By: Michael Seid, Managing Director, MSA Worldwide
In addition to our work with companies in their development of new franchise systems, much of MSA’s practice involves working with established franchisors that are looking to make changes because of system performance issues or they find themselves embroiled in some form of internal or external conflict or they want to take advantage of some opportunities or to revigorated their growth. Because of the breadth of our practice, we work with clients at all levels of development. It is because of the depth of our experience that we are able to provide solutions specific to each client’s needs and circumstances.
It is well known that the franchise marketplace has evolved from single unit ownership to a majority of franchised locations being owned and operated by multi-unit franchisees. Multi-branded platform companies are common, yet the integration can often be challenging to its brands and to the franchisees in those brands. International opportunities exist, but because of technology and competition, the market has been shifting away from master franchising and the existing pipelines for some franchisors may be under performing. We are in a period of flux and have been for quite some time.
Multi-unit ownership has evolved into a variety of what are best described as “classes” of franchisees with each having different characteristics, economics, benefits and requirements. More than just single unit and multi-unit franchisees exist and today the marketplace includes strategic franchisees that are both multi-unit and multi-branded; de novo multi-unit operators; private equity owners, conversion operators and a mix of those using management companies, area representatives or work in a shared resource environment.
Yet all too frequently, despite the differing business realities and the layered benefits these classes and structures can bring to franchise systems, many franchise systems only differentiate the relationship by adjusting the initial fees for multi-unit franchisees. Someone forgot to tell them that the word Uniform in UFOC never meant the offering had to be the same or that Uniform is no longer a term mentioned in the FDD.
Most brands are still charging the same continuing fees and including the identical rights and obligations in their agreements, regardless of the class of the franchisee. When PE firms get involved, they don’t always know how to effectively best leverage the abilities or advantages that come from the resources and variety of opportunities they hold. Sometimes they can even over leverage which can result in relationship issues and increased potential liabilities.
The cookie cutter approach to franchise system business structure and legal documents that we frequently find, lessens the efficiency and effectiveness of not only the franchise recruitment process but also negatively impacts the relationship between the franchisor and franchisee. In doing so sustainability and return on investment are impacted below what the franchisor and franchisee had hoped to garner. By not thinking through the offering and properly structuring it for the differing classes of franchisees, a boiler plate approach creates issues and managing the system becomes challenging.
The world would be a very different place had franchising not been invented and those of us in franchising are rightfully proud to be part of it. However, we don’t often discuss the frailty of franchising and the numbers of franchisors that have emerged, sold a few or many franchises and then stalled or ceased to exist. Most of the studies on franchising are on the performance of existing brands and do not include brands that have left the field, which can give all of us in franchising a distorted feeling of well-being, safety and performance. There is a lot of causes for this problem and we can leave that for another article.
The IFA, of which I am a board member, talks about responsible franchising. This is a worthy goal but for many brands it will require a strategic rethinking of the overall approach to franchising to reach that summit. While there are most certainly generally accepted standards and practices in franchising, including in setting and enforcing band standards, I think one of the biggest enemies of great franchise performance can be found in their original structuring and the reluctance of some franchisors to make changes based on the market and the system’s evolution.
People refer to franchising as an industry, but it’s not. Franchising is a sector of the economy; it’s an alternative method used by many industries for expansion and downstream product and service distribution. Because it is made up of more than one-hundred distinct industries, (and within each of those industries are companies at different stages of development, performance, makeup, products and services, some with national and global potential and others limited to regional growth) the concept of “best practices” frequently touted in franchise lectures and on podcasts makes little sense and frequently is counterproductive.
What companies need to focus on, in order to maximize success, is the notion of “contextual practices.” A contextual practice focus requires you to think though approaches though the lens of a company’s history, culture, environment, consumer, economics, franchisees and other relevant factors. Thinking that franchise systems are fungible, ignoring the brand’s underpinning and copying another brand’s best practices, simply leaves you with less than satisfactory results. Creating a franchise strategy and managing that system based on the principles of contextual practice is essential today for brands and their franchisees to prosper.
