Germans are widely considered to be risk-averse, and Germany is hardly the first country one associates with entrepreneurship. “The entrepreneurial culture is much more advanced in the U.S.” than in Germany, according to Walter Grassl, partner at Munich-based venture capital fund Munich Venture Partners. 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 concept of the visionary, risk-taking entrepreneur is far less developed in Germany than in many other countries. Traditionally, independent German businesses have been based on the technical and engineering expertise of their founders, rather than on the novelty of their business models. The great powerhouses of German industry, as well as the Mittelstand stock of small- and medium-sized enterprises, which in many ways forms the backbone of the German economy, are strongly focused on engineering and other technical sectors.
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. Hartmut Schauerte, Germany’s Federal Secretary for Small and Medium Enterprises (SMEs), praised the commitment of the franchise sector in a speech at the 30th-anniversary celebration of the Deutsche Franchise-Verband (German Franchise Association), saying that “to start up one’s own business through a proven business idea is becoming the mentality of entrepreneurs, which is strengthening German SMEs.”
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 ($52 billion). This represents 300% growth over the last decade, starkly contrasting with 25% growth in GDP in the same period. In per capita terms, Germany employed around 5.4 people in a franchise per 1,000 inhabitants. By comparison, the United States employed around 37 people in a franchise per 1,000 inhabitants in 2007, according to a report from PricewaterhouseCoopers.
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. According to a Deutsche Bank research paper by Uwe Perlitz, titled “Franchising in Germany Coming of Age”: “One reason for this has been that business in veteran franchising sectors like fast food has continued to expand at good rates, while inroads have also been made into lucrative new segments such as wellness.” Based on the same research, services have accounted for more than 50% of the growth in franchises, and are expected to expand at a 7% annual rate to contribute €70 billion to German GDP by 2015.
Finding Work in New Sectors
Over the last decade, franchising has increased from 1.0% to 1.6% of German GDP, and the number of employees in the sector has doubled. In contrast, general employment rose by only 4% during the same period. The increase in self-employed workers remained lower than the increase in the number of franchisees (2.6% vs. 8% 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%, slightly above the average of 67% within OECD countries but far behind leading nations such as Switzerland, Norway, or Iceland, with a rate of 75%. Approximately 22% of German jobs were part-time, and 56% 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.
According to Deutsche Bank projections, the franchise sector’s growth rate is likely to outstrip GDP growth in the medium term, although it probably will not reach the 11% annual rate of the last decade. Within the franchising sector, the greatest growth is expected in the health, education and environmental services sectors. The retail, restaurant and catering segments are considered largely saturated and are not expected to yield explosive growth.
In his article, “Franchising and the Choice of Self-employment,” Patrick J. Kaufmann, a marketing professor at Boston University, describes the relationship between purchasing a franchise and its financial and business benefits. Franchising offers the opportunity to expand in a much wider range of sectors. In addition, franchisees are more likely than independent business owners to operate in sectors in which they do not have previous experience. This suggests that franchising provides a means of increasing the flexibility of an economy. This is of particular value in Germany, where workers often have specialized training that results in high structural unemployment as entire industrial sectors contract.
Dietmar Wahnelt, a franchisee in the Munich restaurant chain Münchner Suppenküche (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 Münchner Suppenküche, 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. Working with the German Franchise Association, which compiles franchising offers on its website and provides consulting services to potential franchisees, he came into contact with the Münchner Suppenküche franchisors.
Münchner Suppenküche aims to differentiate its products through the use of fresh, natural ingredients. The company uses no preservatives and received “Bio Certificate” organic food certification in 2007. In addition to daily specials, international soups and home-style soups designed to evoke memories of home-cooked meals, the menu includes entrees ranging from Argentinean meat soup to artichoke soup à la Provence to vegetable curry. Franchisees determine prices within a range set by the group, generally less than €5 per soup. The company has also recently begun to sell broth with instructions so customers can make their favorite soups at home.
Franchisees invest between €95,000 and €115,000 to open a new location, of which €12,800 comprise a one-time start-up fee. Franchisees receive an equity stake of about €35,000 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% of monthly net sales and an advertising and brand fee of 1.5% of monthly net sales. Münchner Suppenküche 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.
Wahnelt was attracted to the franchising model by the opportunity to gain expertise from the Münchner Suppenküche’s central organization as he started his restaurant and further training as he operated it. The franchise reduced uncertainty by supplying a fixed model within which to operate. The company’s central organization provided marketing, public relations and process optimization — freeing Wahnelt from key business tasks with which he was most unfamiliar.
Soup in Large Quantities
In the case of a soup restaurant, operators are faced with the challenge of providing perishable soup in large quantities to consumers who visit restaurants primarily during short periods each day. Wahnelt’s Münchner Suppenküche location serves the vast majority of its customers between 11:30 a.m. and 2:30 p.m., with some additional sales on cool winter evenings. Consumer demand for a wide range of soups makes the task more complicated.
Participation in the Münchner Suppenküche franchise allows franchisees like Wahnelt to source their soups from the centralized kitchens of the group, which are located in Munich, and to incorporate products from local markets. Münchner Suppenküche uses a proprietary system to cool and package the soups in five-liter sealed containers. The process, which is difficult to replicate — in part because it requires a seamless refrigerated delivery chain — allows the soups to be stored for at least 16 days, accommodating the uneven demand of lunchtime customers.
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.
As a new business owner, Wahnelt has benefited from the Münchner Suppenküche’s brand recognition in Munich, where it has operated for 26 years, and has received positive press coverage — both in the local press and in foreign publications from the U.S. to Japan, including The New York Times’ travel section.
After less than a year running his Münchner Suppenküche franchise, Wahnelt is already finalizing plans for an independent restaurant modeled on his own culinary concepts. Building on Münchner Suppenküche’s emphasis on light and healthy fast food, Wahnelt has designed a “vitamin bar,” where customers can choose healthy alternatives such as curry soups, salads, fruits, vegetarian sandwiches, and, of course, the whole complement of Münchner Suppenküche’s soups. “I want to offer colorful and healthy food to enhance the experience of my customers,” says Wahnelt. This new concept builds upon many of the features that first attracted him to the Münchner Suppenküche franchise but brings them a step further with a fuller complement of healthy food choices.
Franchising is a powerful tool for promoting business ownership and entrepreneurship in Germany. By mitigating some of the risks inherent in starting a new business, franchising facilitates the jump to business ownership and, as in the case of Dietmar Wahnelt, can serve as a stepping stone towards independent entrepreneurship. As Germany makes the transition to a more service-oriented economy, this model of business ownership will prove to be a powerful tool in helping Germans achieve broader levels of prosperity.
This article was written by Gokhan Afyonoglu, Marcos Contreras, Sean Meyer, Thomas Rose, and Christoph Weber, members of the Lauder class of 2010. Marcos Contreras acknowledges a graduate fellowship from the Fundación Pedro Barrié de la Maza.