Many franchise systems include one or more company-owned stores – outlets that are owned by the franchisor and operated by its employees. Some argue against this mix, citing a potential conflict of interest; there would be a powerful temptation for franchisors to cherry-pick the best locations for stores they will own and run themselves. Even where the franchisor is scrupulously fair, franchisees may not see it that way.
DC Strategy executive director Rod Young believes that, in a well-run system, the benefits outweigh the disadvantages.
“I think there’s a nexus between the profitability of franchised stores and the ability of the company to operate its own stores,” he says. “There’s a greater alignment of the commercial interests and understanding between the customer and the franchisor and also a third leg, which I would describe as the softer issues, such as empathy with the franchisees’ situation. I have a view that a franchise running a core of company-owned stores has much greater appreciation of the franchisees’ position and the mood of the market place because the owner is confronting the same issues around customers, stock, competition, marketing and so on.”
The franchisor will also have more practical expertise in maximising profitability.
“To me it’s a non-negotiable that, before they launch into franchising, every retail franchisor should have a proven and profitable retail concept established in order to demonstrate clearly proof of concept, proof of the systems and processes and, importantly, return on invested capital. I’ve not seen a franchised network get off the ground where the franchisee pilots the idea. In fact, I would see it as one of the red flags and would discourage anyone from being one of the first in a franchised network where the franchisor has no track record of running locations.”
Company-owned stores are run by paid employees who tend to be less aligned to the long-term outlook of the business than an owner-operator. That means they can provide a useful base line.
“If a company-owned store is profitable, a prospective franchisee can draw a reasonable assumption that the business model, brand and operating system can produce a decent return on invested capital and benefit even more substantially with an owner-operator standing at the counter,” says Young.
Why franchise?
From the owner’s point of view, a successful chain of corporate stores can be more profitable than franchised equivalents – so why franchise in the first place? Drew Camm is well placed to answer the question. Five years ago, when he owned a chain of five de Pot Man outlets, he decided to cut down to two and, in future, focus on franchising.
“When you’re running your own stores you’re responsible for every aspect of the business,” he says. “That wasn’t easy, especially as I spend a lot of my time out of the country sourcing stock. I was finding it stressful having so many staff on the payroll and having to come up with all of the associated costs like payroll taxes. And trying to find good people to run the stores also creates a lot of pressure.”
Franchising presented a more effective and manageable way of growing the business.
“Good franchisees are prepared to put their heart and soul into the business,” he says. “Most managers aren’t prepared to do that unless you’re pushing them all the time.”
With three franchisees in Queensland, Camm’s goal is to have 30 franchised outlets running successfully across Australia. However, he is adamant that he will always retain at least one company-owned store.
“Owning a store keeps you in touch with what’s happening in retail,” he says. “We’re always looking for new and better ways of doing things, and your own store provides the ideal place to test everything from stock and display to new business systems.”
Ross Strudwick, owner and CEO of Struddy’s Sports, agrees that having one company-owned store in a chain of 14 franchises provides real benefits to franchisees, including in-store training.
“We’re able to give new franchisees hands-on experience in retail and ordering as well as the general daily running of a shop,” he says.
Struddy’s also operates a successful direct wholesale business supplying schools and sporting clubs. The imports and wholesale divisions are, again, company owned, and in-house training at the wholesale division teaches new franchisees whom to target, how to approach them and how to service them as a customer.
There are plans to open a further seven franchised outlets in the next five years and the company will be focusing on the country areas of Queensland and New South Wales. “These are areas where the direct wholesale business servicing clubs and schools is already established,” says Strudwick.
An important resource
The only Australian franchise to be based in Tasmania, Banjo’s also has bakehouse and caf outlets in three mainland states. Thirty-two are franchised, four are company owned and CEO Jon Lister says that these play a particularly valuable role in training and certification of new franchisees.
“They provide a pool of trained and experienced staff who can be called on to provide help where it’s needed,” he says. “And they also allow us to conduct extensive research and development to ensure we have a continual supply of new innovative products to maximise sales and minimise customer fatigue.
“We’ll definitely keep corporate stores in the mix in the future. As we continue to expand, we might even consider adding one or two more if they make commercial sense and would be of strategic value.”
While franchises often start out with one or two company stores then move into franchising, Luxottica was established as the world’s leading eyewear company before considering a franchising model. There are more than 900 retail stores across Australasia and, in Australia, there are now 54 franchises across four brands – Bright Eyes, Laubman and Pank, Budget Eyewear and OPSM – the largest optical retailer in the southern hemisphere.
“We have a huge amount of experience in operating retail stores and now we’re sharing that expertise with franchisees,” says Peter Baily, director – franchising and acquisitions at Luxottica Retail. “With the size of the Luxottica business, we have to be experts in running our stores. Franchisees can benefit from our size and experience and tap into the systems, the brands, the marketing – everything we have developed over years of running a successful global corporation.”