franchising in the retail market

The Musgrave brothers, having considered these factors, decided to Musgrave Group was started in 1876 when two brothers, Thomas and Stuart Musgrave, sons of a schoolteacher, started a grocery and coal business, in Cork. This enterprise proved very successful, so they decided to expand and open a new business in Tralee, Co Kerry. Musgrave Brothers became a Limited Liability Company in 1894. That business has now grown to sales in excess of IR1.5 bn, has a share-holding in a U.K. Multiple and a business in Spain. When setting up a business, entrepreneurs have a choice of setting up as a sole trader, a partnership or a private limited company. They must take the following factors into consideration when making their decisions: the amount and availability of capital needed to set up and run the business the desire of the entrepreneur to share the running of the business or keep the control in the hands of one person the level of investor risk will determine the need for limited liability. If there were a large risk then investors would feel more secure if the company was a limited liability company hence a private limited company should be formed the amount of tax that will have to be paid on profits In a private limited company shares cannot be issued to the general public or sold on the stock exchange. When the brothers needed to raise money to expand the business, they made their shares available to their customers. Once the new enterprise was up and running, they bought the shares back again. By 1917, Stuart had retired and Thomas died not long afterwards. The company was taken over by John Musgrave, son of Thomas, in 1915. He consolidated the core grocery business in a purpose built warehouse on Cornmarket Street, Cork, in 1922. Musgrave Group survived the economic depression of the late 1920s and the Second World War. The company continued to keep their customers supplied and did not engage in profiteering on tea, sugar and other essentials. Hence, they established a very loyal customer base. This loyalty enabled Jack Musgrave who took over from his father in 1953 to introduce Voluntary Group trading to Ireland and to establish purpose built wholesale Cash and Carrys. Voluntary Group (VG) trading occurs when a wholesaler forms an alliance with independent retailers. Voluntary Group trading was a pre-cursor to franchising. However, there was a difference in that the retailers who joined the group were already shop owners in their own right and trading successfully. They joined the Voluntary Group to provide themselves with added commercial protection. The wholesaler provides the brand name, (for example Centra), management training, extra discounts, marketing assistance and management services to the retailer. In return, the retailer agrees to buy stock exclusively from the wholesaler. Voluntary Groups were set up as a means of competing against large supermarket chains that bypass wholesalers and buy directly from manufacturers. The VG trading method was successful. New large Cash and Carry outlets were built or acquired in Dublin, Cork, Waterford, Galway, Limerick, Derry and Belfast. The Voluntary Group grew into SuperValu supermarkets and Centra convenience stores. Expansion was funded from its shareholders funds,
State-of-the-art SuperValu supermarket.

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opt for a limited company. Limited liability encourages business growth as investors are more willing to part with their money knowing they can only lose the value of their investment and not a penny more if the business collapses.

HOW THE MUSGRAVE FRANCHISE EMERGED

The structure of the grocery retail industry in Ireland has changed dramatically in the past thirty years. The change began in the 1960s when supermarkets first set up in Ireland. They began opening outlets and soon a small number of supermarkets were accounting for increasing volumes of grocery sales. Traditionally, goods moved through a channel of distribution comprising manufacturer, wholesaler and retailer. The large supermarket chains purchased in large quantities and soon began to bypass the wholesaler and source their goods directly from the manufacturer. The role of the wholesaler and the competitiveness of the independent retailer was being challenged. Musgrave is a wholesale operation and is in the business of distributing goods to the independent sector. If the independent sector was threatened by supermarket chains, then so too was the business of Musgrave. Musgrave examined the strengths and weaknesses of the supermarkets and the independent retail sectors. The company identified several gaps in the market that were not being filled by either player. Two new retail brands, SuperValu and Centra were created to fill these gaps. The new shops were marketed as a franchise opportunity to independent retailers. Very quickly, the more progressive and market-led retailers responded by applying to become a franchisee of Centra or SuperValu. SuperValu is designed to be a full range trolley supermarket that would be located close to the customer. It is open longer hours (during the week and at weekends) than existing supermarkets. By

