Corporate Cloning

June 2010
Corporate Cloning
Investors are jumping onto the franchising bandwagon. Here’s how to get in on the act.

By Nadine El Sayed


It took Raymond Kroc, the founder of McDonald’s, years of tinkering before he figured out what cuts of meat make the best burgers, the fastest way to pour milkshakes and exactly how much chicken to put into a McNugget.

The results of Kroc’s ingenuity were history making. McDonald’s went from a roadside burger shack to one of the world’s biggest companies in under two decades.

While not everyone can do that, experts say a growing number of local business people are benefitting from the wisdom of Kroc and other iconic business figures by jumping on the franchising bandwagon.

In 2009, local investors poured LE 42 billion into franchise operations, up from LE 22 billion in 2004, according to the Egyptian Franchise Development Association, an industry group. Its general secretary, Hussein Abou El Fath, says that figure is expected to double in the next three years.

The fervor was evident at the recent MENA International Franchise Exhibition, held last month in Cairo. The expo, which serves as a platform for franchisors and franchisees from 19 countries, attracted 19,000 visitors, a six-fold increase from five years ago.

The prospect of time-tested international business models creating jobs at home has attracted government backing. The Social Fund for Development has created a specialized department that provides loans of up to LE 3 million to potential franchisees.

Marwan Abd El Razek, head of the unit, says during the start-up and growth phase, many businesses take serious risks due to lack of experience. Under a franchise agreement, those risks aren’t so prevalent.

“You have the image and perception of the franchisor. You don’t have to build a brand from scratch or re-invent the wheel.

While there are benefits, not every franchisor is a McDonald’s or a Starbucks. Untested business models, sky-high royalties and lackluster corporate marketing can put an end to your business before it gets off the ground.

With that in mind, Business Today spoke with experts on what to look for when considering a venture into the world of franchising.
Some industries are hot, others are burned out

The country can’t seem to get enough of Chili’s and Starbucks; food chains make up around 23% of the franchises in Egypt.

Abou El Fath says while the market is not yet saturated and restaurants will remain the most franchised chains for a while, there are alternatives out there.

Look for innovative business concepts. It doesn’t have to be an earth-shattering idea, but one that sets you apart. Abd El Razek says a prime example is Safe Tech, a tire service center that looked to outdo small garages by employing techniques used in Formula One. It became an instant hit.
Full disclosure is key

The more information you can get from a franchisor, the better.

Scrutinize the company’s disclosure document, which should list the firm’s capital, the number of outlets owned, any legal issues concerning the business, other franchisees, their contracts, countries of operation the list goes on.

“You have to ask to see this document. It is crucial to your decision,” says Abou El Fath.

But sorry, don’t expect to learn about what really goes into a Big Mac. You won’t get to see trade secrets like recipes.
Money talks and you need someone who speaks the language

If math isn’t your strong suit, then call in an accountant when it comes time to review the disclosure documents.

For instance, one thing a bookkeeper should look at is inventory: If the franchisor has a lot of stock, you need to understand why.

“Is this why he wants to open an outlet — to distribute the extra inventory,” says Abd El Razek.

“Is this because the product is seasonal? It may be because the product is obsolete and he can’t sell it.”

The same principle applies to legal matters. Hiring an expert who can explain the contractual fine print is money well spent.
Read the manual

You pay money for the brand name, but arguably the most valuable thing you’re getting is the franchise’s business manual. It should offer detailed instructions on setting up an outlet, running the business and marketing. If it doesn’t, run.
You’re paying for more than the inventory

“Franchising is a very fast way to transfer technology. You sign today and get the technology tomorrow,” says Abou El Fath.

But don’t be fooled; the system makes the business, not the stock. Marketing strategies, correct use of inventory, staff development and the ability to perform even the most minor tasks efficiently can make the difference between success and failure. It’s the know-how that you’re really paying for.
Ask for references

If the franchisor is reputable, they will probably be happy to give out the contact numbers of other franchisees. These people are a good resource for finding out how well the business is doing and whether there are roadblocks you need to be wary of.

“If he doesn’t have any franchisees and you’re the first, then this is a risk you’re taking,” says Abd El Razek.

See how many outlets the franchisor has and how successful they are. If they only have a couple of outlets, check to see how long they have been open and whether they are expanding. If they have the resources to grow but aren’t, that could be a sign the business is stagnant.
Educate yourself

Choose a franchise that will teach you and your staff marketable skills that will allow you to stay in business if the franchising contract isn’t renewed.

Abd El Razek says fast food franchises generally don’t offer training that applies beyond the scope of the company; most of the menu items are ready-made and the processing is minimal.

A better route for personnel development would be to set up a traditional restaurant where the staff receive corporate training and the franchisee is left with valuable knowledge post-contract. bt