How taking care of your franchisees can lead to long-term growth

Tom Potter, former CEO of Eagle Boys Pizza, shares what your brand can learn from failure and how to avoid it.

It was thirty years ago when Tom Potter was mentoring his first franchisee in New South Wales, and it was the last day before that particular restaurant was officially sold.

“I'd had this franchisee training beside me for about three weeks. And every time he came to me to ask me a basic question, I'd sort of point to him and say, ‘This is retail, mate. All you have to do is look at the consumer in the eye, acknowledge them when they come in, ask them what they want, and give them give it to them as quickly as you possibly can,’” he said during his session at the QSR Media Sandhurst Fine Foods Conference & Awards 2019.

“You just need to take total ownership,” he had told the franchisee, time and again.

Potter, who now also serves as a strategic consultant and restaurant fast food analyst, said that identifying ownership and who holds the responsibility in a QSR structure is the first step in recognizing the factors that may lead a brand to failure. He argues that the CEO and/or Board are the “ultimate” reasons why brands can fail, if their strategy, leadership, morals and ethics are "just plain wrong" or “misguided”.

The challenges of a mature market
In an environment that is constantly in a state of disruption due to emerging technologies, rising business costs, and the prevalence of online food aggregators like Deliveroo, Menulog, and Uber Eats, Potter noted that QSR operators today face more challenges and stiffer competition compared to the past, when brands might see up to 30% EBITDA within a year.

Even as consumers become more likely to dine outside the home, or have more disposable income for leisure spending, Potter said that brands now have to compete with new players such as supermarkets and convenience stores encroaching the industry. Despite the relative conveniences of the internet and social media, their arrival had ushered in a wave of independent brands, vying for the market’s attention.

“It was almost a gold rush watching this in the last ten years. People rushing to the market, new players and new industry sectors, particularly the Mexican food market and obviously the coffee drive-thru market which have just gone gangbusters in that particular period. Because competition became fierce, rents continued up, the cost of electricity quadrupled, government red tape and bureaucracy increased. Marketing has become extremely difficult,” Potter said.

“So the bottom line is the real world of an open, competitive, capitalist market marches on in this country. If you can't handle the heat in the kitchen, you will certainly die from lack of change as evolution is critical.”

The importance of leadership
It is precisely the coming of this ‘perfect storm’ of challenges that highlighted the industry’s need for good leadership. Potter surmises that leaders who possess the technical and practical know how to navigate Australia’s cutthroat market, who are able to charter a path towards growth and success, and most importantly, who possess the moral fortitude to choose to do right by their people, franchisees and staff are in short supply at times.

He highlighted the failures of the new owners and management who took over Eagle Boys in using funds.

“The human carnage when Eagle Boys failed alone lost over $450 million of other people's money, and they were over 250 families eventually lost out or ended up back to square one. I actually look at things like that and wonder why there aren't more laws taking over what's going on,” he said.

Of course, many failures in the industry are simply due to a lack of experience or technical knowhow to run a business. Marketing strategies, under capitalisation and investment, competitive analysis, pricing, all these factors contribute to the success or failure of a business after all. 

Potter pointed out the failed ventures of known brands like Quiznos and Dunkin Donuts are mostly due to their inexperience with Australia’s difficult geography and their lack of logistical knowledge to overcome it. There are some operators, however, that put their own personal profits and careers first before considering the long-term sustainability of their own business model, putting their franchisees at high risk.

“This highlights the complete dysfunction between reality and some of the corporates who have no skin in the game, no idea and simply don't care what's happening to the people that actually pay the wages, which are the franchisees,” Potter said.

“They (franchisees) don't make enough money or any money at all. The franchisor themselves or their employees misrepresent, lie or or say very little to incoming franchisees about potential profits, risks, and projections and opportunity and security, which is what everybody wants. They have no plan, no governance, not enough skill or people to help guide them, are undercapitalized and they're ultimately doomed to fail. This is an enormous cost to both people, families and livelihoods.”

It is important, then, for good strategy/quality, diversely skilled directors and corporate governance to establish a clear vision that takes the welfare of its entire business into account. Ethics in the company, Potter said, should be aligned, there should be a readiness to accept change, and move accordingly to the needs of the market.

“Short-term profit can sometimes lead to disaster. The long view is the only view in the franchising . Morals and ethics, along the right strategy and plan is critical,” he said. “Whether it's the digital, whether it's the product range, whether it's the way we're servicing them, we have to continue to evolve.”

(Tom Potter is a member of the Australian Franchise Hall of Fame and was named Valour Dictorian in his graduating class at Harvard Business School. He has served on multiple boards, including the AFL Commission, Soul Origin and Brumby’s Bakery. He fills his days by consulting and mentoring and travels around Australia and internationally as a public speaker. Email him at [email protected] and check out his website at www.tompotterspeaker.com.au)