being a more convenient supermarket in terms of location and opening hours, and by having local ownership, it enjoys a competitive advantage over many of its larger competitors. The Centra brand is now segmented into three different sections : Centra Supermarkets - offers a full shopping trolley service to consumers in smaller towns and villages and also, of course, provides a top-up convenience service. Centra Foodmarkets - are to be found in housing estates and villages and provide basket and top-up shopping. Centra Quickstop - are located on the High Street, providing a wide range of convenience, ready-to-eat food at competitive prices; some of them open 24 hours. SuperValu and Centra stores account for almost 20% of the Irish grocery market. This figure includes Musgrave Groups nine large Cash & Carrys and the independent retailers serviced by Musgrave Group which now account for 25% of grocery sales in the Republic of Ireland, 11% of Northern Ireland sales and an overall share of 21% of the total grocery market on the island of Ireland.

FRANCHISING
A franchise is an agreement that permits the individual accepting the agreement (the franchisee) to use the established name, logo, methods of operation, marketing strategy and product of the existing business by agreement with the owner (the franchiser). The Musgrave SuperValu Centra franchisee pays no franchise fees whatsoever, but agrees to a buying loyalty agreement and contributing to the marketing of the SuperValu and Centra Brands. There are both advantages and risks for the franchisee and the franchiser.

employment grew rapidly and the company was profitable.

State-of-the-art Centra foodmarket.

Advantages and risks of franchising

ADVANTAGES
Franchisee There are economies of scale in areas such as centralised purchasing of stock, national advertising and promotions. There is instant recognition of the business name, so it is easier to attract customers. The business formula is tried and tested so there is less risk of the business failing. The franchisee has a guarantee that there will be no competition using the same name in specified area. The management team receives valuable professional training and advice from the franchiser. Musgrave franchisees are encouraged to add their own personal touch to the business. Each franchisee must achieve the same standards as all other outlets. This puts pressure on the franchisee and staff to reach very high standards which Musgrave Group sees as a positive competitive tool. Franchiser The franchiser receives lower profits than what could be earned if they owned and managed the outlets themselves. There is a loss of control over the day-to-day running of the franchise outlets. If a franchisee proves unsuitable then the reputation of the whole franchise is put at risk by staff problems, poor quality standards, etc. Franchiser The franchiser can expand at relatively low cost and risk as most of the start-up finance is provided by the franchisee. Musgrave SuperValu Centra however, provides assistance with business plans, financial planning, store location and planning permission, equipment leasing and provides a wide range of support services at no cost to the franchise retailer. The franchiser is not involved in the day-to-day management of the business and hence is free to concentrate on further expansion and development of the business.

ACQUIRING A MUSGRAVE SUPERVALU - CENTRA FRANCHISE OPERATION IN IRELAND

When a retailer is considering acquiring a franchise with Musgrave there are two major benefits to take into consideration: the retailer is buying into a successful business formula the retailer will receive expert advice on all aspects of the business.

Musgrave continues to be Irelands largest cash and carry wholesaler. The nine large outlets around the island had a record year in 1999. Sales grew by 23% to IR294m and Musgrave now services over 25% of the total cash and carry market on the island of Ireland. The Day Today retail support offering for independent retailers is serviced from the cash and carrys and, along with the growing food service and delivered retail businesses, is proving to be a highly successful business initiative and is proving particularly successful for the independent retailers who do business with Musgrave Cash & Carry. In August 2000, Musgrave acquired what, in effect, amounts to a 44% shareholding in Budgens plc, the U.K. Multiple quoted on the London Stock Exchange. The Group has committed not to acquire the remainder of the shares in Budgens for a period of at least 12 months, unless there is a competitive bid for the shares.
Choose the right franchise for you.

