Changes in store for copy shops

Australia’s print franchising sector has just come through the year from hell. Printing is a lagging indicator. When economies go into decline, companies cut marketing which means less demand for printing. Add to that the fact that it’s a low-margin business.

As a result, the global financial crisis hit printing franchises and outlets hard. David Bell, managing director of Kwik Kopy, puts it bluntly: “For the industry and us, February to June ’09 was like a train wreck.”

Corporate doctors have told ProPrint that over the past 12 months, a growing number of print franchising operations have gone out of business or have been placed in administration or receivership. The most prominent of these has been Worldwide Online Printing, which was placed in administration in February.

Wayne Turley from McGrath Nicol said his firm was appointed administrator for the Perth-based printing franchise but refused to comment further, or for that matter, even send a press release which was publicly available. However, at time of writing, it was believed that the administration process had now progressed to second-round offers to acquire Worldwide. With the company’s franchise stores operating as normal throughout the administration, it is believed there is a chance the franchisees might be able to continue on their own.

Industry sources say Worldwide’s big problem was that its production hubs were too costly and unprofitable. One Worldwide franchise owner, Michael Kelly, who is also a member of the advisory council, refused to comment for this article.

However, he has in the past thrown his support behind a different take on the model. “My view is the hub-and-spoke is an excellent business model and I’m in favour of Worldwide retaining the model going forward, but I would want to see the print supply under separate ownership from the franchisor side of the business, or at least operating as totally separate entities,” he told ProPrint in March.

The problems confronting the print franchise sector have raised a number of questions about the different business models and about the issues confronting the copy shop sector, which is worth is $450m-$500m and covers about 366 franchise outlets and another 150-200 independents.

Players say the two big problems for the sector are over-capitalisation and cut-throat discounting. Add to this the problem of fragmentation.

The print industry might be the fourth largest manufacturing employer in Australia but at its heart, it remains very much a cottage industry with many small operations. A giant such as Kwik Kopy, for example, might be among the top companies but it has only a 2% market share.

Worldwide’s problems are a warning for the sector, which has been dominated by the big players. Until this year, franchisee groups Kwik Kopy, Snap and Worldwide Online had a combined annual turnover in excess of $225m. Up until the global financial crisis, they were experiencing healthy growth in the range of 20-30%.

Two operating models
Basically, there are two broad operating models. The first is the bureau design service and hub model. This was championed by Worldwide Online and has since been taken up by Snap Printing. Under this model, the franchise outlets get the jobs from clients, do the necessary design and create print-ready PDFs, then farm out the work to various production hubs. Here, the franchise outlets operate as shop fronts dealing with the clients.

There are generally no production facilities and all investment decisions are made at the hub level. This allows the franchise owner to focus on customer service and delivery and the hub becomes the trade supplier.

Worldwide introduced this model to Australia. Once voted Australia’s fastest growing print franchise by BRW and the first fully dedicated hub-and-spoke print business here, it was regarded as an innovation leader.

But in an industry where the margins are so low, cash flow is all important.

“You can have a wonderful operating model but if you don’t have the cash flow, you are in trouble,” says one prominent industry source.

Snap Printing chief executive officer Grant Vernon says Worldwide’s troubles have been the result of the company owning production hubs. He says this means franchisees were in effect just paying a fee to generate profits for Worldwide – not a good way to ensure they were moving lock step with the parent company.

“The problem is that hubs are a very significant fixed cost when you have got big equipment and staff,” Vernon says. “If you are not getting full support from the franchising network because they are unsure whether they want to support the hub or not, then you can lose a lot of money quickly.”

Snap is an evolving model. Its new generation of shop fronts do not handle any production at all, only the design. Apart from keeping costs down, the other great advantage of that model is that it can attract franchisees who are not necessarily from the printing industry and who can come in with different and innovative ideas. It is the kind of model that could attract, for example, people from the design industry.

Vernon says the business models for other outlets are flawed because of their high fixed costs. “They are still very production-oriented. They are about having big presses and huge fixed costs of infrastructure,” he says. “There is a need for big presses but Snap won’t be owning them. We buy the work from trade suppliers and have our hubs that service specific niches.”

While the core of Snap’s client base is small- to medium-sized businesses, it is now getting more work from large corporations.

“This year, we will do over $18m of work from large corporate accounts that include Westpac, Commonwealth Bank and Telstra. It’s growing rapidly and we would expect that to increase further next year based on the work that’s continuing to come on stream now,” Vernon says.

