Great for food! Not so good for IT

Technology products, at least in retail, aren’t very compatible with franchise approaches.

Franchising is a powerful way to start or expand a business. But does that hold true in the technology space?

Next time you’re in your local shopping mall count the technology stores. They’re an eclectic group, ranging from big box retailers and consumer goods movers to repair shops, from gadget specialists to flagship vendor outlets, from single store independents to listed multinational chains. That’s quite a variety. But you can simplify it: how many of those are franchises? Chances are, not many.

This is peculiar, as franchising is a popular way to grow or create a business. This much, is evident from research by the Franchise Association of South Africa (FASA).

“According to recent FASA research, 
the franchise industry generated almost R500 billion in annual turnovers in the year ending 2015,” says Dumisani Bengu, head of franchising at Absa. “We expect this figure
 to be much higher now as it’s been growing at a compounded annual growth rate of about 14% over the last eight years, providing almost 40 000 business units – thus contributing significantly to entrepreneurial activity.”

The failure rates are also lower: two-thirds of franchisors in South Africa claim 
to have been around for ten years or more, according to the same research. Factors such as continuity, investment and confidence also rank substantially higher than companies that go it alone.

Franchises have access to better support networks and, from the franchisor’s view the model is a less costly way to expand a business.

Then where are the technology franchises? Only one IT franchise is registered with FASA. The vast majority of technology businesses don’t franchise. So is franchising a choice to consider in tech?

The short answer is maybe. So, lets look at the two sides of the coin.

Those who don’t

Let’s start with not franchising. Incredible Connection is one of South Africa’s most prominent and widespread technology retail brands. It operates 70 stores in three countries, all 100% owned and operated by the company. It doesn’t franchise and isn’t considering this approach. Why not?

Technology products, at least in retail, aren’t very compatible with franchise approaches, says Craig Lodge, chief executive at Incredible Connection.

“It doesn’t work well as it’s difficult to drive the consistency needed in this category. With the growth of pure online players, the store franchise model is further strained and will only get worse in the future. There will always be a need in tech to provide customers with in-store services beyond online, but this is very costly with no big returns in the short-term.”

He cites several areas that make franchising difficult. Foremost is the stock, requiring capital outlay and frequent rotation (every
six months to a year).

Stock rotation is a particular pain point when combined with low margins. Other interviewees noted the tendency for price wars in tech, squeezing margins even harder, and security concerns around holding high-value stock.

Lodge further notes the higher costs around staff training – low margins need to be met with high service levels – and the pressure
 of good locations that demand higher rents. Overall, the challenge for technology retailers is to balance stock and profit margin risks with high footfall and quality service, factors that can demand very hands-on attention. Though a franchise can apply these levels – food franchises are notorious for demanding consistency – tech franchises may have too many spinning plates for this to be a possibility. Sometimes companies try franchising and then step away – this is what

The Gadget Shop did, ending its franchise arrangements in 2013 for a single company model. It cited challenges and complications with franchisees as the reason. This is the other catch with franchises – despite a seemingly top-down hierarchy, they’re incredibly peer relationship-orientated.

Those who do

But franchising can work in technology. WeFix is a repair-oriented retailer that started ten years ago. A few years later it had already expanded through its first franchise shop, though weFix founder and CEO Alex Fourie says this was more serendipity than planning. “I was actually approached by a friend's father to offer a franchise and we agreed to give it a go. So we didn't specifically choose it at the outset, but it became a good way to scale the business.”

WeFix does have an advantage, being
 that it’s not primarily a goods seller. It makes money from repairs, a more consistent model not tied to frequent stock rotations and thus better positioned for long-term business – broken smartphone screens will long be a problem. The company does have a small retail arm and it recently expanded into selling refurbished handsets with warranties.

However, weFix shares a similar challenge to Incredible Connection: maintaining service and quality. But here Fourie believes that
 the nature of the business appeals to certain types of entrepreneurs. “I think the brand
 has helped to attract technicians as we have grown, especially after our move to weFix last year, from iFix, which has created a national footprint of 36 stores. There’s a six-week training period, which takes franchisees across all aspects of the business, from the front to back office.”

