Cutting franchisee support results in growing profits for franchisors. Right?

Does slashing franchisee support really equate to a profit boost for franchisors? Let’s take a look at Australian retailing and franchising giant Harvey Norman, which recently reported a big jump in half year profit for the six months ending 31 December 2014.

Profit before tax for the half year was $200.79m, a 25.8 percent increase on the $159.64m result in the previous corresponding periodSales growth was more subdued in comparison to the big spike in profit with global sales for the half year up to $3.09bn, 3.2 percent higher than the previous corresponding period and a 3.4 percent increase on a like-for-like basis.

This global sales result includes company-owned stores and the breakdown to franchisee sales saw an increase of 1.8 percent to $1.17bn in the September quarter and 2.1 percent to $1.36bn in the December quarter, with like-for-like sales increasing by 2.8 percent in both quarters.

Below these headline figures the following line in Harvey Norman’s financial accounts drew much attention: “tactical support to franchisees decreased by $11.47m, or 22.4 percent, to $39.97m for the half year”.

This led to many “profit up after slashing franchisee support” style headlines splashed across the financial press. The fact that a franchisor of the size and profile of Harvey Norman enjoyed a big profit jump on the back of cutting franchisee support was also going to grab attention.

It is also likely to ignite ongoing debate and pose many questions for the franchising industry. But what can we really read into this?

Firstly, what exactly is Harvey Norman referring to when it talks of tactical support to franchisees? Some commentators reported that this comprised the subsidising of underperforming franchisees in the form of rent relief and marketing, which could suggest it is beyond the realm of normal or standard franchisee support.

Also, it is worth noting that the Harvey Norman presentation on its latest financial results highlights a number of new strategic initiatives for phased roll-out in 2015, which include: merchandise, inventory and supplier management system that will enhance backend capabilities of franchisees, increase inventory turns and improve customer experience. Another such initiative is workforce productivity technology to enable franchisees to optimise productivity of staff.

So reading a little deeper beyond the simplistic “profit up, support down” headlines, it becomes clearer that Harvey Norman is still committed to new investments in its franchisee support systems.

A sustainable strategy?

The coinciding of Harvey Norman’s profit rise and its cut back in tactical franchisee support will no doubt be jumped upon by many arguing that it proves that cutting back on franchisee support will subsequently increase profits. But is this really a sustainable strategy for franchise growth and success?

It may deliver a short-term sugar hit to financial results in one reporting period, but what about the longer-term impacts on the viability and longevity of individual franchisee businesses?

Like many stories, there is much more to this Harvey Norman one than first meets the eye, but the questions it poses and resulting discussions are healthy for the wider franchising industry.