as promised by Mark!