Franchisees v company owned stores: which performs best?

By Sarah Stowe | 29 Oct 2015 View comments

Do franchisees really perform better than their counterparts in managed company owned stores? The latest research from Franchise Relationships Institute has put the common belief to the test.

The research, which looked at what happens when businesses are converted from company to franchisee operated, or franchisee to company operated, included 19 established retail networks that control more than 3,000 franchised and company owned stores.

Greg Nathan, research director of FRI, said "Most franchisors enthusiastically talk of stores achieving an immediate lift in sales of over 20 percent when they change from being managed by the company to being operated by a franchisee."

Franchisors and franchise consultants also regularly claim that franchisee operated stores outperform company stores due to the “skin in the game” factor where franchisees invest their own money in a business and are responsible for its profits or losses.

“Our hunch was many of these stories are exaggerated to suit the biases of people who want to push the franchising model” Nathan said. “So we decided to put the proposition to the test using longitudinal data of stores that were converted from one model the other.”

The study findings

The outcome of the research showed that when businesses convert from a company managed unit to franchisee operated, performance improves, particularly in the areas of sales growth and cost control. On the other hand performance generally dropped when stores went from franchisee operated to company managed, especially when the business had been performing well as a franchise.

However as another part of the study found from comparing clusters of franchised and well-resourced company stores within the same franchise system no significant differences were found in performance.

“Where a franchisor is willing to invest in solid management support and incentive systems for company stores, and the locations of these stores are strong enough to generate the sales to support this type of investment, they can perform as well or better than franchised stores," Nathan said.

What else do potential franchisees need to know about performance?

Are there any keys to franchisee success?

In an earlier report FRI found certain factors affect franchisee performance. Read more here.

Check out this video interview for more tips from Greg Nathan on what to look for as a franchisee.

A study of business failures and survivors by the Asia-Pacific Centre for Franchising Excellence discovered what helps and hinders small business.