EXCLUSIVE: Snap-on President Discusses Coping with the Credit Crunch
Founded in 1920, Snap-on is a $2.8 billion, S&P 500 company headquartered in Kenosha, Wisconsin. Snap-on Tools Company, LLC is a global manufacturer and marketer of tools, diagnostics, equipment, software and service solutions. Through a fleet of mobile franchises, it is one of the largest non-food franchise systems in the world, selling its products through more than 4,000 franchisees worldwide including in the U.S., Canada, United Kingdom, Australia and Japan.
Born in Birmingham, England, Mr. Young has a 28-year career with Snap-on. He became the president of its franchising efforts in early 2007. Having just returned from visiting operations in Japan and Australia, Mr. Young drove to Snap-on's Los Angeles office for his Blue MauMau interview.
This is Part 1 of a 2-part series.
Q: I understand you started in Snap-on as a franchise owner.
[Young] I joined Snap-on in 1980 as a franchisee in England. I did pretty well and did that for three years. I had a great field manager that gave me great guidance and was inspired by him. As a result of that I wanted to work for the company. I became a field manager out of branch offices in Bristol. I eventually became national sales manager. That all took about 18 years.
In 1999 I had the opportunity to move to Australia and look after Snap-On’s businesses in Australia, New Zealand and South Africa. Though our product is the same around the world, the market is a little different and the cultures are certainly a little different. We did very well down there. We grew the business significantly. We grew the number of franchisees and the paid sales average of our franchisees.
In the beginning of last year, Snap-on asked me if I wanted to move to Kinosha, Wisconsin, the land of Snap-on.
Q: There’s a credit crunch going on right now. Are you seeing any signs of it in the tool industry and with your competitors?
[Young] Certainly I read and hear that borrowing money to start a small business nowadays is next to impossible. The banks are very nervous even to lending to each other, let alone to people who want to risk going into business. Banks typically demand some kind of collateral, often an individual’s home. Even that is complicated because homes are becoming more difficult to sell. The values of homes are going down. Therefore, the value of equity in people’s homes is going down. This makes it ever harder to borrow money, even assuming the bank wants to do it.
Q: Are you seeing this worldwide?
[Young] Yes. The world is watching America very closely. Clearly, the effects of the credit crisis are extending internationally to the U.K. and indeed to Australia. I was just in Australia, right before going to Japan. There’s no doubt about it. New franchisees looking to join us … In fact, the local management told me that they had people who had been doing their due diligence and going through the process of joining us. They had gotten approval in principle from their banks to borrow the money but in just the few weeks the banks had said that perhaps they wanted to take another look at it.
The problem does extend overseas.
Q: Is it hard to get money if you want to expand as opposed to operating a franchise?
[Young] But our experience in Snap-on is different. There’s really two parts to this story. There is the challenge of finding credit and finance for potential franchisees to join us. Then there is the challenge of finding finance for customers, the end users, to buy our products from our franchisees. We handle that successfully through our own internal credit organization, Snap-on Credit. Snap-on has owned it for many years.
We’ve been doing this for decades. Any potential franchisee who wants to join us or expand to multiple stores is able to borrow money from his own bank should he choose. But if he wants to, he can go to Snap-on Credit. The good thing is that Snap-on Credit understands our business very well. Ordinarily, if you want to get into business, you have to go to a bank manager and say my name is Barrie Young. I’ve seen this great franchise I want to buy. Here’s the collected information from the franchisor. Here’s the due diligence about the route or territory that is available to me. Here’s my business plan. Here’s my cash flow forecast. Will you lend me the money?
The bank manager collects all of this data and tries to make an assessment that Snap-on is a good company and that this individual is a good investment. If both are true, he’ll probably lend him the money. With Snap-on finance doesn’t need to be convinced that Snap-on is a good thing. We just need to be convinced that the individual has the personal net worth and the right kind of credit history. And based on his business plan, he has the ability to repay the debt.
Q: How has Snap-on been able to get into the credit business? Many franchise funding vendors have slowed or stopped lending. How are you able to get your funding?
[Young] We are an old company that has been around since 1920. We joint venture with a bank, albeit Snap-on supports the majority of the loan. We also take advantage of the expertise of the bank. It is a joint venture, but it is managed by Snap-on people.
Q: I know some costs have been skyrocketing. But now some seem to be dropping, for example, the price of gas. Are you seeing deflation? And if so, are there any concerns you have on what deflating prices might bring?[Young] We are driven mainly by the consumption of steel in China. We saw earlier in the year the costs of steel multiply horrendously. We saw huge increases in the cost of raw materials to make the product. But actually we work very hard to protect the franchisees from those increases. Certainly we had to pass on some small increases but nothing like the increases we were seeing from the material suppliers.
What we know is that Snap-on’s success is driven by the success of our franchisees. They are small independent business people and less able to manage these massive shocks in costs. Where possible, we try to absorb them and help them through these difficult times.
Snap-on’s been around since the 1920s. This is not the first time we have seen a difficult environment.
Q: In other words, Snap-on has outlasted every economic downturn in nearly a century, including the Great Depression. You've learned a few things about how franchisees need to get through hard times.
[Young] Exactly! Indeed, the interesting thing is that if you go back through those times, our founders invented what you and I now call the ratchet and socket, where one snaps onto the other. Hence the name [Snap-on]. Almost immediately after being invented, the world around the founders collapsed. Customers couldn’t afford to buy these great new products. In an effort to grow the business, instead of sitting in the store and waiting for the customers to come buy, that’s where the idea of the mobile store came from.
Back as early as the 20s and 30s, Snap-on has been operating the franchise model, although it wasn’t called a franchise back in those days. But actually it was much the same thing. It was a self-employed person in a mobile store taking the product to the customer at his place of work and offering him tools with the help of credit, even back then.
Q: When gas prices skyrocket, is there pressure from mobile franchises, where the owners might prefer a fixed site location?
[Young] Not really. Our big advantage as a brand is our ability to get in front of our customer. If you are a fixed site location, whether you are selling tools or donuts, you hope people will stop by. Of course, when you are mobile, you can be much more pro-active in which when customers got up in the morning, they didn’t know they would buy.
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Read Part 2: Snap-on Discusses Helping Franchisees Be Profitable in Tough Times
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