Understanding how to begin to conduct an audit of a system to determine what changes are required or possible is critically important. A philosophical approach that we have used with our clients for many years focuses on five key elements - “Consistent, Sustainable, Replication, Communication and Culture(sm).
Likely the most important of the five elements is understanding the system’s culture and its approach to supporting and dealing with franchisees and through them the consumer. This is closely followed by Communications and the methods employed when things are going well and especially when issue have arisen and conflict exist. Consistent and Sustainable are easily defined.
People new to this approach frequently think that the word Replication relates to franchisee recruitment and sales. But that is not the case as system growth is the natural derivative of a well-executed franchise system and we don’t include it as a separate element. Replication actually deals with how well the franchisor leverages the growth of the overall enterprise in sharing the benefits downstream with the franchisees and other stakeholders. Helping companies improve their execution as a franchise system is core to our work and the starting point will always be to focus on the brand’s culture first.
Every brand lives and suffers based on how consumers feel about it and how the experience of shopping for or at that brand makes a customer feel about themselves. Customers are attracted to great companies that strive to have and continually fine tune and deliver on their culture in a way that maintains their loyalty and helps to grow the brands.
Likely the easiest example at the retail level is how Apple uses “retail theatre” in elevating the consumer experience of shopping at an Apple Store. From the moment you are greeted at the front door you are transferred to a person with the knowledge and experience to help you make decisions on an important investment. Apple’s staff looks the part and each has the knowledge and training needed in a consumer focused environment. Apple’s layout creates an environment where customers are encouraged to touch and play with the expensive toys and the energy in the store is palpable. While in many respects their retail strategy is playful, there is a comfort in knowing that in the back of the store are not just customer service representatives but “geniuses” working at the “genius bar”. When you are done being educated on the product, frequently with assistance to transfer your old data to your new toy, you walk out with a service contract and accessories you will actually use. If you are a student or a professor, you even get a discount on your purchases.
Now compare that experience to buying the same Apple product at a big box retailer like Best Buy or Costco. Apple draws you in, excites you about how the product will benefit your personal or business life and closes the deal because “retail theater, whether it is at the store level or in the introduction of this year’s new products, is at the heart of Apple’s culture. Disney uses a similar approach in its overseas retail stores and most certainly in their parks. If you want to turn around lagging sales, in addition to introducing new products and services, give some thought to “retail theatre” and how you can excite the buying experience.
The most recent example of a company missing the mark because management did not understand its brand’s relationship with its consumer is Starbucks. Thinking it was in the QSR space and seeing how important drive throughs were to brands in the QSR space, including Dunkin, Starbucks began to think it was in the coffee business and began to focus on opening drive through locations. While having a positive impact on sales, drive throughs lessened the brand’s ties to its customer and disrupted the loyalty the brand counts on.
Coffee may be the product that Starbucks markets but every first year marketing student knows that people go into a Starbucks because the language and culture of the brand makes them feel better about themselves. Starbucks is an experiential brand. Just as the diamonds you buy at Costco are actually of a very high quality, it is the experience at a Tiffany store and its signature blue box that makes the diamond shine just a bit brighter and allows Tiffany to capture its premium price. Starbucks is now returning to its root culture and is redesigning stores to attract customers not only to purchase coffee, but to lounge for a while and absorb again the Starbucks experience necessary to sustain customer loyalty.
There are many layers of work that need to be considered when updating your current offerings, including how you approach imagining change and then going through the development process. How you communicate the why, the process and the change and how franchisees and customers perceive the change once it is introduced is an essential element of updating a brand’s strategy successfully.
Don’t fall into the trap of examining every change in the context of whether someone else is doing something similar and instead start to think of your brand contextually through the five attributes of success – Consistent, Sustainable, Replication, Communications and Culture.
Change is hard but standing still or making minor tweaks or copying someone else’s strategy because you think it is the least disruptive approach is not a recipe for sustainability or growth. There is a long and growing list of brands that stood still and are no longer with us. Remember, change takes time, and it requires an open mind and frequently an outside shepherd to facilitate the process and guide your way.
For more information please contact Michael Seid | [email protected] | 860.261.2539