Snap calls this its corporate accounts strategy. It’s a different take on print management, with Snap employing a corporate sales team to put together coordinated tenders to win these large contracts. “It provides the large corporate clients with a distributed solution for the print requirements, but in a centralised way,” said Vernon.

He adds Snap’s sales for March were up 11% on last year. The key to Snap’s business model is a rigorous governance framework. Every hub has its own board and separate management. Each hub is run independently of the franchise, ensuring the hub behaves as a trade supplier so the franchise operator can focus on customers with minimum cost.

Different approach
The second model has production facilities at the franchise outlet level.

This is the Kwik Kopy model. Under this prototype, the franchise outlet offers design and pre-press services. It undertakes the printing as well, generally thanks to digital print technology.

Under both models, Kwik Kopy and Snap get their revenues from royalties. The franchise outlets can offer a total package of solutions to their clients. The important difference is the outsourcing of the print function. Under the bureau design service and hub model, the work is farmed out to a hub whereas with the Kwik Kopy model, most of the work is kept in-house. Bell says only about 20%
of the work is outsourced. Kwik Kopy has 108 franchise agreements and 95 franchises.

The other major difference is that under the Kwik Kopy model, franchise owners are more independent. This allows them to race ahead with brilliant management and decisions. But it also leaves some vulnerable to making bad mistakes. There is more control with the Snap model.

Hagop Tchamkertenian, national manager for policy and government affairs at Printing Industries, says there is another important difference – the hub-and-spoke model can potentially provide a wider offering. “The franchise outlets can take on work that is not just limited to the instant printing segment,” he says.

“The production hubs benefiting from economies of scale and volume are also able to invest in offset sheetfed printing presses as opposed to just digital printing equipment. This allows the franchise outlets to offer greater range of products and services. Operators under the production-at-franchisee-level model either will not be servicing clients that require offset sheetfed capabilities or if they do then they have to outsource work to a commercial sheetfed printer.”

Investment overdose
Bell says the big challenge is overcap­italisation, a problem that confronts not only the print franchising sector but the entire industry. “A lot of the guys are like kids in a lolly shop,” he says. “The digital suppliers did a terrific job dazzling them, with all the new equipment and persuading them they need to upgrade. We spend all our time saying only do it if you can run the numbers and can make a business case and return on investment.

“In the case of our business, we do have individual businesses where that is the case and the owners have decided to buy a big piece of equipment and get into the situation where they have to feed the beast but as a general rule, most of our owners have not fallen into the trap.”

What does Kwik Kopy do when a franchisee gets themselves overcapitalised or reduces their cash flow to a trickle with trying to match competitors with ridiculous discounts?

Bell says: “It’s almost like being a parent. You can’t say: ‘Sorry, I am going to let you die because you made a mistake’. You dust them off and say I told you so and we have to work to get you out of it.

“The way you do it is by having a model, being very clear about what it is, about being super diligent and having ways of monitoring performance. If you have any indicators things aren’t going right, you get in there quick,” he adds.

He says most franchise owners stick to the Kwik Kopy model and don’t get into trouble. Bell reckons print franchising has several big challenges ahead. With companies putting material on CD-ROM, memory sticks, email and other forms of digital communication, how does the franchise replace the lost income? Do more need to upskill to offer digital print services, digital advice or website design, as some copy shops are already doing?

So how does Kwik Kopy do it when their model is full of independent operators? Bell says you need to target the right ones. “You have 25% of the guys who are the top performers, you have the middle 50% and the bottom 25%. What you do is work with the top 25%, the people who really understand how to make money. We know that if can get the top 25% in what will happen is the middle 50% will look over the fence and say if it’s good enough for that bloke, we better do it ourselves. So you get a domino effect through the 50%.” With the remaining 25%, some will come on board too,” adds Bell.

The advantage of the Kwik Kopy model is that it can potentially generate some break-away performances from franchise operators. The big challenge for Kwik Kopy? Rigorous levels of diligence are required, particularly when it has high costs of production.

Bell says Kwik Kopy’s sales were down 3% last year although he stresses this is a lot better than the rest of the industry, where sales fell by as much as 15%.

“We are clawing our way back,” he says. Bell believes print franchising will have a massive shakeout, because of the irrational levels of discounting.

He does not believe there are too many franchise operators. But the high level of discounting is putting pressure on the sector. “Too many are chasing the work and undercutting each other on price,” he says. When it happens, the shakeout will test the two dominant models. Watch this space.

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