Do Franchisees Really Outperform Corporate Stores?
Written by Ken GaeblerPublished: 4/3/2014
Recent study tests the belief that privately owned franchises are more successful than locations that are owned and operated by franchisors themselves.
If you set aside franchisors' need for royalties and franchisees' need to achieve personal business ownership goals, franchise operations often boil down to a simple, but common question: Are independently owned franchise locations more effective and profitable than company-owned stores?
The issue of company ownership has ramifications for both franchisors and franchisees.
For franchisors, it can mean the difference between a business model that is primarily based on franchising and one that leans toward multi-site, company-owned operations. For franchisees, on the other hand, company ownership often translates into reduced opportunities for business expansion--typically considered one of the benefits of owning a franchise.
Historically, conventional wisdom has dictated that independently owned franchises are more successful than company-owned stores because franchisees have more at stake. If the location fails the franchisee goes belly up, while the failure of company-owned locations has less impact on individual stakeholders. In effect, the theory goes, the franchisee is an entrepreneur who cannot afford to fail, whereas the franchisor's manager is a company man who will get paid no matter what happens.
A report in the Australian franchise journal recently discussed the results of a new study by the Franchise Relationship Institute, exploring the reality behind the longstanding notion that franchisees outperform company stores--a concept that many believe is perpetuated by franchisors to make opportunities more attractive to prospective franchisees.
"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," said Greg Nathan, director of research at the Franchise Relationships Institute.
In a review of more than 19 established franchise networks controlling more than 3,000 franchised and company-owned stores, the study found that when locations converted from company ownership to franchisee ownership/operation, there actually were significant improvements in sales growth, cost management and other performance categories. When businesses converted from a franchisee operation to company management, performance decreased.
But the study also discovered that clusters of well-resourced businesses within the same franchise system experienced no measurable differences in performance between franchisee and company management.
"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," added Nathan.
While the study suggests that good management skills, rather than ownership type, is the key driver of a given location's success, there is also the question as to who gets the best locations.
There's always been a rumor that some franchisors keep the best locations for themselves and give the worst locations, the "dogs," to franchisees. This particular study didn't comment on that topic.
For franchisors, it can mean the difference between a business model that is primarily based on franchising and one that leans toward multi-site, company-owned operations. For franchisees, on the other hand, company ownership often translates into reduced opportunities for business expansion--typically considered one of the benefits of owning a franchise.
Historically, conventional wisdom has dictated that independently owned franchises are more successful than company-owned stores because franchisees have more at stake. If the location fails the franchisee goes belly up, while the failure of company-owned locations has less impact on individual stakeholders. In effect, the theory goes, the franchisee is an entrepreneur who cannot afford to fail, whereas the franchisor's manager is a company man who will get paid no matter what happens.
A report in the Australian franchise journal recently discussed the results of a new study by the Franchise Relationship Institute, exploring the reality behind the longstanding notion that franchisees outperform company stores--a concept that many believe is perpetuated by franchisors to make opportunities more attractive to prospective franchisees.
"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," said Greg Nathan, director of research at the Franchise Relationships Institute.
In a review of more than 19 established franchise networks controlling more than 3,000 franchised and company-owned stores, the study found that when locations converted from company ownership to franchisee ownership/operation, there actually were significant improvements in sales growth, cost management and other performance categories. When businesses converted from a franchisee operation to company management, performance decreased.
But the study also discovered that clusters of well-resourced businesses within the same franchise system experienced no measurable differences in performance between franchisee and company management.
"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," added Nathan.
While the study suggests that good management skills, rather than ownership type, is the key driver of a given location's success, there is also the question as to who gets the best locations.
There's always been a rumor that some franchisors keep the best locations for themselves and give the worst locations, the "dogs," to franchisees. This particular study didn't comment on that topic.
The article makes complete sense when it says that the franchisees have more risk and tend to do better than the company owned locations. The franchisees have so much more to lose and so much more gain also. With the franchisee owning the store, it can really only help both the franchisee and the franchisor if the location does better. On another note, it is pretty obvious that the franchisor would want the best locations also. If they gave the franchisee the best locations, it would be like the franchisor is just giving away money to the franchisee. They would collect royalties and fees from the locations, but they wouldn't be making as much as they would if they owned it.
ReplyDeleteI have to say I enjoyed reading this post, and to me it makes a lot of sense. As we talked in class, what makes franchises do so well is the incentive from both sides (franchisee and franchisor) to do better. In my opinion, the franchisee will do better most of the times, because as the post says "franchisees cannot afford to fail," while a franchisor would probably take the hit without worrying too much about it. Therefore, the franchisee has that pressure, plus the pressure of the franchisor on its shoulder. Also, the franchisee has a bigger will to do better in single store in order to make more money, while the franchisor worries more about more than one store and looks at the numbers($) from a higher standard.
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ReplyDeleteIt is true that franchisees are generally able to outperform corporate owned stores because they are more motivated to perform better in order to generate more profit for their business, whereas a franchisor that owns multiple stores may not be as motivated to make one single store generate an abundant amount of profit since they are still getting profits from other stores, but this will highly depend on whether or not the brand of the franchise is a well-known brand.
ReplyDeleteIf the brand is not a well-known, then the story is a little different, the franchisor and the franchisee will, in this case, perform relatively the same; this is because it is in the franchisor’s best interest to also generate greater profits to expand its brand more and achieve brand awareness across the area, state, and or country. The answer at the end would always be, “it depends,” it is a very broad question and there are many ways to approach the answer since there are multiple variables that could affect the final answer.