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franchise business 2020-04-27

8 major challenges franchising network will face during COVID-19

In India, the Franchising community has never experienced a crisis like this, the immediate effects are apparent with the shutdown of pre-schools, K12 schools, food outlets, retail shops, salons.

By Features Writer
8 major challenges franchising network will face during COVID-19

In India, the Franchising community has never experienced a crisis like this, the immediate effects are apparent with the shutdown of pre-schools, K12 schools, food outlets, retail shops, salons; all of them heavily franchised owned and operated.

Here we present 8 major challenges that franchising network will face during COVID-19:

Cash Flows

As the global response to coronavirus evolves, the companies are experiencing significant operational, financial, and liquidity challenges. The major concern right now for many businesses is to manage their cash pressures to ride out the crisis.

If you continue to franchise your business, you should look at how to re-engineer your Capex and how do you work on your Opex.

In order to re-engineer the Capex, companies should review the requirement of capital investments. They should lease/hire-purchase model for high-cost machinery and equipment, and also evaluate alternatives for the financing option. Further, organizations should consider a smaller yet more efficient business format without diluting customer experience. Enhancing customer experience from multiple channels by offering omnichannel presence would also help.

To work on the Opex, businesses should rework on the variable costs. Inventory management should be kept in place, which means don’t over-stock and don’t ask your franchisees to have more stock. Franchisors should negotiate with vendors for longer credit periods, and offer discounts or schemes to make early payments.

Talent Loss

Post-COVID, there will be a huge amount of talent loss. In March 2020, the talent demand dropped owing to the nation-wide lockdown. In order to retain your employees, you should follow these three main steps:

1. Communicate – You need to communicate with your team on a regular basis to keep their motivation high. Retaining employees is important.

2. Prioritize – You should develop a plan to prioritize team members in terms of their contribution/cost.

3. Optimize – Convert fixed salaries in a combination of fixed component (75-80%) and bring a variable realistic incentive linked 20% component.

Damaged or Outdated Inventories

This is going to be a big issue for the franchised outlets that are overloaded with inventories as these inventories might get damaged or outdated. You need to find a way on how to liquidate these inventories because, for all the product companies, the biggest problem is going to be how to liquidate these inventories.

In order to manage these inventories, companies should develop a model for more efficient stocks planning and build a system that can ensure a certain amount of predictability/sales forecast. They should improve the time-to-market cycle and anticipate the overall product life cycle to move with the market.  Stock correction and rotation across the Franchise network must be planned and executed well. Franchisors should switch to the Just-In-Time inventory model, and can tie-up with online aggregators where outdated yet functional inventory can be sold at a discounted price.

3-6 Months of Working Capital to Drive Business Post Opening

Due to COVID-19 impact, Capital Goods giants, known for efficiently managing working capital, are making revisions in their WC cycle.

Points to remember:

1. Revision of working capital cycle/ inventory planning/ manpower deployment.

2. Optimize rental payout or implement a revenue share model.

3. Suppliers – Renegotiate with vendors to extend credit periods to delay payables.

4. Buyers – Identify potential NPAs in the current situation and address them immediately. Further, all new orders must be done on a cash payment basis, as much as possible.

Change in Consumer Priorities

Consumers would change very fast. Earlier, consumers had very clear segregation in terms of how they choose their brands. They either chose from a level of service they get from a brand or they chose from the competence of the brand. But now, they will look at both of them together; how well the brand can take care of its consumers by being extremely competent.

In order to woo the consumers, business evolution has to happen, which means switching to an omnichannel presence. Brands should create a franchise model with neighborhood concepts ideology.

Disturbed Vendors & Supply Chain

Another challenge that would hit your franchise business could be disturbed vendors and supply chains. This disturbance is happening all over, with 66% happening due to lack of transport, 51% police restrictions, 54% feared contacting virus, and 34% left for the hometown.

So, your next move should be to find out who can be your supplier, who can give you more efficient supplies.

1. A new model of the supply chain – Cross Integration: Tie-ups among brands and corporations operating in seemingly unrelated or even competitive sectors seem to be one way of getting around the supply chain challenges.

2. Localization of raw material: Businesses would need to develop menus/products with domestically sourced raw materials and accordingly develop vendors that can supply in abundance and as required & not dependent on global sourcing.

Inflation

Inflation would also be a big problem and will hit us in the next three to five months. The companies need to see how to adjust this.

Brands should adjust their pricing, reduce their debt/improve their cash flow, optimize their business for productivity, look for ways to deploy technology that can reduce costs, and evaluate their supplier situation & switch if need be for a better deal.

Legal Issues

There can be multiple legal issues post-COVID. This can be like public health and safety issues. For eg: you have an employee who comes to work at your outlet and gets sick and has a fatal result, he/she can sue you because you didn’t do public safety.

Points to remember:

1. Know and understand the public health and safety and other legal and government requirements associated with COOVID-19.

2. Enforce the obligations of each franchisee to comply with these requirements.

3. Understand state and local level operating environments as regulations could be very different from another simply by virtue of location and industry.

4. Be agile in approach to compliance and stay up to date on a jurisdiction-by-jurisdiction basis.

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