In the text-book we looked at franchising as a mechanism for expanding a retailer’s operations both in a national and international context.
One of the most challenging aspects of retail strategy revolves around the issue of how to achieve a critical mass in terms of the scale of operations. How quickly can you grow the business in terms of the number of outlets?
We are all probably aware of the potential benefits. The larger the scale of operations then the more likely it is that a retailer can benefit from getting better discounts and deals from suppliers. A retailer can also spread the cost of doing business across the outlets and benefit from synergies and so on.
Franchising is seen as a quick and relatively low-cost way of achieving such a position.
The traditional franchise model is based on two key features: an initial “up-front” payment by the franchisee (the individual who wishes to become a partner / member of the franchise arrangement) and an annual percentage of sales that is paid to the franchiser (the company / individual who has established the original business idea and developed it into a successful investment proposition). The success of the concept is based on the belief that the franchisee benefits from the established brand proposition and the expertise of the franchiser in terms of help and support provided by the latter. It also works on the principle that it gives the franchisee the opportunity to own his / her business and a clear incentive to work hard to make it work. The franchisor benefits from gaining access to a wider geographic region and thus begin to benefit from a larger scale of operation.
I was brought back to this topic recently when reading an article about Majestic Wine: the largest specialist wine retailer in the UK. Originally established in 1980, it has expanded to over 200 stores in the UK and two in France. In 2015 it acquired Naked Wines to enable it to expand its operations.
Let me stress that it does not currently operate a full franchise model: none of its stores are franchised out.
However it has begun to introduce what its CEO Rowan Gormley refers to as a “franchise – light concept. Gormley was previously the CEO of Naked Wines and when this was acquired by Majestic Wine he subsequently became its overall CEO.
In his new role he embraced the philosophy of putting the customer and his staff first. In response to the customer he developed a multi-channel strategy with “click and collect” and online sales, simplify the pricing strategy and improve the design of the store to make it more “customer-friendly”. In response to the staff he felt that it was necessary to create a climate which could better incentivise his store managers.
Motivating store managers was seen as a particular challenge. In 2015 around twenty-three per cent of them left: mainly due to the restrictive nature of bonuses (they could only earn up to a maximum of £1000 and were earning a salary of £28,000.
This raises a more general question of the challenges of retaining staff in a sector which is pressurised to manage costs and salaries in order to remain competitive, particularly in the face of the ever-present threat of discounters.
The traditional “command and control” model is predicated on the practice of everything remaining in the hands of top management: where decisions on strategy are passed on to middle and junior management for implementation with little or no consultation.
Gormley challenged this approach by introducing what he termed the “Majestic Partners Programme” in 2016. This is based on the principle of allowing store managers to take responsibility for more control over the management and day-to-day operations of the business.
This is reflected in the store managers making decisions on issues such as staffing levels, opening hours, which product line to carry, discount levels and tasting products for use within the store.
Such a strategy can potentially allow them to earn around £50,000 based on performance. This is a significant improvement on the average earnings of £30,000 for the typical store manager.
This “franchise light” approach buys into some of the underlying features of a traditional franchise model. For instance it passes over some of the operational decision-making to individual store owner. By taking responsibility for areas identified earlier the manager is in a position to directly influence his / her income from the business.
While not having any responsibility for overall strategic decisions, never the less it can be argued that such responsibility can act as a major incentive and provide a strong indication that the store manager has an influence on the future of the individual store and by implication the overall business model.
It also provides a major incentive to stay with Majestic Wine and grow the business.
More importantly (for the store manager) it means that no up-front fee is required in order to participate in the business model. Thus one key element of the traditional business model is ignored.
One of the criticisms of the traditional franchise model is that there is conflict between what the franchiser wants and what the franchisee gets.
The franchiser does not want an entrepreneurial individual who typically likes to take some risks and above all resents being told what to do. In short they want someone who will diligently follow and embrace the underlying value proposition that has been embedded in the business.
However people who might invest in such a business (particularly if they have some independence and flair) find it difficult to operate in a situation where there is no “wiggle-room” for introducing new ideas or behaving in an innovative way.
The “half-way house” approach introduced by Gormley at Majestic Wines possibly overcomes this dilemma. It enables store managers to increase their income levels while at the same time broadening their range of management and customer service skills. In the longer term this arguably makes the overall business of Majestic Wine more profitable and sustainable.
As against that it can be argued that some of the successful store managers will most likely move onwards and upwards or even establish a rival business proposition.
On balance I like the approach adopted by Majestic Wine as it avoids some of the pitfalls of the typical franchise arrangement. It should certainly improve the qualities of the store manager.
Gormley expects to have around fifty to sixty per cent of the store portfolio operating the “franchise-light” model over the next year to eighteen months.
He recognises that not all store managers would be keen to participate in such a framework and be burdened with the responsibility for such decisions.
Successful managers who improve the business are likely to seek further reward by gaining promotion. If such a procedure or opportunity is not available then they will move to another company.
Gormley’s overall philosophy revolves around the “test and learn” model. Let’s keep an eye on this business over the coming years.