By GOKHAN AFYONOGLU, MARCOS CONTRERAS, SEAN MEYER, THOMAS ROSE and CHRISTOPH WEBER
A version of this article was originally published by Knowledge at Wharton
Germans are widely considered to be risk-averse, and Germany is hardly the first country one associates with entrepreneurship. For typical middle-class Germans accustomed to long-term employment in their field of training, entrepreneurship is often seen as complex and overly fraught with risks. Franchising, however, represents a means of avoiding many of these risks.
The quintessential examples of German entrepreneurs include Werner von Siemens, who started his industrial empire in a small workshop in Berlin; Robert Bosch, who opened a workshop for "precision mechanics and electrical engineering"; and Carl Zeiss, who founded his namesake company as a workshop for precision mechanics and optics. Each of these entrepreneurs focused his life on a developing company that bore his name and remained true to the core competencies upon which it was grounded. The idea of the serial entrepreneur focused on the process of launching new businesses and discovering new ideas across a range of industries has traditionally been far less common.
As Germany's structural unemployment continues to grow, the government has increasingly sought to encourage growth in entrepreneurship. It recognizes franchising as a means of facilitating entrepreneurship by mitigating the risk would-be entrepreneurs must take on.
The latest data from the German Franchising Association for the year 2007 shows that there are more than 900 franchisers and about 55,100 franchisees in the country, with 441,000 employees and a total turnover of 41.5 billion euros ($52 billion). This represents 300 percent growth over the last decade, starkly contrasting with 25 percent growth in gross domestic product, or GDP, in the same period.
A shift in the hierarchy of sectors within the German economy has supported the growth of franchising. As the growth rate of engineering-oriented businesses in Germany has slowed, franchising has emerged as a key way for business starters to access the faster-growing service sector.
Over the last decade, franchising has increased from 1.0 percent to 1.6 percent of German GDP, and the number of employees in the sector has doubled. In contrast, general employment rose by only 4 percent during the same period. The increase in self-employed workers remained lower than the increase in the number of franchisees (2.6 percent vs. 8 percent per annum), which lends credence to the prospect that franchising offers a feasible alternative for Germans to own their own businesses.
Helping unemployed Germans find work in new sectors would provide huge benefits to the economy. In 2007, Germany had an employment rate of 69 percent, slightly above the average of 67 percent within OECD countries but far behind leading nations such as Switzerland, Norway or Iceland, with a rate of 75 percent. Approximately 22 percent of German jobs were part-time, and 56 percent of unemployed Germans seeking a job in 2007 had been doing so for over a year. By this metric, Germany was ahead of only Slovakia among European countries.
Dietmar Wahnelt, a franchisee in the Munich restaurant chain Munchner Suppenkuche (Munich Soup Kitchen), provides an example of how franchising can help the German entrepreneur enter a new sector. Up until last year, Wahnelt had spent his entire life in Spelle, a small town in northwestern Germany. He completed eight years of vocational training to obtain the title of industrial master at a large oil refinery near his hometown, where he worked for 26 years, ultimately serving as a supervisor. Eventually, Wahnelt became disillusioned with working in a large corporation, mainly due to the inability to work independently and the overnight shift-work he was often required to perform. During this time, he pursued some small part-time business ventures. By the summer of 2007, his frustrations had reached a head and he decided to pursue his entrepreneurial aspirations full-time.
Based on his passion for cooking, Wahnelt targeted the restaurant business. Rather than starting out completely on his own without any experience, he decided to utilize the franchise model. After investigating a number of opportunities via various franchising organizations, he became interested in Munchner Suppenkuche, a small chain of restaurants in Munich that focus on healthy soups. The idea of serving healthy, affordable and convenient meals was highly appealing to Wahnelt, and he became the third MSK franchisee in the summer of 2007.
Franchisees invest between 95,000 euros and 115,000 euros to open a new location, of which 12,800 euros comprise a one-time start-up fee. Franchisees receive an equity stake of about 35,000 euros in their restaurants. Restaurant operators sign a 10-year contract with the company and have an option to extend the relationship. Ongoing costs include a franchise fee of 4.5 percent of monthly net sales and an advertising and brand fee of 1.5 percent of monthly net sales. Munchner Suppenkuche restaurants usually begin to achieve positive operating results after about six months.
Franchising offers risk-averse German entrepreneurs like Wahnelt a clear template to follow as well as operational support for their businesses. Franchising programs typically offer formal and informal training opportunities, along with company best practices and established supplier contracts. Structured support from franchisers is the key value proposition to many risk-averse entrepreneurs and can facilitate new business creation despite cultural distaste for uncertainty.
Centralized procurement and proprietary technology help franchise entrepreneurs reduce risk. Not only do the measures cut costs, but they also remove opportunities for error. Financial risk-sharing further encourages hesitant entrepreneurs, lowering the necessary personal investment and cutting the potential for losses.
The benefits of franchising, from operational advantages to financial backing, become particularly relevant in a risk-averse culture like Germany. The certainty provided by the franchise structure appeals strongly to would-be entrepreneurs who would benefit from the independence of entrepreneurship but hesitate to accept the incumbent risk.
The German example shows how franchise models can unlock entrepreneurial potential and illustrates how a franchise can serve as a tentative first step for aspiring entrepreneurs who might not otherwise have the stomach to launch their own businesses.
Gokhan Afyonoglu, Marcos Contreras, Sean Meyer, Thomas Rose and Christoph Weber are members of the Lauder class of 2010.