The following are the stages that a prospective franchisee will go through: An initial meeting between the Regional Manager from Musgrave SuperValu Centra, the retail franchise division of Musgrave Group, and the potential franchisee. At this meeting the regional manager will explain how the franchise works and inform the potential franchisee of the benefits. If there is agreement in principle at this stage it will progress onto the next stage. A finance meeting will be held to ensure that it will be in the best interests of both Musgrave Group and the franchisee to make the investment in the franchise. If the franchisee is an independent retailer then he/she must consider what the potential financial benefit of converting to the new business format will be. At this stage financial projections will be prepared. Issues which arise at this stage include: capital investment required to purchase the current business retail turnover what are the expected increases? the product mix of the store will be established to meet the requirements of the market or consumer a store development review will be undertaken to estimate the expected refit spend. Legal agreements are drafted and provided to the retailer. Agreement in principle is made now on whether to proceed or not. Store development For existing retailers, engineers and architects prepare plans for building modifications, layout changes and equipment (for example, ovens for hot food that may be additional to the current product mix, freezers etc). Re-branding of the store needs to take place to match corporate/franchise colours. Building work on the shop is undertaken which usually involves extension or improvements for the new services being added. For first time retailers, Musgrave SuperValu Centra must find the right location for the store. Then store layout, design and shop fitting services are provided. Information Technology A computer scanning system is introduced which allows the store to operate online. This means the store will be connected to Musgrave Groups computerised warehouse in Cork. Sophisticated retail ordering and stock control systems are put in place. Operating procedures, financial systems and controls are set up.

Marketing At this stage, the marketing team and Regional Managers prepare for the initial opening of the store. They focus on merchandising the store to the optimum level. A merchandising service is brought in the week prior to opening. Merchandising is an extension of the selling process. Products are displayed in the best location in the store to ensure the product will be sold as quickly and profitably as possible. Fresh food specialists, Trading Managers, merchandisers and other retail specialists are involved. A local marketing campaign for the store opening is drawn up. This includes advertising and sales promotion activities. The key message that is communicated through the marketing campaign is hassle free shopping. This is embodied in the Shopping as it Should Be advertisements for SuperValu. After opening Musgrave SuperValu - Centra monitors the performance of the store very closely over the next six months to ensure retailer will hit projections set at the outset. A wide range of support services are available on an on-going basis.

Musgrave Group also owns a wholesale and retail distribution company called Distribuidora de Alimentacion del Sureste SA (Dialsur), based in the Alicante region of south east Spain. Dialsur operates a franchise chain of 60 retail outlets under the brand name Dialprix. The majority of the stores are owned by the retailers who operate them. Musgrave will continue to use the experience gained in this marketplace to help expand into other international markets. Look at Musgraves website at: www.musgrave.ie

TASKS AND ACTIVITIES

1
Define the following terms: limited liability franchise Voluntary Group trading. Discuss the factors an entrepreneur should consider when choosing a suitable business organisation. Describe how the Musgrave franchise emerged. List three features of a private limited company. Explain the advantages and disadvantages of setting up a franchise for the franchisee and franchiser. Outline the steps a potential franchisee must take to secure a franchise with Musgrave Group.

2 3 4

RISKS
Franchisee The cost of setting up can be high.

CURRENT SITUATION
5
Musgrave Group employs 2,100 people in Ireland and Spain. Current group sales are in excess of 1.5bn. Sales have grown on average by 18% per annum in each of the past five years and pre-tax profits have grown strongly over the same period. The gross assets of the Group are in excess of 500m. Musgrave Group has declared its intention to remain a privately owned company, believing that its successful past can be best moved forward by the family and its own employees. Today, the Musgrave Group, as it is now known, is Irelands largest grocery and food distributor. They operate a countrywide distribution network, servicing over 20% of the market in the Republic of Ireland and 11% in Northern Ireland. There are over 200 SuperValu Supermarkets and over 300 Centra Supermarkets, Foodmarkets and QuickStop convenience stores throughout the island.

Advice and support from the regional manager.

Help and guidance from the store engineer.

While every effort has been made to ensure the accuracy of information contained in this case study, no liability shall attach to either the Irish Times Ltd or Woodgrange Consultants Ltd for any errors or omissions in this case study.

Business 2000
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