Synopsis
Over the past few months, media outlets have reported on the hazards faced by franchisees of well-known franchise brands Chesa Nyama and Tammy Taylor. In both cases, it was reported how franchisees had been duped or misled by franchisors which left them financially ruined and depressed. It is quiet unfortunate and much empathy is felt for those who lost their life savings in the hope they had a found a route to economic freedom and emancipation. Their stories provide lessons on things to look out for when buying a franchise to overcome weak spots.
Background and Context
Franchising is defined as a form of business by which the owner (franchisor) distributes their product, service or method through affiliated dealers (franchisees) and earns licence fees and other income from franchisees for supplying goods, staff and management training, merchandising, and marketing of the brand.
According to the Franchise Association of South Africa, there are over 865 franchised systems, over 45,000 franchise outlets, and 17 franchise business sectors. The sector contributes around 12.5% to South Africa’s GDP with a turnover of R721 billion. These numbers speak to the popularity of franchising and its being a significant contributor to the country’s economy. The top two categories for franchising in the country are Food, followed by Beauty. It is no wonder people are itching to jump on the train of a well proven and financially lucrative ventures such as Chesa Nyama and Tammy Taylor.
Chesa Nyama
In April 2019, the Johannesburg Stock Exchange notified the market that they would delist Gold Brands Ltd due to non-compliance of the JSE Listing rules, namely the failure of the company to produce Audited Financial Statements. This was then followed by a Special Assignment exposé in which disgruntled franchisees shared some of the experiences.
At the time of the JSE announcement the Chesa Nyama brand was in its seventh year. Since its launch in 2012, the business had quickly expanded to well over 300 outlets country wide by 2016. By then it was ranked as one of the largest franchisors in the country, with talks of possible expansion to the USA, UK and across Southern Africa.
The brand appealed to potential franchisees for the following reasons:
- Relatively low set up fees: at the time of the launch the set-up costs were less than R500k. This was significantly less than other well-known franchises such as KFC, and those under Famous Brands whose set-up costs are in the millions of Rands;
- Short Payback periods: the franchisor claimed that franchisees would be able to get their money back, and then some because the set up hurdle was relatively low to other franchise brands in the food and beverage category; and
- Proven Business model: the popularity of the food and beverage category among existing franchise brands gave the impression that the business is low risk and would be a relatively safe investment.
- JSE Listing of Franchisor: Gold Brands, which owned the Chesa Nyama franchise, listed on the JSE under a positive air of good business to join other well-known food retailers listed on the board such as Taste Holdings and Famous Brands.
In a span of two years the growth and destruction of Gold Brands since listing is best relayed by its having over 300 Chesa Nyama outlets country wide at its peak and that number dropping to 141 outlets still operating in 2018.
Some of the challenges the company faced were passed down to franchisees, such as the following
- A dramatic slowdown in the economy;
- Supply chain issues: the Franchisor was unable keep up with the large orders that came with the fast growth of outlets country-wide;
- Allocation of capital and resources: spurred by the growth in Chesa Nyama outlets, Gold Brands began opening outlets of additional franchise brands namely Las Iguanas, and Café Rouge;
- Store Location: the stores were not located in high foot traffic areas but this was detrimental to sales also some outlets were opened too close to each other;
Towards the end of 2018, it was clear that Gold Brands was in trouble as it reported a 72 % decline in earnings. The business started having cash flow difficulties and was unable to settle outstanding Value Added Tax due monthly. Because of the intricate relationship between Franchisor and Franchisee as soon as the wheels came off for Gold Brands , the Franchisees followed suit with many left in the lurch.
The Chesa Nyama brand has subsequently been sold to Laudian Group – a South African private equity company known for its having bought over the Black Steer Brand. Since delisting, there has been little to no new on Gold brands save for its website indicating the business is still in operation.
