Why some South African franchise brands fail in other African markets

With the rise of the middle class in Africa, consumer food tastes have changed dramatically in the cities.

Restaurant entrepreneurs willing to invest in the restaurant space have partnered with South African franchisors to establish foreign restaurant brands in the market. The South African brand franchisors have sought to expand in these once untapped African markets opening up international restaurant brands in the cosmopolitan cities north of Africa.

To some it has been a success, to others it has been a total disappointment. They have had to shut down the business completely and move back to South Africa. We have had the likes of Steers, Debonairs, Dominos, Nando’s and of recent Pizza Hut open up branches all over Africa.

The few that are successful have had to localize operations and product supply chains – of course with the approval of the franchisor. There are plenty of success stories of South African franchisees coming in and doing well, but the failures are more visible.

The brand loyalty in South Africa is absolutely unparalleled; South Africans buy South African and they have home-grown brands like nowhere else. Ugandans are not brand loyal; they will easily switch to a new entrant offering a cheaper price and experience.

A lot of people who lead the expansion of South African companies into other African countries function as if the markets are the same. That is the biggest challenge. If you come in thinking you know too much that is when you run into trouble.

Inside South Africa, South Africans recognize that the rest of Africa is a different market, but many, when they land in other markets, forget how different it is and assume that they can do business the way they have done in South Africa, which doesn’t always work.

Franchising makes owning a small business easy. One buys into a proven business model, follows the instruction manual and, voila, presumably experiences financial success. The truth is that hundreds of franchisees can fail.

Because of lack of funds, poor people skills, reluctance to follow the formula, a mismatch between franchisee and the business, and perhaps surprisingly an inept franchisor, here’s a look at some of the most common mistakes that can befall franchisees — and what they can do to avoid them.

Undercapitalization

Insufficient funding is a prescription for failure in any business. With a franchise, the initial fee is clearly stated, but newcomers often underestimate operating costs. A slow beginning or unanticipated event can quickly drain and doom an undercapitalized franchise.

Building a KFC Uganda branch can cost you close to one million dollars and that’s not including the franchise fees, marketing fees, etc. Unrealistic optimism also can be a recipe for financial distress. Weathering unexpected situations without a financial cushion can be problematic even for an established franchise.

To avoid such events, experts advise would-be franchisees to assume they will lose money the first couple of years and have a nest egg they can tap into in case of emergency. The franchisee has to be deep-pocketed.

Poor management skills

As with so many ventures, a franchisee’s success depends on the people involved. Good managers create an environment where everyone can excel, or at least be made to feel important. If you can control the costs and give people an environment in which they can succeed, then you make money. It’s also good to pay people well and treat them as part of the business. The foreign brands hire middle-level manager expatriates who are paid more than the local employees. The expatriates should be a short-term skills solution as you build a quality local team.

Follow the rules

Franchises aren’t designed for the independent-minded. They depend on a by-the-book execution of a business plan, adherence to time-tested systems and a willingness to follow directions. Some franchisors are forced to import ingredients which in turn increases the business operating cost. The cost increase will affect the bottom line of the franchisee business. It’s always good to source and check whether there are local quality suppliers for the ingredients of the products on the menu.

The wrong franchisor

Occasionally it is the franchisor who is largely to blame for a franchisee’s failure. Aggressive expansion can stretch a system and short-change franchisees, particularly when it comes to helping them address problems. Franchisees are expected to open a certain number of branches in the market every year, or else they lose the franchise.

If the market wasn’t well researched, the local franchisee will expand in locations that aren’t business worthy. Kampala in Uganda, for example, is the only area a franchisee chain can locate the business because most of the consumer segment is located in Greater Kampala and it’s a small area. The maximum branches you can have are between ten and fifteen or else you will cannibalize the stores if they are located close to each other.

*Sam Kayongo is a franchise development consultant based in Uganda. The views and opinions expressed are those of the author and do not necessarily reflect the official policy or position of FASA.

Sam Kayongo

Sam Kayongo, a franchise development consultant has worked as a QSR consultant with locally owned chains for the past fifteen years. Earlier in his service career, he worked with Simba Telecom and MTN franchisee retailer as a Sales Executive for four years. He later joined Kuku Foods E.A, a KFC South African owned Franchisee, for seven years where he grew his career to Restaurant then Area management level. Thereafter he started a restaurant consultancy company called GSK Hospitality Ltd. He has worked with locally owned chains like Shaka Zulu Foods, Chillies Fast Foods, Pizzeria, as a Consultant Operation Manager. Currently he and a colleague offer Restaurant Consultancy Services to restaurant investors and franchisees. He is also a member of the GLG consultancy group. Sam can be contact at kayossamuel@gmail.com.