Flexibility Drives Growth - Business Media MAGS

Sunday Times Franchising

Flexibility Drives Growth

Franchisors and franchisees in the retail grocery sector find success in building flexibility into the business model, writes Susan Reynard.

Winner of The Franchise Association of South Africa’s (FASA’s) Franchisor of the  Year Award in 2015 and 2016, OBC Chicken & Meat, credits the group’s growth to treating franchisees as investors and partners. In 2015, combined sales for the network grew by 15.7%, customer count was up 15.9%, and average spend rose by 6.2%.

OBC’s winning formula includes offering a range of basic fresh and dry foodstuffs to mid-to lower-income customers, promising quality and value for money, consistency and convenience, says Managing Director Tony da Fonseca. New OBC stores of around 600m2 cost approximately R5-million to set up. Franchise fees are not fixed – franchisees pay 2% of sales for the first R1.5-million, 1% on the next R1-million and 0.5% of sales from R2.5-million upwards.

OBC now has more than 50 supermarkets since first franchising in 1999, and has expanded to the OBC Fried Chicken fast-food brand. Business has thrived, thanks to group buying power; strong supplier relationships; good store sites; efficient distribution centres (DCs); modern stores; dedicated franchisees; and a basket mix that appeals to all budgets.

Chicken is the brand’s calling card, and stores sell feet, heads, gizzards, hearts, livers, skin – the parts its clientele consider a taste of home – as well as regular pieces. Dry groceries, including house-brand products, are sold in bulk packs and small sizes to complement the butchery, fruit and vegetables and dairy departments. It’s a low-margin, high-volume business. Franchisees buy 70% of stock from OBC DCs and the rest from suppliers and the local community.

Saverite Supermarket offers independent retailers the security of a formal franchise operation backed by the bulk buying power of both Shield Buying & Distribution and Masscash Wholesale, explains General Manager Anton Smith. The brand addresses the gap between corporate supermarkets and formal franchisors. Volume discounts, attractive payment terms and credit and retail expertise appeal to its franchisees.

Pick n Pay’s franchise business allows the brand to operate in diverse neighbourhoods and service a wider range of customers, says Chris Reed, group executive: franchise and Hypers. The group, started by Raymond Ackerman in the 1960s, currently has 500 franchisees. In February, Pick n Pay and the Gauteng Department of Economic Development partnered to pilot the group’s first “spaza-to-store” conversion in Diepkloof, Soweto. Monageng Market store, owned and run by Solly Legae and his family since 1972, has had a make-over and now has access to Pick n Pay’s full business offering.

Spar has been operating in South Africa for more than 50 years, and includes brands such as Superspar, Spar, Kwikspar, Tops@Spar, Build It hardware and Spar pharmacy, with six modern DCs and more than 363 trucks servicing stores in South Africa and neighbouring countries. Start-up costs start at R5-million for Kwikspar, R8-million for Spar and R10-million for a Superspar.

It is a voluntary trading organisation, explains Craig Coetzee, group property development manager. Approved retailers become Spar members and join the Spar Guild of Retailers. Store owners typically buy around 90% of goods from the Spar warehouse and on-drop shipment supply.

Food Lover’s Market (previously Fruit & Veg City) specialises in fresh foodstuffs. Its 100 stores locally and 28 throughout Africa, serviced by seven DCs, impress customers with vast displays of fresh goods, says co-founder Brian Coppin. Stores cost between R10-million and R20-million, so while the customer base is broad and across all living standard measures (LSM), specialised franchisees are needed.

Destination stores

OBC has its eye on a number of key locations, some identified through ongoing research and others driven by landlord, franchisee and consumer demand. Tony and his team go out to each site,  walk the streets, observe the flow of commuters and  “taste the dust”, as he puts it. “We don’t make money on setting up a store,” he says. “Our main aim is to get the operator into the business as cost-effectively as possible, and for franchisees to start making a return on their investment.”

Saverite competes on pricing through Masscash cash and carry, to enable an efficient and relevant supply chain. Royalty fees are only charged on purchases made through the group’s ordering channels, ensuring franchisors share the risk of keeping franchisees competitive.

Spar stores are tailored to meet the needs of the communities within which they trade in terms of design and product range. Craig says Spar stores become part of the community, employing staff from the region and supporting local initiatives.

“As business becomes more competitive, customer service becomes more vital, no matter what your store brand is,” says Nelson Lourenço, owner of OBC Dobsonville, Soweto, and OBC KwaMhlanga, Pretoria.

Franchisee selection

OBC likes its potential franchisees to work in one of their stores to get a feel for the business. Tony says getting stuck into receiving, processing, packing and dealing with customers and staff reveals whether people are suited to a life in retail.

Saverite’s Anton says the way to gain a franchisee’s confidence and trust is to deliver on commitments made during the recruitment phase.

“Spar provides in-house training in order to assist new members,” says Craig. He describes ideal franchisees as entrepreneurs who are motivated, hard-working people with a passion for retail.

Food Lover’s Market looks for experienced franchisees and may enter into joint ventures until franchisees find their feet. Owners must demonstrate product knowledge to be able to have informed discussions with customers.

“Franchising suits me as you need the buying power out there,” says Jaco Pieters, owner of Saverite Supermarket Emakhazeni in Belfast, Mpumalanga, and two-time winner of FASA’s Store of the Year award. “I really support Saverite, as the more you put in the more you get out.”

“You need to have passion for this business,” says Fabio De Faria, who, with his brother Dino, owns OBC Bushbuckridge in Mpumalanga and OBC Maake in Limpopo. “Franchising is one of the biggest ways to become an entrepreneur and you must fight through the tough times.”

Competitive edge

“There is no question that franchise competition, like grocery retailing, is very competitive,” says Pick n Pay’s Reed. “We aim to differentiate through increasing the number and variety of value-add services.” This includes the Smart Shopper loyalty programme, which now has 10 million customers.

Humbulani Conway Mulaudzi, owner of OBC Malamulele in Limpopo, notes, “You must be active in your business, keeping an eye on the pricing of your competitors and local suppliers. The branding and buying power of a franchise are its main benefits, and banks and suppliers want to deal with sustainable, stable brands.”

OBC has long been present in townships and outlying areas, claiming a strong understanding of the needs of the mass market. This trading space is now hotly contested, as bigger brands that originally focused on higher LSM consumers are recognising  the importance of diversifying.

Tony believes landlords should balance out anchor tenants with secondary anchor tenants in shopping centres, to pull in more daily foot traffic.

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