Printed in USA Today
by Nancy Rathbun Scott
"A franchisor's job is to reduce operating costs and increase margins," says Ron Retzetko, CEO and founder of Wisconsin-based Batteries Plus. Rezetko is describing what reputable franchisors do artfully-cut deals. Whether they're negotiating with equipment and computer manufacturers, insurance carriers, sign makers, management trainers, real estate developers, or paper companies, savvy franchise companies bring buying clout to the franchise arrangement.
How franchisors get their clout
The bigger you are, the more buying power you have. With 100 stores now-and another 40 planned to open in 1998-Rezetko's nine-year old franchise has the leverage to demand high quality products and services from vendors. "A smart franchisor will take advantage of economies of scale to maximize profits by providing the most complete business package available to optimize franchisee success," he says. "The more supply costs are cut, the more store owners can spend marketing and managing their business. An independent could only get two-thirds of all the product lines we feature and their gross margin would be 10-12 percent less."
Common deals cut by franchisors cover inventory and such
disposable items as paper products, as well as the fixtures and equipment associated with opening the store. Franchise companies like Learning Express and Batteries Plus typically employ bulk buying to save their franchisees five to ten percent or better on the purchase of sales products from manufacturers. In addition, with multiple stores opening, franchisors can arrange favorable terms on start-up costs. "Building ten new stores at a time, Learning Express can buy fixtures, computer software packages, carpeting and signage for close to half an independent buyer's cost," says Sharon DiMinico, president of the 80-store franchise, which specializes in high-quality educational toys.
Other savings are possible, too
While bulk purchase of products probably saves the owners most, many franchisors negotiate favorable terms on such services as business insurance. Forward-looking companies also develop and fine-tune training programs that are cost effective for their particular industry. Michael Seid, managing director of Michael H. Seid and Associates and incoming chairman of the Council of Franchisors says, "A lot of franchisors bring in Dun and Bradstreet to talk about small business finance-how to analyze the books-or Merrill Lynch to advise on tax and succession planning."
Favorable financing also accompanies larger systems. Franchisors like Batteries Plus and Petland, Inc. offer total turnkey financing for new stores. "As a member of the International Council of Shopping Centers, we can even negotiate leases for our franchisees," says Jim Whitman executive vice president of franchise development at Ohio-based Petland, Inc. Still, the best deals remain with the larger systems. "Even if you are an SBA- approved franchise, most finance companies don't want to talk to you until you have over 100 units," says DiMinico.
Suppliers respond to quality as well as size. Specialty franchises-even those that sell their own product lines, like Petland-often can negotiate the right to carry high quality products not sold everywhere. "Over 2000 proprietary products are sold exclusively to our 172 franchisees-items that the competition cannot sell," says Whitman. "For 30 years, suppliers have seen Petland as a unique chain of stores able to bring products that require technical salesmanship to the marketplace. We can support everything we sell in the marketplace-whether brand name or exclusive items-with discounted merchandise from our suppliers."
Comparison and distribution save more. Other advantages accrue to being part of a franchise system, too. "Reputable franchisors are sourcing out and developing information technology systems," says Seid. "They poll their franchisees on a regular basis, analyze that information and give it back to the franchisee in some useful format. They might compare costs between two comparable franchisees in two different cities and then help the less cost- effective franchisee figure out how to save the difference in costs."
And then there are such economies of scale as inherent in Petland's central distribution center. "Our just-in-time inventory capacity enables our franchisees to buy merchandise from the distribution center every week with no quantity restrictions so they don't have to tie up capital better used to promote or operate the business," Whitman says.
Find out how well the franchisor does. "The truly great franchisor spends an extraordinary amount of time thinking about ways of stripping costs out of a franchisee's operating expenses," says Seid, who also points out that some franchisors do a good job and some don't. "Most franchisors focus on reducing franchise entrance costs by bulk buying of fixtures and equipment, but they may not be so good as service providers."
It's possible, though, to find out who's doing it right. Seid advises a prospective franchisee to check with existing franchisees questions about cost structures and sales costs. "Ask questions: Can you buy cheaper outside the franchisor's suppliers? Are franchisor-supplied goods always available? Is supplier delivery on time? Is the quality of the merchandise good or are you seeing a lot of shrinkage-second-rate goods or items with unduly short shelf lives? "
A smart prospective franchisee also will sit down with the franchisor and ask to see the sourcing section of the franchisor's operations manual. "Ask where they get their products and make sure they have a system. Then ask other franchisees if the system is working. Are you saving money? How much? If the royalty is five percent and the franchisor is saving the store owners a couple of points, great! You want to know what sort of bottomline the franchisor is delivering."
Finally, Seid suggests that prospective franchise owners get a list of reputable franchise companies from the International Franchise Association (202/628-8000). He also advises speaking with the head of a company's franchisee advisory council or independent franchise association.
Find Out How Suppliers Measure Up
Vendor arrangements affect the bottomline of the franchisee, so prospective owners may be interested in answers to the following questions.
1. Is a vendor financially stable enough to meet current and future needs?
2. Can a vendor fully cover the product line, so that only one vendor is needed for that particular line of product?
3. Can the vendor supply the product nationally, in the quantity necessary to maintain inventory levels?
4. Do the vendor's credit/payment terms meet the franchisee's needs; for instance, can the vendor bill individual store owners directly, offer acceptable credit limits, extend payment terms, and offer cash discounts?
5. Does the vendor offer an acceptable turnaround time between placement of the order and shipment date?
6. Can the vendor track orders and ship overnight?
7. Are minimum order quantities and free-freight levels acceptable?
8. Is the price right for products purchased individually, in bulk, or through bid?
9. Does the vendor offer a warranty of reasonable length that is easy to process ?
10. Does the vendor offer good customer service, such as full staffing of phone lines and product knowledgeable representatives?
11. Can a new vendor under consideration deliver a quality product that is equal to or exceeds that currently used by the franchisor?
® copyright 1999 Nancy Rathbun Scott
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