Pass In Training

Analysing Scour's franchise operations will be important to passing R1.

Revenue

The points to consider when discussing revenue are:

Overall franchise revenue

The overall revenue will increase for the following reasons:

• The 11 franchisees in 2019 will have a full year of trading rather than 6 months
• New franchisees in 2020 will probably have 6 months on average trading
• The total revenue generated by the franchisees from their customers will increase the ongoing fee
• If the average revenue generated by each franchisee increases this will also increase the ongoing fees
• The sale of products to the 11 franchisees will increase as they will have a full year of trading
• The recharge of products to the 11 franchisees will increase due to the full year of trading
• Sale of products and recharge of transport to new franchisees in 2020

Sales mix

The change in franchise revenue is likely to mean it's share of the revenue mix will increase.

Please keep in mind that this trend of moving away from Owned to Franchise generating a larger proportion of revenue is likely to continue until the franchise network is mature.

What impacts each revenue type within Franchised operations?

The main drivers are:

• Start up fee: The number of new franchisees in the year - fixed fee of £10k. Remember this has not covered the start up costs incurred by Scour in the past (see GP section)
• Ongoing fee: The full year of trading from 2019's new franchisees, the number of new franchisees set up during 2020 and the average revenue generated by the franchisees from their underlying customers.
• Sale of products: This is the same are the ongoing fee PLUS any price increases from Thom which would be passed onto the franchisee. It is also influenced by the mark up which is applied by Scour to the franchisees (approx 20% mark up, circa 16.6% GP margin). If Scour increases or decreases this mark up the revenue could change.
• Recharge of transport / distribution: As per the sale of products, with the exception being mark up by Scour. There is no mark up on the recharges and we would not expect the examiner to introduce this.

Gross Profit

Each of the different revenue types within Franchise operations has its own unique costs. Therefore, it allows the GP margins within these types to change independently.

The reasons for changes are:

Set up costs

These are incurred by Scour on behalf of the new franchisees. They are prepaid until the first day on which the franchisee starts trading and then they are written off.

To date they have been around £13k per franchisee meaning a loss is generated on each franchisee that sets up.

The more franchisees in the year to start, the larger the loss and it could impact the stream's GP%.

Additionally, if the costs per franchisee increases as well, the loss per franchisee will increase.

There is definitely a potential recommendation to make here!

Ongoing fees

The examiner has set this section up to allow you to break it down into Ongoing costs for new franchisees and existing franchisees (see page 14 of the Advance Information). He has also given the split of revenue between existing and new franchisees in the Advance Information.

The costs to the new franchisees has increased from £4.75k to £4.91k between 2018 and 2019 - so potentially it could increase again. However, new franchisees do generate a profit from ongoing fees.

2020 will be the first time any similar analysis could be done on existing franchisees.

Overall gross profit for ongoing fees should increase as the franchise network matures and less work is required for the 7% fee for the established franchises.

The gross profit generated by ongoing fees is highly contingent on the underlying performance of the franchise network. As the costs are relatively sunk in supporting the network, the more revenue each franchisee generates from its customer base, the higher the gross profit margin generated by Scour.

Purchase of cleaning products

The gross profit margin of this stream is unlikely to change as Scour purely recharges the products it buys from Thom to the franchisee. The current mark up is approximately 20% generating a GP margin of around £16.9%.

If this margin changes then the explanation is either an increase or decrease in the mark up on products.

Cleaning products is the largest revenue type within the franchise revenue breakdown, so it could act as a bit of a cap on the gross profit margin growth. However, the recharges generate higher GP margin than Owned!

If Thom increases it's prices, then the amount recharged will increase ad this will increase the gross profit without increasing the gross profit margin.

Transport & distribution

This stream generates no gross profit or GP margin. The recharge is at cost and is 5% of the value of the products purchased from Thom. There is little to talk about other than it does reduce the overall GP Margin of the stream.