Tammy Taylor
Tammy Taylor was launched in 2016 and grew significantly to over 40 franchises within 18 months. This growth could be compared to other well-known beauty franchisees in South Africa such as Sorbet, Perfect 10, Dream Nails etc.
Unfortunately by 2017 were there reports of franchisee complaints by the Lowvelder news outlet which was extensively reported on the following. Two years later, the story was picked up by eNCA special reports show Checkpoint and in found the issues persisted. Notably Tammy Taylor South Africa released a press statement in response to the Checkpoint episode professing misrepresentation and denying any mistreatment of franchisees.
As in the previous case, Tammy Taylor appeals to potential franchisees for the following reasons:
- Low Set Up Costs: compared to other well-known beauty franchises a Tammy Taylor franchise was significantly cheaper to set up;
- High End Market Appeal: Tammy Taylor’s brand is a premium product and service offering targeting higher income customers; and
- International Brand Equity: Tammy Taylor is a well-known American brand with well over 30 years of operations and success.
In the span of two years of new reports the following key issues have been identified:
- Lack of support: the inital Franchise agreement when the brand launched in 2016 did not place any responsibility for the Franchisor to commit to support the Franchisee in the form of additional marketing, training etc. It should be noted that according to the Franchisor statement, this has since been changed. However this is in stark contrast to industry practice;
- Supply Chain issues: orders from franchisees were not filled even after payment with price increments charged without notification and regardless of orders being placed prior to the price change;
- Store Location: the franchisor approved the opening of stores within close proximity of each other despite promising to avoid such practice as it causes competition between its own brands.
Tammy Taylor South Africa is still in operation despite the negative press. At this point it is difficult to do an accurate diagnostic with only 7 reported cases with no other public records available on the franchisor’s financial performance except for the lavish lifestyles of the named owners.
Lessons from those who got their fingers burned on the franchise grill at Tammy Taylor and Chesa Nyama serve as warning to potential franchisees. Therefore the following is advised to help avoid falling into the same traps when looking to buy into a franchise:
- Research the Franchisor’s background to determine whether the owners or founders of the Franchise have the relevant experience and skills to operate a franchise.
- Consult with other Franchisees in the network to understand their experiences both good and bad, in order to compare to your capabilities
- Get a Legal opinion on the nature of the Franchise agreement to get a better handle of the rights and obligations of the Franchisor towards the Franchisee and vice versa. Things to look out for is the provision of training, marketing, product supply, – support and proximity between outlets.
- Financial Return: compare the promised payback period and/or investment return with other investment opportunities targeting the same market segment along with examining the economic reality of the target market. Any franchise that promises doubling of investment in less than a calendar year should serve
- Gather Resources: The Franchise Association of South Africa (FASA) is a trade association for franchisors, franchisees and the professional organization that services the franchise community. The association is a good resource in terms of information on Franchisors, franchising and becoming acquainted with other franchisees.
Conclusion
Not all franchisees who fail are the franchisor’s fault. Almost 90% of all businesses fail within the first five years of operating. A Franchisee contends with the same economic realities all small businesses face thus is not risk proof. Furthermore, the goal of the Franchisor is to increase the number of outlets. The more outlets distributed; the more income earned sans the financial capital required to extend their footprint. This revenue structure is prone to franchisors overstating their success to draw in more franchisees. So while the experiences of franchisees of Chesa Nyama and Tammy Taylor emphasise a need to apply greater scrutiny when looking to invest in a franchise, those found to have taken advantage of franchisees must face the consequences of their crimes.
References
Special assignment report: Chesa Nyama http://www.sabcnews.com/sabcnews/sabc-investigates-allegations-about-chesa-nyama-franchise/)
Lowveld report: Tammy Taylor link https://lowvelder.co.za/373458/bully-nail-boss-trilogy-a-trail-of-complaints-from-around-the-country-part-2/
Checkpoint coverage: Tammy Taylor https://www.enca.com/shows/checkpoint-nailed-30-july-2019-part-2
The Status Quo 