Investing in a franchise business gives you plenty to be optimistic about, suggests John Di Natale, senior consultant, DC Strategy.
If you’re like me, you’re tired of hearing about the world’s economic woes. Every day there seems to be another bad news story. It’s not that I’m unconcerned or flippant about the difficult trading conditions or the fact that many businesses are struggling. It’s just that sometimes, it’s good to read a positive story – if for nothing more than a little balance.
And there are success stories – even now. Perhaps not surprisingly, many of them seem to be centred on franchised operations. Let’s look briefly at a few examples: since opening the first store at Knox City Shopping Centre, Hairhouse Warehouse has grown to more than 130 stores and is continuing to show strong sales growth. The group plans to expand to more than 200 stores both in Australia and around the world in the next few years. Snap-on Tools has a 20 year history in Australia and its 140 franchisees continue to rank highly in the best performing franchisees in the world for that group. Quest Serviced Apartments has been a consistently good performer over many years. Emerging systems such as Appliance Tagging Services, a specialist electrical contracting company, Cupcake Bakery and Shuji Sushi are proving there is significant growth to be had with a sound business concept, a well developed franchise system and a strong focus on marketing.
Can franchising then, buck the economic trends? Are there elements in a franchise business model that make it more resilient, more likely to succeed, even when the broader economy is struggling? I believe there are.
Some contributing factors may be:
The nature of the business model
A well developed franchise business model has been “bench tested” in a number of scenarios. In designing the business model, a great deal of work goes into predicting and understanding its potential economic performance. The sales and revenue generation capability of the business, the cost structures under which it will operate, its sensitivity to changes in revenue and costs and the operating parameters within which the business is most likely to succeed are all analysed very carefully. When the roll out of operations begins, there is a much higher chance of success. This is a far cry from the “lick your finger and check the wind direction” approach that many independent business people take.
In a franchise system, the management of operations and procedures is carefully considered. A series of what-if scenarios are assessed so that policies can be devised for dealing with each scenario. This detailed forward planning provides franchisees with a structure that helps them make better decisions when they need to.
A good franchisor is appropriately cautious in selecting suitable franchisees. In the recruitment, screening and selection process, franchisees are assessed for their fit with the brand, their ability to fund the purchase to ensure they are not over committing and their lifestyle needs are also taken into account. This means that a franchisee entering a system is better prepared for the challenges ahead than the average new business entrant.
Owner and operator motivation
I don’t think many people would argue with the premise that finding and retaining the right people is one of the key challenges for any business. It’s widely accepted that franchisees are more motivated and more committed than employees. Some would argue that franchisees are more highly motivated simply because they have invested their own hard earned dollars into the business. I agree this is one of the factors, but it goes deeper.
Franchisees have made the decision they want more out of life than the usual employment scenario offers. They want to run their own business, take a little risk and reap the rewards. There is pride at stake. A franchisee invests a little of themselves in their business and genuinely wants to succeed. When the going gets tough, as the saying goes, a franchisee will usually dig deeper than the average employee to keep driving the business forward.
Solid business processes
Good franchise businesses are driven by processes. They have a well organised approach to every aspect of their operations. When things tighten up, customers are conservative with their spending and traffic past the door slows down, it’s easy for an independent operator to start taking short cuts. Any form of advertising or promotion is usually one of the first sacrifices on the altar of tough times, followed by a loss of focus on the little things that matter – stock levels and rotation, presentation, a proactive sales approach, appropriate staffing levels and good customer service.
Where these things are clearly defined in the business model and every day operations, as they are in a franchise, it’s easier for the business owner to remember to keep doing the things that have been important in growing the business in the first place. A determined franchise network will see that maintaining profile and continuing to attract its share of the customer spend will require an even sharper focus on these factors and respond accordingly.
National branding with local involvement
Franchise networks have brand power. By virtue of their presence in shopping centres, high streets or vehicles on the road, people know their name and what they stand for. If that presence is supported by good marketing and customers choose to engage with the brand, a relationship is formed and a level of trust is established.
When funds are tight and consumers are faced with a purchasing decision, who will they put their trust in to deliver what they are looking for? The brands they are familiar with, of course. If you think about where you have shopped in the past month or two, this is almost certainly true. Most of us rely on that coffee store for our morning caffeine hit or that hairdressing salon to keep us looking presentable. We rely consciously and subconsciously on the brands that have provided us with a good experience in the past or are appealing enough for us to explore.
Adaptability to changing customer tastes, requirements and needs
Franchisees don’t operate in a vacuum and the business is not dependent upon the efforts of one person. As an independent business owner, it’s easy to be blinkered by what you have done in the past. There are plenty of businesses still operating as they were six months ago, a year ago, sometimes a decade ago. While this might create a little charm of yesteryear, it’s generally not the best strategy if you want to stay relevant and keep growing.
There is no doubt that consumer needs continue to evolve. There are trends and shifts in how people want to buy; the continual migration to online, the desire for engagement with a brand and its products and the demand for a better customer experience. These are all ongoing challenges – and opportunities – for the business owner. A recent study in the US Journal of Marketing Research indicated, for example, that relaxed shoppers are prepared to pay up to 15 percent more for goods than those who are on edge. Seems logical enough that we would be happier to spend when we are feeling comfortable than when the pressure is on.
A franchise group is generally better equipped to take advantage of an opportunity like this than a sole trader. Why? The traditional sole trader has to wear a manager’s hat, a marketing hat, a finance hat and an operations hat. In a franchise model, there are generally more resources dedicated to identifying, understanding and responding to these ongoing, sometimes contradictory changes in market conditions. The marketing person might identify the trend and devise a plan, the merchandising team will work on store layout and presentation and each franchisee can focus on creating the in-store experience – perhaps installing a waterfall and playing soothing music to keep the customers spending.
These are just a few of the reasons franchising – at its best – has the wings to fly above the storm and why many of the leading brands belong to franchise groups in Australia and around the world.