Three phases of Franchise - Get in on the first, third is worst

 A well-crafted product offering that people want to buy. That’s the one-in-fifty new start businesses, or the result of years of research and development, otherwise known as trial and error. Once you have this utopian restaurant, retail store, or product, you want to clone it and gain more economy of scale.

If you manage to create a clone model that can be operated by the right people, you have a great start as a franchisor. Everyone else want to get involved. At this stage you’ve engaged a consultant and a lawyer to get the franchise offer framed up properly, and invested in marketing the concept.

Quite often those steps have required an equity investor with franchise experience. Australia has more franchises per head of population than America which sends a message but the answer is not obvious – other than that we like to ‘have a go.’

Phase one is the start and in that phase the original designer of the business is engaged and usually quite enthusiastic, which helps the franchise sales.

After an initial group of new franchisees have operated their businesses for a period, some tweaking of the model is bound to happen. Supply chains are modified, branding updated, pricing examined closer. The effect of scale has become quantifiable, costs are clearer, margins are analysed more closely.

During this middle phase, the original owners may have become less enthusiastic or taken things for granted. With the inrush of franchise start up fees also came the need for more operating capital to bridge the cost of expansion and often a reduction in owner’s equity. Having been at the coal face for some time and working long hours, many owners see the merit in cashing out some of their share and relaxing a little.

The franchisees are all beavering away and growing the market for the product, which better informs the system as to what to do next. Pricing decisions are made across the whole network in response to competition or changes in customer tastes. All franchisees are bound to whatever price and selling decisions the franchisor makes. Imagine how the Domino’s store owners felt when head office announced the $5.95 pizza – a loss leader.

In Phase two, the management and shareholders become dominant and the original owner usually slides towards a minority share – with less input. At some point, they exit or the management dominance sidelines them.

Now in Phase Three, the product offering is less important than recurrent sales of franchises. Existing franchisees find selling their franchise difficult because head office won’t cooperate or approve their prospective buyer. Head office is more interested in selling new franchises because an existing outlet changing hands is worth less to them.

In 1989 I looked at buying a Snap Printing franchise and it wasn’t a long analysis. Once I realised that head office would hold the lease and could bone me for any of many little breeches in their lengthy and very binding contract, I wanted nothing more of it. The would control inputs by selling me EVERYTHING I needed at whatever price they decided, and they would control output by pricing the printing and services. They could – and probably did – increase the fees they charged, without any real justification.

If anything the franchise ecosystem has worsened as it expanded. It’s not ‘being your own boss, running your own business’, it’s servitude that most closely resembles legal slavery.

Cuba 2018

With open minds we land in Havana after a 2.5 hour direct flight from Houston. We had purchased the entry card at a stand next to checkin, for US$85 each. The baggage line featured many cling wrapped bundles, goods needed from the USA. The flight was full.

Our colleague Dimas picked us up after a fairly slow baggage collection and an uneventful stroll through customs. He took us to the 'Taxi' which is a euphemism, it appears anything on wheels can be a taxi, without any apparent regulation. Ours was a 1960's Ford something, rattling along with a Mitsubishi diesel sitting small under the huge bonnet.

The old car thing is one of the Icons of Cuba, in part forced by the isolation forced on the Island state after the Revolution. In 1959 Castro and a small force snuck onto Cuban soil in a small boat from Mexico. His rebel forces ousted Fulgencio Batista, a US-backed dictator who had turned Havana into a playground for the mob.

That Revolution is both ubiqtuous and controversial. After all, everything owned by American interests was taken by the new Government. The giant bronze American eagle atop the statue near the water was felled. The column remains, minus the bird.

The haul was immense. A new Hilton hotel, a complete replica of the Capital Building, sugar factories, mines, oil refineries and all the holiday homes and bank accounts of American nationals. For this the Amercian's were understandably very pissed, so they threw on an embargo that partially remains to this day.

Fidel Castro went one further and invited Russia into the fold, producing the Missile Crisis that freaked out my parents who were convinced like most thinking people that we all had just days left before armageddon. JFK thought the same thing, as he kept his hand near the Nuclear Suitcase until a backdown appeared. Shades of North Korea - history can repeat.

Through the new communist regime initial euphoria gave way to regulations and bureaucracy. Dimas is thankful for the opportunity - he could leave his island of Nueva Gerona and go to University in Havana, for free. It was, he says, something that his parents could not afford under the old Government.

But the regulations exist today. There are two currencies, the peso (CUP), sometimes called the "national currency" the other being the convertible peso (CUC), occasionally called "dollar" in the spoken language. CUP is what the locals use, CUC is what us tourists use. It's confusing.

Tourists stay in lodgings with a Blue sign, locals stay under a Green sign. There are queues for some commodities purchased with vouchers - Dimas's retired mum gets rice, oil, daily bread, beans, chicken and 24 eggs month. And of course cigars!

