Should You Franchise Your Business?
As someone involved with franchising restaurant concepts since 1991, I can say without hesitation that using franchising as a business model to grow one’s business is very challenging. There are clearly many attractive reasons for considering the franchising model but all too often restaurant operators think it is a panacea for their long term success without recognizing all the pitfalls. Let’s discuss here both the pros and cons of franchising to see it is the right model for your business.
Do you have a proven concept with a solid store level economic model?
Many franchisors in markets like Korea, China and Indonesia lack the capital to build many direct owned stores, so they open a few locations and then look to license their brand and quickly build hundreds of locations. With only a limited number of stores operating, it is very difficult to determine the consumer appeal of a concept. Are revenues strong because the stores are only in “A” locations? Do the store results reflect a fully loaded P&L including all franchisor charges? Generally, as more stores open, revenues tend to decline as stores may cannibalize each other in the same trade areas.
How complicated is your operating model?
Full service restaurants with complicated operating models are difficult to franchise successfully. The more complicated the operations the more failure points; i.e. the more that can go wrong. Brands with simple operations like ice cream or coffee have a higher probability of success because it is easier to satisfy customers with quick service and few mistaken orders. However, even simple operating brands require strong operators who are well trained.
Do you have an adequate franchisee support structure?
Many franchisors try to build their businesses on the cheap by investing the minimum in team members and technology to support their franchisees. This can lead to a train wreck if the company is not careful.
Is there a robust online training system for franchisees?Do you have digital recipes and build cards?Do you have franchise business leaders in the field visiting stores, doing audits and coaching the franchisee owners to improve their performance?Have you invested in dedicated real estate professionals utilizing up to date real estate analytic techniques to assist franchisees with site selection?Are construction professionals available to help franchisees with store layouts and project management?Do you have adequate tech systems to monitor store revenues and ingredients usage?Can franchisees order ingredients and other supplies seamlessly online?Do you provide a digital labor model for more complicated operating concepts?Can franchisees access a cloud based POS system that can track sales and cost of goods as well as food wastage?
How do you make your money?
Historically in Asia (Japan excluded) there has been a lack of trust between franchisor and franchisee. Many franchisees try to avoid paying taxes by under reporting revenues and often push back on using the POS provided by the franchisor. Franchisors are therefore reluctant to charge royalties when they cannot track the true revenue totals so they rely to a large extent on supply chain & equipment mark-ups as well as new store franchise fees. Over time, mark-ups tend to rise and franchisee profitability declines leading to conflict between both parties and the franchisee cutting corners to maintain profitability.
In this day and age, franchisors must enforce the use of a standard POS that can securely track sales and be linked to the franchisor IT system. In return, the franchisor must moderate its mark-ups and institute a royalty system based on the concept’s store level economic model.
How are you making your money? Does your revenue system allow the franchisees adequate room to make a good return on their investment?
Are you pushing store development too aggressively to collect franchise fees and creating too many opportunities for store cannibalization?
Franchising is hard!
If you are operating a complicated full service concept, it is far better to consider owning the stores yourself or considering joint ventures with strong operators.
Simple operating concepts lend themselves well to the franchising business model if proper systems are put in place and the franchisor is willing to invest in people and technology to support their franchisee partners. This will normally require a significant investment upfront before large store counts are achieved.
Neither model is easy and the either pathway will always create challenges but take the time to understand what kind of concept you want to operate and choose the best model to support it.
