Magazines Archives - 2007 December

Lack of understanding impedes business growth
Cover Story

There is no denying that the franchise and licensing industry in Singapore has exceeded its growth expectations since the industry took off in the 1970s. Yet, despite the immense potential for further growth, a recent survey revealed that a lack of understanding of the business ranked second in the top five problems that franchisees here encounter.

Singapore has more than 30,000 franchisees in over 420 franchise concepts that range from F&B to fashion and, over the past year,

The booming Asian economy, coupled with swiftly expanding markets of China and India, has secured the region’s continued growth for a good number of years to come. “This rapid growth reflects the untapped potential of the large and relatively undeveloped

franchise markets in the region,” attests Rashid Hassan, COO of PastaMatrix International Pte Ltd, which operates the Pastamania franchise in Singapore. Loh Khum Yean, chief executive of SPRING Singapore, the agency for enterprise development, adds: “One of the ways which enterprises can grow their business is through franchise and licensing. This approach offers several advantages such as speed to market, strong brands, recognition and greater economies of scale in growing the business operations and systems.”

With the immense potential that embarking on a franchise business in Singapore holds, it comes as a surprise that despite having been a dominant player in the economy, one of its biggest challenges revealed in a survey conducted last month is a lack of understanding of the business.

The survey, released by the Franchising and Licensing Association of Singapore (FLA), an industry body that assists and monitors developments in the industry, together with the Singapore Business Federation (SBF) and FT Consulting Pte Ltd, a local consultancy group, also highlighted developments and challenges which industry practitioners faced in the midst of the burgeoning economy.

Often, a mismatch of expectations between the franchisor and franchisees is the underlying cause for the perceived lack of understanding in the business.

“Franchisees buying into a franchise usually expect an easy entry into the industry without fully understanding the many different back-end works that need to be done before the business can actually start earning its first dollar,” says Rashid.

Highlighting some such areas, Rashid elaborates: “Franchisees must be aware that the initial financial investment required will be more than terms stated in the franchise agreement, as there are many hidden costs such as rental deposits, travelling costs, HQ staff costs, initial cost of goods (COG) and licences that will be needed at the start.”

Just as with any business venture, one of the fundamentals are doing sufficient homework beforehand, an attribute that Jack Chin, business development director of Mad Jack Group, home-grown restaurateur of Australian- concept dining, felt was lacking in franchisees. “Most of the potential franchisees enquiring about the business did not have sufficient understanding of what they were enquiring ... and we [discovered] that most of them were not real potentials as they had not done enough homework or were not ready to take on any business venture at all.”

Clearly, as franchisors, the frustration and disappointment that they facewhen franchisees expect them to be a one-stop solution for discounts and to make a quick dollar is apparent. Often, local franchisees are more eager to see a quick return on investment, which leads to them overlooking standard operating procedures, thus demonstrating their lack of understanding.

Although franchising and licensing has lower business risks and is a provenplatform with higher success rate, trying to unravel the idiosyncrasies of the industry is no easy feat. Apart from the task of selecting the right franchise business, there are the many regulatory terms and agreements that both parties have to review prior to any arrangements.

“One of the areas that franchisees need is training, because taking a franchise is nothing like building your own brand,” says Terry Wong, general managerof FLA Singapore. The association, she elaborates, frequently organises courses and seminars for both franchisees and franchisors in the republic to further enrich their knowledge so as to fuel their success. One such programme is a twoday franchise-management course,which is conducted twice a year, to cover the key aspects of franchising. FLA has also launched a specialised diploma in Enterprise Managementat the Ngee Ann Polytechnic in Singapore, which is a more detailed course in franchising and licensing. In addition, the association holds monthly seminars and talks, inviting industry experts to share experiences and insights, and organises an annual exhibition in Singapore as a platform for industry professionals to come together and further explore and expand their businesses.

Apart from FLA, SPRING Singaporehas played an active role in encouraging entrepreneurship and enhancing businesses in the city-state. With an extensive range of highly relevant programmes, such as BrandPact, Intellectual Property Management, Micro Loans and financing schemes, the agency provides aid to start-ups as well as enterprises that wish to take their business to the next level.

Resting on one’s laurels is never an option in the industry, warns Tan Yew Kiat, general manager of bYSI International Pte Ltd, local fashion and accessories retailer. He says: “Adaptability is crucial and constant changes need to be done to ensure compliance and flexibility in the new market, especially in the c o m p e t i t i v e fashion industry.

At the same time, we experience and unlock new potentials of our brand.” Rashid concurs: “In any new relationship, the ability to turn the business into a profitable entity will be the most crucial challenge of the business. Both parties need to collaborate and work hand-in-hand to determine the best approach in building the sales and managing the profit. This discipline must be inculcated from the first day of operations as impressive future growth plans are usually dependant on the success of the first few outlets.”

That said, franchisors add that “government regulations and economic vision can affect the franchise industry”. “The government’s vision in making Singapore a world-class centre for retail excellence has definitely improved the overall retail standard that, in turn, improves business performance of the franchise [business] in the retail sector,” adds Tan.

However, one point that rings through with local franchisors is for franchisees to recognise that getting into the franchise business is not a sure-win formula. “There is still room for improvement. For instance, both parties need to set the right expectations,” advises Aldrin Loi, executive chairman of Ya Kun International Pte Ltd.

Loi adds that most franchisees in Singapore face increasing rent pressure, which in turn affects their bottom line and will eventually have an impact on the franchisor who may break the established standard operational procedures.

“There is a need for the franchisor to provide a good support system to its franchisees, and likewise for the franchisee to comply strictly with the franchisor’s business system, whether or not they fully agree with it,” Loi states.

At the end of the day, with renewed government support and continued assistance through trade associations, franchisors should continue to work towards eradicating the lack of understanding of the business. However, this can only be achieved by working closely with franchisees, as Rashid reminds: “Roles and responsibilities of each party not only need to be spelt out clearly in the franchise agreement, but they also need to be thoroughly discussed in detail so as to ensure clarity of roles and the amount of commitment that will be required to make the relationship a success.” ra