A flight to Havana from her island costs 5 CUC.

Most businesses are state run, leading to ridiculous amounts of paperwork. The Hotel Nacional on the headland in  Havana is one of the best, yet it is overstaffed by serious faced people with forms for everything. The room attendants mingle with the maintenance guys in the hallways, shouting and laughing and doing as little as possible.

Private enterprise is creeping in, after a relaxation that came in the wake of Fidel Castro stepping down in favour of his younger brother Raul. During our visit Raul himself stepped down for his deputy, a bland Miguel Diaz-Canel Bermudez. There was little reaction on the streets, but the USA media all hopped in with reports that welcome changes were now possible.

But the whole country is run down. Havana is like a movie set: row upon row of crumbling, peeling, flaking buildings with one or two restored editions standing out. It's like stepping back into the 1970's - minus the hair. Kids play ball on the street, little ones play marbles. There is no widely available internet, other than at wifi hotspots, often in parks.

We walked home at midnight down quiet streets and came upon a dimly lit park with fifty people standing and sitting, all looking at their phones. It was downright weird. To get online you queue up at a telecom shop and buy a scratch card that gives you five hours for 5 CUC. Only problem is those cards run out, as in, there are not enough cards issued. This opens up the black market, which is the place you get most of the things you need that are not covered by free vouchers. 

Aside from an enormous fleet of 1950's American cars, there are countless old and no so old Lada's. These Russian workhorses seem easy to fix, and fixing cars is a national passtime. As is boxing, the second national sport after - of all things - Baseball. Please note: do not argue with a Cuban in a bar. It may end bad for you.

A visit to a furniture store, in a mall of sorts, lays plain the pain of communism, or socialism, or whatever the fuck this system actually is. A cheap microwave was about 180 CUC and a crappy lounge was 1000. Thin patterned budget linen was about 15, but choice was not an option.

Dimas says you can import goods up to a certain value, things like electric bikes are popular. The Police now have some, they are almost dead silent and handy for zooming up on a miscreant. Crime seems contained: while we were at Callejon de Hamel (a crazy laneway full of bizarre artworks made of reclaimed trash) the Police came in looking for a badass who was hassling tourists. Another time, our 'taxi' was caught in a roadblock while they searched for someone else.

There are certainly enough Police and Military, some in colourful uniforms and accompanied by young dudes in green on their three year national service. While there are plenty of hustlers on the street they generally abide by the same script: asking us where we are from ('Australi.... Skippy!') and then pitching their thing. A cigar can be a black market cigar - or something else altogether.

Havana is a city of 3 million relatively happy souls, a crazy mix of indigenous indian, Creole, Spanish and the descendants of the African slaves who were imported to harvest on the sugar plantations. They have all the alluring charms we see from afar: the tendency to dance without provocation, and a warm and often helpful disposition. They also argue and yell a lot.

The climate can be harsh - avoid Summer! Our April timing was due to climate, Dimas says early November is the other shoulder season without much wind, heat or bothersome cyclones. Just eight months before out visit, Havana had a tree snapping blow called Hurricane Irma that produced 30' waves that made short work of the sea wall and pushed inland, flooding a lot of the lower areas.

The sea wall and coastal road runs about 8km, the USA embassy sat across the road from our first apartment on the waterfront. It is a brutalist design, built in 1953. After the revolution, the Swiss looked after it until 1977 when it was re-opened. 

The Americans installed a ticker-tape sign along the top floor, broadcasting propaganda about human rights abuses. In reply, the Cubans installed 80 flag poles the height of the embassy, blocking the sign.

The food is bland - not much if anything in the way of spices. At the markets are bunches of floppy carrots obviously imported from somewhere south. Beef comes from Argentina. Fuel from Venezuela. The supermarket has sparse choices.

Around the shops I am struck at the total absence of made-in-China. Other than a Japanese tour group, we saw a lot of Russians. We ate at Restauranti Sovietico - a strange outpost that celebrates the union between the former Soviet Union and Cuba. The notes on the menu celebrate the sons that studied in Russia, and the daughters they brought from the snow to the sand.

We moved to the Saratoga Hotel for our final two nights, needing some quiet luxury and a rooftop pool. I wondered: Cuba isn't first world, or even third world. It must be second world, whatever that is. But one thing it is: unique!

Make sure you go to Fustalandia, a fantastic precinct of houses turned into mosaic art!

Some final reflections - it is cheap, safe-ish, and after acclimatisation easy to deal with. Dimas was our guide for the first 4.5 days, with a car and a driver, which opened up much of what I've written above. The rest of the time we walked around or took a taxi. We enjoyed looking at the long lines snaking towards Coppelia, the worlds most successful socialist Ice Cream parlor.

It's a place we will definitely return to.