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The risks and rewards of franchising

Following Mothercare’s decision to franchise its UK operations, Drapers analyses what the model, traditionally used internationally, may have to offer the fashion industry domestically.

It is a business model that can build global empires, but not many UK fashion retailers have taken the bold step of franchising their home markets. Until now. Mothercare announced on 26 July that it was planning to franchise its UK stores.

Mothercare chief executive Mark Newton-Jones tells Drapers the aim is to turn the current retail business into a UK operator that would act as a franchisee to a reshaped global Mothercare business, which would sell stock to the UK division.

He says: “There is an irony in the fact that 75% Mothercare’s turnover is from outside the UK, so we thought we should be designing a range for the global audience and distributing it in Britain. The only market we don’t franchise in is the UK.

“We’ve restructured the business into two operational divisions. One is the global brand and has the responsibility to design, develop and distribute anything with the Mothercare logo on. It is a B2B operation that sells to the franchise partners [which form the other division].

“The natural consequence of breaking the Mothercare brand into a global entity is to see the UK [business] behave exactly the same as a UK franchise.”

Newton-Jones argues that the restructuring will free up the global brand, which currently franchises into more than 1,000 stores in 50 countries worldwide, to move into new areas, including wholesaling and licensing Mothercare products, and let it focus on markets including India, Indonesia and China. Whether Mothercare stays as one is entity being debated.

“We are going through the exercise with our brokers to see where best value for shareholders is created,” explains Newton-Jones. “The outcome of that work will tell us if it is appropriate or not [to separate the business]. [The UK Mothercare business] could be held by someone else, it could be several franchises, or it could be a joint venture arrangement.”

The only market we don’t franchise in is the UK.

Mark Newton-Jones, Mothercare

Many fashion retailers and brands work with franchise partners internationally to expand their global reach, but Mothercare’s unusual step of taking its UK offer into the franchise sector raises the question of whether the strategy could work for other UK players. 

Marshall Lester, chief executive of brand management consultancy ML Marketing, says that if Mothercare’s plans are successful, it may be emulated by others in the sector: “Franchising is not new in the fashion industry, and has been done very successfully. At one time [it felt like] there were more branches of United Colors of Benetton in Manhattan than there were McDonald’s.

“The franchise model is less capital intensive [than owning and running your own stores], which takes pressure off the business. That’s one of the motivating factors in considering this route for any UK brand. The industry will be looking closely at Mothercare to see what the ultimate business model is, and whether it works. If it does, then others may think about taking a similar route. Newton-Jones is a very astute guy and I am sure he has thought this through.”

One former franchise operator, who has managed franchise operations for brands in the UK and internationally, tells Drapers that although the franchising model can seem like a low-cost option for many retailers, it takes a lot of work and investment to get right: “Franchising lets you cut out the capital costs [and other financial demands] –  staffing alone can be 15%-20% of turnover – but if someone tries to do it on the cheap, the proposition gets diluted.

“First and foremost, the proposition has to be right. You have to have a brand bible that you stick by. Once that is correct, it is key that you choose the right partners. Otherwise, things can fall apart quickly.

“You need brand controls and standard controls in place so that [the store and brand offer] looks seamless. The clothes need to be folded right and the presentation has to be the same, whether it’s owned by Mothercare or by Mr Jones the entrepreneur from down the road.”

We sign off every location, and no one can open a store without our approval.

Damian Hopkins, Matalan

Matalan aw 19 2

Matalan autumn 19

One UK retailer that has successfully expanded its reach globally through franchising is Matalan, which has 32 international franchise stores across 12 countries.

International director Damian Hopkins says that picking the right franchise partners and keeping the number of franchise partners low has been essential: “We have gone down the route of having as few partners to manage as possible, to give us a level of consistency.

“We sign off on every location, and no one can open a store without our approval. We look for partners who have a proven track record of working in retail. They are an extension of our business.

“What they are buying into with Matalan is a model that is second to none and a business with 30 years’ experience. If you start a business from scratch, you can’t buy that overnight.”

This brand value is vital. One franchising expert says that for the franchise model to work in the UK, it has to be successful for the franchisees who take up operations on behalf of a brand: “To build up a franchise network is not an overnight thing, and nor should it be. For a franchisee, it is essential that they are given relevant support, training and guidance to run a business.

“If a brand wants to expand through franchising, it needs to be able to reproduce its business model for someone else to follow, and allow people to recruit and grow their own businesses.

“Franchise terms are, generally speaking, five-year contracts. [Franchisees] have to have a business to resell at the end and a protected territory they know they are selling into. What franchisees want to know is that they are taking on a business model that works.”

Matalan’s Hopkins adds that proper research is a must when looking at expansion plans into new areas: “Some brands and retailers in the past didn’t do all the due diligence they should have and entered markets very quickly. We are stringent on due diligence. It’s not worth us entering a market where our product does not work.”

Mothercare is making a bold decision to franchise its domestic operation, as it shifts its centre of gravity and embraces globalisation. But the retailer would do well to heed Hopkins’ warning.

 

The Drapers Verdict

The UK franchising plans unveiled by Mothercare represent a bold redefinition of what the retailer is, and have turned its priorities on their head. Franchising is not a simple solution, however: maintaining brand identity and finding the right franchise partners are essential.

It remains to be seen whether Mothercare can succeed as a global brand selling in the UK, rather than a traditional British retailer that has spread its influence abroad. But if the experiment works, franchising may appear to be an appealing option for other UK retailers whose strength lies more in their branding and product than their bricks-and-mortar retail core.

 

 

 

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