Part 2: Snap-on Discusses Helping Franchisees Be Profitable in Tough Times
A leading manufacturer and marketer of tools, diagnostics, equipment, software and service solutions, Snap-on is a $2.8 billion, S&P 500 company. It is one of the largest non-food franchise systems in the world, selling its products through more than 4,000 franchisees worldwide, including the U.S., Canada, United Kingdom, Australia and Japan.
This is Part 2 of a 2-part series.
Q: You recently launched a program in Australia in which Snap-on Tools would allow franchisees to consign its inventory through a payment system instead of insisting on an advance purchase. Tell me about that.
[Young] We don’t always do that, but consignment is an option. We do have programs that we apply, where they make sense.
In terms of joining Snap-on, we have a standard franchise. But if we find an excellent candidate that for whatever reason hasn’t managed to save enough cash or doesn’t have enough equity to borrow the money that it costs to start, we do have here a gateway franchise, where a franchisee can join us for as little as $17k - $25k. Because we have this ability to finance the loan through our own company, the entry cost can be very low.
We are being aggressive at the moment in coming up with super-competitive promotions and products at discounted prices to get their customers excited. The interesting thing about customers of franchisees is that this isn’t a nice thing to have. This is important to do their job. If you look under the hood of a modern car, it is a different experience of 10 to 15 years ago. I read only recently that an average five-seater family car has in excess of 50 computers in it. The kinds of products that we sell now are very different than traditional wrenches, sockets and screwdrivers, although we still sell all that stuff.
Nowadays our franchisees are competent in selling diagnostic products and software and information-based products as well.
Q: What other things are you doing to help your franchisees succeed?
[Young] Should franchisees become established and successful in one store, if they are the right candidate, we give them the right encouragement to expand into multiple stores. If you go on to Snap-on Credit, we can arrange an appropriate business.
Because we are a mobile franchise, if you asked us 10 weeks ago what the biggest thing on our mind was, we would have told you it was the cost of fuel. But nonetheless, what are we doing to help them be successful? As fuel was rocketing northward, we spent a lot of time figuring out how to help our franchisees take cost out of the business to minimize the use of fuel by using fuel-saving devices on their mobile stores. Because our stores are on wheels, franchises visit a place of work every week. Therefore, the cost of diesel or gas, depending on the truck they use, is important. That effort has not been wasted because whether fuel is $3 or $5 per gallon, franchises still want to consume as little as possible.
At our recent convention in Las Vegas, we dedicated an entire section of our exhibit floor to a business and profitability center. Very often much of the show is about new products and new sales programs that franchisees can employ and excite their customers. But this year we thought we’d pay particular attention to helping franchisees think about managing cost within their business. It was very well received among our franchisees.
Q: Snap-on’s profits are up 33% from 2007 in the third quarter of 2008. During such tough times, what's going on there? What super vitamins is Snap-on taking?
[Young] Well, the good news is that Snap-on is a global company. We sell to 130 countries across the world, not always through a franchise. There are different types of distribution. As markets vary around the world and exchange rates go up and down, Snap-on has a balanced portfolio. In fact, the franchise business represents less than half of Snap-on Inc. Snap-on has an industrial division. So imagine companies like Boeing, General Motors and big manufacturers, they don’t want to deal with a one-man in back of a truck. We have an industrial division that deals with that kind of customer.
Our franchise business is dedicated to the service of professional technicians who are responsible for buying their own tools, who service cars, trucks, boats and motorcycles that you and I drive every day.
Q: Where do you think the franchise division is getting the most bang for the buck internationally that is raising its profits?
[Young] We’ve had benefit in recent times with the pound in the U.K. That’s not quite so true anymore, but that’s the point really. Because we operate and sell our product in multiple countries, we aren’t all affected by the same things.
There’s a couple ways to improve profits. You can either sell more stuff and improve margins or figure out how to take out costs. Snap-on manufactures the vast majority of what it sells, so we’ve found ways to improve our production methods and eliminate costs at the same time.
Q: Are there any franchisee lawsuits that Snap-on is now in settlement with? What’s the legal scene look like in 2008?
[Young] We have very little litigation going on.
One of the things that we are focused on particularly and one of the things I’ve been focused on since moving to North America is compliance to the system. I don’t just mean our franchisees compliance to the system, but also Snap-on’s compliance to what it says it is going to do to its franchisees. If a franchisor deals honestly and ethically with its franchisees at all times, there’s no reason to be in litigation. We think of our franchisees as being partners in servicing our end-user customer. We know that a win for our franchisees is a win for Snap-on. To say that there is never anyone that is unhappy, I would be naïve if I said that. But if someone does get unhappy, we find out why that is. If it has to do with what we’ve done or shouldn’t have done, we fix it immediately. I think that is our reputation amongst our franchisees.
We participated over the last couple of years in the Franchise Business Review (FBR). We now service every one of our franchisees at least once a year. Since we’ve been doing that, we’ve gathered great information about what we do well. And if they tell us things that they don’t like or we don’t do well, we find ways to fix it. We’ve seen our rankings improve significantly.
FBR has been a good organization to help us do that. We’ve extended that not just to the U.S., but also to Canada, the U.K. and Australia. The truth is that we’ve always served our franchisees in regard to how they feel. That’s not news to us, but that just compares us to us. The great thing about FBR is that it allows us to compare our results to other best-in-class franchise systems. We’ve found that to be very valuable.
Q: I couldn’t help but notice that in the 2007 Snap-on Annual Report (pdf, see Note 15, e-page 95), the company recorded a $38 million pretax charge in 2006 representing its best estimate on an agreement to settle in a class action lawsuit from its franchisees. That's a sizable amount in litigation loss. Tell us about that.
[Young] Truthfully, I wasn’t here at the time. I’m probably not the right person to comment on this. But the fact is that there were some issues going back to the early 2000s. The then current chairman wanted to straighten all that up and that is exactly what he did. Since then, we’ve had little or no litigation.
As far as litigation, it is something that every quality franchisor has to think about. But I think if you treat your franchisees well and you get up every day thinking about how to make them more money, you will limit the likelihood of people wanting to sue you.
Only within the last two weeks while I’ve been away, there’s an organization called Frost & Sullivan that measures technicians' preference of products and brands. Once again Snap-on had swept clean, running first in every category. That convinces not just franchisees that we have a great product, but also anyone who is thinking of joining us.
Clearly, if you are looking to get into business, the one thing you have control over is your own level of work ethic and commitment and determination. You want to apply all of that to an excellent product and a great brand. We are lucky at Snap-on that we have both of those things. By as much as 9 to 1, the customers in your market prefer your brand before all others. That is pretty powerful.
--
Related reading:
Part 1 of this 2-part series: Snap-on President Discusses Coping with the Credit Crunch
- Franchise topic:
