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Make your landlord a franchise partner?

Philippa Dempster of Freeth Cartwright, one of the UK’s leading law firms, tells us why teaming \rup with your landlord gives financial benefit

Franchising is a popular way of growing businesses, especially in the current financial climate when obtaining funding to meet expansion plans is proving difficult for many businesses. Franchising is Capex free, which means expansion.

Unlike setting up a completely new venture, buying a franchise means that you’re buying into an already tried and tested formula, which is profitable. The market research has already been done, the concept honed and investment has been made in the brand and investment will continue to be made. However, there are still two potentially difficult aspects. Firstly it’s finding the right franchise partner to grow the business with and the resources and skill base to do so, and secondly is finding the right property without the risk of taking on a reasonably long-term lease.

Retail landlords are faced globally with voids in their portfolio and are acutely aware of the need to find ways to attract new businesses into their estates. Some now provide a creative and neat solution - they become a franchise or joint venture partner or enter license agreements to buy the products and advertising support. They are the one-stop solution, often with multi-sites, and a great opportunity for expansion. However beware, this is not necessarily a tried and tested solution - most are part time franchise owners and the incentive is to reduce void rates rather than grow global brands.

Land Securities, through their subsidiary, Brand Empire, was one of the first UK shopping centre owners and operators to attract international brands. The benefit for the brand was that this was a relatively low risk and low cost way to enter the market.

However being the biggest landlord, and having the right property and resources to support the brand, does not always guarantee success. The concept and product still needs to be road tested to ensure that it works in the UK market.

One of Brand Empire’s early signings was Cortefiel, the Spanish women’s fashion retailer. However, sales were reported not to be sufficient to sustain the business and the stores have now closed; a little surprising seeing as Cortefiel trade did so well elsewhere internationally.

The concept of the landlord becoming the franchise owner or brand partner is one that has been used very successfully in the Middle East for some time. The Alhokair Group, for example, operate 16 shopping malls and have around 1,100 stores, including around 70 international brands. They have used this model successfully to attract businesses wishing to trade on the reduced risk basis. As a key business partner, the Group are able to provide the store and to run it for the brand, if the brand wants them to.

Businesses looking to enter into such deals with landlords should consider exactly the same selection criteria as for a typical franchise transaction:

  • Is the ‘fit’ between the partners a good one?
  • Does the franchise owner have the requisite commitment to their brand, and their brand alone, and experience on the ground to deliver brand equity?
  • Is the capital available to invest in the franchise deal?
  • Finally, crucially, does the franchise owner have access to property? This can enable an accelerated roll out programme and, if anything, enhance the speed to market and market presence.

The concept of landlord franchise owner is a good one, but it’s not a panacea, and it’s vital that franchisors wanting to take this route in the UK or globally do their homework on each deal and consider the exit strategy if it doesn’t go according to plan.