Start-ups are a risky business in the present climate – unless you opt for a chain reaction, finds Rosemary Gallagher.
PIZZAS and millionaires may not seem to have anything in common, but the hundreds of entrepreneurs who own a Domino's franchise would beg to differ. One in five of Domino's Pizzas franchisees has sold enough cheese and tomato-topped bases to earn at least 1m and the chain's expansion across the UK shows no sign of abating, despite the credit crunch.
Domino's is not alone, with statistics showing that franchise-based businesses are weathering the economic storm and experiencing significantly lower rates of failure than other start-ups.
The British Franchise Association (BFA), the sector's voluntary regulator, estimates around 80% of start-up businesses fail in their first year, while 93% of franchises are making a profit in that time.
According to the BFA, the number of franchise brands in Scotland now stands at 493, up from 460 last year and the sector north of the border is worth 1bn, an increase from 800m.
Tomorrow marks the start of the BFA's Scottish Franchise Week (SFW) to build awareness of opportunities in the sector.
Arguably, Domino's is one of the most successful franchise brands. It has 39 outlets in Scotland and 514 across the UK, with ambitious plans to almost double that figure to 1,000 by 2017.
The success of the operation makes it clear why enterprising Scots are attracted to it. For example, Domino's sponsors the hit ITV show Britain's Got Talent and on the night of the final (May 31) the chain sold about 200,000 pizzas in the UK, worth around 2m. This was up about a third on an average Saturday.
Andy Hirst, head of franchise development at Domino's, who will deliver a talk to delegates at the SFW business breakfast on Friday in Glasgow, believes investors are attracted to such operations because they get a sense of ownership, but with more support than starting a company from scratch.
He said: "We opened our first Scottish store in 1997 in Giffnock and it has grown from there. Being a Domino's franchisee means you are part of a network of around 8,500 stores worldwide in more than 55 countries. Franchisees provide the capital, effort and labour and we provide the process and system."
A Domino's store costs about 240,000 to open and franchisee needs to put forward about 30% of that and obtain bank funding for the remaining two thirds.
Hirst disagrees with the suggestion that, because franchising comes with restraints on what individuals can do within the brand rules, it is not as glamorous or creative as other forms of entrepreneurship.
He said: "We have a number of multi-millionaires as franchises. Some have gone on to own 50 Domino's stores, which is a sizeable business in its own right. If you saw their houses and cars you would think they were glamorous."
However, franchising has its critics, which is hardly surprising given horror stories of potential business people being taken in by scams that involve them handing over their cash and getting nothing in return. But the BFA, which has Sir Bernard Ingham, former press secretary to Margaret Thatcher, as its president, helps police the sector to avoid such issues. Another complaint is that while start-up costs may be lower than establishing a business from scratch, franchisers take a regular management fee of around 10% of turnover for such services as marketing and ongoing training.
But as Pip Wilkins, client services manager at the BFA, says: "If something goes wrong for a franchisee, there is a big company to look after them."
A long-running operation is Prontaprint and its Edinburgh franchisee Gavin Hagart says being part of the brand allows him to attract business from all over the UK to his Howe Street office.
"If I was trading as Hagart Print, I wouldn't get such pieces of businesses coming in. The downside is that the brand is often perceived as just a copy shop, which isn't the case."
But even Wilkins admits that being part of a brand over which franchisees may have no control can have its downsides. "If some moron in McDonald's sells cat meat instead of a prime Angus burger that will affect the brand as a whole, not just the individual franchisee. A few years ago McDonald's had the issue of a customer getting burnt by a cup of their coffee in America and that was news all over the world."
Hirst says that while Domino's has robust systems in place to protect franchisees, there is a risk that if one store does not perform it will affect the brand as whole.
Despite such potential problems, an advantage at the moment is that banks may be more likely to fund a franchisee than a brand new start-up with unknown risks.
Richard Holden, head of franchising at Lloyds TSB, said: "There's no doubting that the credit crunch has made things tougher in the last few months. But if a franchisee is investing in a tried-and-tested business model, it will still attract funding from a bank. Such businesses are in a stronger position than most to weather the current economic climate."
One franchise clearly not deterred by the credit crunch is The Streat, a chain of cafs established in Belfast in 1999, and which now has 30 outlets across Northern Ireland.
It plans to open the same number of cafs in Scotland over the next five years and is talking to possible franchisees with the first one likely to open in Glasgow or Edinburgh over the next few months. Gerry Carey, who is responsible for The Streat's franchising in Scotland, said: "Not one of the potential franchisees we've been talking to in Scotland has even mentioned the credit crunch. Going down the franchise route means lower establishment costs and faster growth."
He does not think the coffee market in Scotland is saturated, claiming that The Streat's approach of combining a coffee shop with a deli where the majority of customers sit in rather than take away their coffee will fill a gap.
While the restrictions of franchising may not suit all entrepreneurs, it does give owners the back-up to establish and run which would not be available if they were to go out on their own from the start.