WeFix is also looking at options beyond franchising, though Fourie stresses it’s not moving away from franchises. Maintaining relationships with its franchisees is fundamental and weFix is clear it doesn’t want to endanger those. Instead there’s a general trend towards hybrid models that encompass different approaches. FASA’s research reflects this, noting that company-owned stores and joint-ventures are on the rise.

US-based Experimac has a similar business model to WeFix, offering a mix of repair 
and retail, although it specialises in Apple products. “Our business model is to bring second-hand, refurbished and refreshed Apple equipment to the market at a discounted price,” says Jaco Norton, COO, Experimax South Africa.

“We want to position ourselves as a one-stop-shop for Apple users, offering the full set of services – servicing hardware requirements, upgrades, repairs as well as offering trade-ins. We have technicians in all stores and do repairs onsite.”

The first Experimax store was opened in Cape Town in 2016, and there are plans to have 18 stores open across the country thanks to
 an army of franchisees; by the end of 2018. 
In addition to sending franchisees on an intensive two-week training course at the US headquarters, and an additional three weeks of localised training, there’s a centralised support function that can provide remote technical, service and business support.

Perhaps the most famous example of a local technology franchise is Matrix Warehouse. Seventy-five percent of its nearly 90 outlets are owned by franchisees, although that’s ten percent lower than the general average in South Africa. While it’s largely known as a retailer, its new brand refresh (currently being rolled out) includes a Tech Terminal service area, adding repairs and upgrades to the offering is a similarity shared with weFix and Experimax.

Perhaps more typical of the franchise model however is that, in addition
 to stocking high-end brands, franchisees also stock a range of own-brand products, which
is an additional source of revenue for the franchisor to make margin, as a supplier. Franchising in technology is tough and nuanced - several technology retail franchises have bucked the trend. It’s not impossible and there are clear benefits, particularly around matters of risk and support. But there are aspects to technology – the combination of goods costs, low margins and a highly competitive marketplace – that make technology franchises riskier.

“Remember franchising is more a channel of distribution than an industry sector,” says Absa’s Bengu. “So there are a lot of players in the ICT space that embrace franchising as a business model. Most of these would be found in areas such as mobile data and cellphone retailing companies, technology hardware retailing, printing accessories and techno-entertainment fields to name but a few.”

Still, one area that seems most widely suited to franchises is device repairs. It’s not so reliant on retail product sales, and the services it offers are more evergreen. And the next time you’re in a local shopping mall, there’s an incredibly strong chance device repair shops – independent or franchises – will be showing strong.

Franchise vs the channel

Franchises are not common in the technology industry. This could be down to two reasons.

Business buyers

The first reason is the nature of the majority of business IT purchases, namely that they’re large and complex. Realising these will often require partnerships between different industry players, the most typical example being a vendor that offers the solution and the systems integrator that moulds the technology solution around a customer’s needs. This partnership approach is highly favoured by vendors.

Franchising is a means to expand a business fast without inviting too much overhead. For systems integrators (SI) and other solution providers, that approach makes little sense. They don’t gain more business through more locations (though some SIs companies have attempted franchising as a multinational expansion strategy). The same paradigm can be applied to other types of technology businesses. For example, there’s little motivation for ISPs to franchise, since their main service – internet access through their network – will always be centralised.

Consumer long tail

The second reason is that consumer products, peripherals and the bric-à-brac of digital lifestyles can comfortably fit with other business types. For example, a stationary franchise could also stock technology goods, negating the need for rival technology franchises. Consumer technology has become so pervasive that you can buy flash drives at supermarkets.

Retail businesses are better suited to franchising, but they have a trifecta of barriers: low margins, high-value goods and a fickle market. If they don’t move goods fast and efficiently, they can quickly run out of road. This means they often compete through scale and service, two areas that are easier to manage inside a single organisation than across franchises (though franchise models can offer these to smaller businesses with great effect).

Technology retail businesses also prefer partnerships, such as being designated an authorised dealer. There exists tension between franchises and dealerships in the technology space, especially when the dealerships might belong to the vendor (cellular shops are a good example).

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