Choosing the right spot for your franchise business can be just as important asthe product and system you go for.
Peter Buckingham of
Spectrum Analysis advisory service reports on whatyou need to know about your franchisor's site selection.
Selecting a location for a business is one of the most important decisions you will make in your business life. If you are going into a franchise, this decision may be partially made for you, however, most franchisors will take all steps to ensure that this is your decision, and one they have not made for you.
While most large franchisors have specialist property people, many smaller franchisors operate the Jack of all trades philosophy, and this function may sit with someone who is basically inexperienced in this important field.
So what should you be asking the franchisor?
- Do you have a process for selecting sites?
- Do you have any quantitative analysis to support this?
- Are there any sales prediction tools you use to assist in this decision?
While the franchisor may not wish to share his research you, the knowledge that research has been undertaken sho boost your confidence in their system. Some franchisors wil share this information while others just let you know that the have approved the site, and believe it is good enough for a franchise to operate there.
It is quite likely you are going to a bank to fund your investment, and the banks generally show more confidence in franchise systems they know and have approved for loans. This approval process varies according to institution, however, one of the areas they explore is the method of site selection employed by the franchisor. If you are able to show the bank some supporting material as to why Me proposed site should be successful, then this definitely assists their approval process for your funding.
Some franchisors insist on you going to an expert third-party, and then the report that is generated can be given to the bank as part of their approval documentation.
The US approach In the US, there is a real stand-off approach by franchisors when it comes to helping franchisees in their site selection. I attended the last International Franchise Association Convention in Las Vegas in February 2007, and was surprised at how little the franchisor would commit.
Most franchisors have a very detailed guide to what sort of site a franchisee should secure. Then they introduce you to an expert who will help you find the site, negotiate the deal, and fill in the SAR (Site Application Request) to the franchisor.
Once the SAR is received, the franchisor normally has 28 days to approve or decline the site. This is creating a new breed of real estate consultant, expert in their own city, to assist as being the approved person by the franchisor for that city.
This approach has probably been brought about by legal issues in the US and we may be heading in this direction. The Lenard's case broached many of these issues, and a current case with Muffin Break could raise this to a new height.
What can a franchisor do to support new site selection, and show a prospective franchisee that all due diligence and care has been exercised?
Levels of research available The more sites a franchisor has operating, the better should be their information and the likelihood of predictive tools used in site selection. I believe all franchisors should be able to demonstrate a process they use in site selection, which probably covers as a minimum:
- initial site identification
- suitability from a demographic view
- physical site suitability
- economic feasibility
- final approval
Low site numbers
If a franchise has between five and twenty stores, the franchisor should apply some logic to why the best sites are doing well, and the lower performers are not so successful.
At this level, a franchisor should be able to model the demographics around his stores, and see if the better stores match his perception of the customers in terms of demographic of the area. A check chart can be created using a combination of customer perceptions, plus the statistical results of looking at the demographics of the best stores.
Medium store numbers
In a system of 20 to 50 stores, maybe a percentage of those in the country, then there should be a much better check chart based on a larger sample size. At these numbers undertaking a regression modelling process identifies the drivers of the business, and then the franchisor can logically add other variables they are confident assist in making for better stores.
Large networks
For established large networks of 50 to 150 stores, a sales prediction model can be built based on the sales achieved by the network, using regression modelling. This is done by a market analysis where all existing stores are surveyed. The survey can incorporate issues such as size of building, number of counters and tills, seating (if a food business), access, store visibility, signage visibility, parking spaces and convenience, nearest neighbours and other business generators, and many other items. A survey like this also produces digital photographs of all aspects of the site, and gives a benchmark for comparison of stores and standards for the marketing department.
Around 400 demographic variables are extracted for each store in the network either at different radii, by sales territories or by catchment areas.
Competition and generators are then measured to determine which categories of business have positive or negative effects on sales. Possible distance effects, wherein the competitive or generative effect is only active within certain radii, are also examined. Exposure is estimated based on traffic counts, signage and visibility, and a measure of pedestrian volume and flow.
Sales information for all applicable outlets completes the dataset, plus any internal operations measures where available. Statisticians then go to work to look for the best variables that explain the sales that are being achieved. Though no guarantee can be given of individual results, we normally obtain models that can be said to be 70 to 80 per cent accurate. The more consistent a brand is, the more accurate we expect the results to be.
Neural networks
The large businesses we work with usually extend past regression modelling, into the use of neural networks. This is often called artificial intelligence and works on looking for patterns in the data that allow it to combine and create new variables that give a better result than can be achieved from pure regression modelling.
One of our clients had more than 200 stores all in strip shopping centres, and all selling the same product. Regression modelling gave us 78 per cent accuracy, whereas the neural network gave us an 86 per cent level of accuracy.
Applying the science once developed
The sales prediction model is designed for mature or established sites that have been open at least one year. In the fast food industry, we have seen cases where with big opening promotions, some stores never again reach the sales level achieved in the first four weeks.
Once a sales prediction model is built and agreed upon, any new sites being considered can be run through the model to give a sales prediction at maturity. This may be done by the consultant, or internally if the company has all the necessary resources.
The sales prediction modelling then becomes an integral part of the approval process that a franchisor undertakes. It should not be seen as the only part of the decision, as exceptions do occur, however it would be seen as a good flag as to what should expect.
For example, a sales prediction in a range below the network average would provide a strong warning against proceeding, and special circumstances would need to be demonstrated to achieve approval. On the other hand, if a new store's prediction is in the top 25 per cent of network average, then there will be a higher level of comfort in approving the proposal.
Although you may not see the results of all this analysis you should have some confidence in the system for undertaking the research. Franchise systems unable to demonstrate science and logical process in site selection, and subsequent site approval are putting themselves at risk of criticism and ultimately, litigation.
A final word came from the bench of the Federal Magistrates Court in October 2007, where the magistrate described the SWAG method of site selection:
- Scientific
- Wild
- Arse
- Guess
Hopefully this is not your franchisor's approach to site selection.
Summary
Implementing a site selection process can be very good insurance, and should help a franchisee determine the more legitimate systems from the others. If a franchisor cannot answer you in a confident way as to how they select sites, maybe you should look at other systems to invest in.
Peter Buckingham is managing director of Spectrum Analysis Australia Pty Ltd, a Melbourne-based geodemographic franchise consultancy, and a Fellow of the FCA. Spectrum specialises in assisting clients with decisions relating to store and site location using various scientific and statistical techniques
This article appears courtesy of Franchising Magazine.
23-Jun-2008