Franchises work?

[Shiftymruzik]

Thanks for the great podcast.
In a recent episode on owning your own business, it's mentioned that franchises are pretty much guaranteed success. However I recall reading that A large percentage almost never make money.
I think it was in the book fast food nation that I read that. Is this true? If so, wouldn't franchises be just as bad of a deal as the rest of the "Buisness opportunities"?

[tkingdoll]

No business is guaranteed success!

Fast Food Nation deals with fast food franchises, it does have some data to show that many don't make money (Subway gets a raw deal in the book because they allow franchises to over-run each other's territory), but there are many, many types of franchise other than food, and you can make a good living from many them if you put the hours in (same as any busy really).

For example, printshops and courier services are often franchises.

ETA: is this thread better off in Business Skepticism? Might get more response there.

[Francesca R]

ETA: is this thread better off in Business Skepticism? Might get more response there.Yeah, it would. :)

I can't load skeptoid.com ("page not found") so I can't listen to that podcast. But no, franchises (the leasing of branding rights, fixed capital, intangible assets) certainly don't always make money. They are a proven system but not a guaranteed one at all. For the franchiser they offer diversified growth that may not be possible organically. For the franchisee they offer a leg-up. But even a franchise for--say--a coke vending machine (selling a product that has very small probability of negative profitability overall), can flop if it is in the wrong place or the pricing/costs are fluffed-up.

Actually it would be interesting to see statistics (if there were any) about the percentage of franchisees who fail/stop trading compared to the number of startup businesses. I don't know if the business risks are empirically significantly different. A friend of mine leased a franchise from an established toddlers' softplay/music enterprise, ran it locally to me for about two years with her husband, but eventually closed it down (and couldn't sell it on) due to the sky high property rents in my part of the country.

The price of easier entry (for the franchisee) is, of course, giving up some of the profit to the franchiser.

[balrog666]

Thanks for the great podcast.
In a recent episode on owning your own business, it's mentioned that franchises are pretty much guaranteed success. However I recall reading that A large percentage almost never make money.
I think it was in the book fast food nation that I read that. Is this true? If so, wouldn't franchises be just as bad of a deal as the rest of the "Buisness opportunities"?


Franchises do work. A better description would be "franchise = work".

The big franchisers don't want investors, they want people desperate to keep their initial investment (and hopes) alive. Like young couples who have spent their life savings to get in and can each spend 60-80 hours a week keeping their investment alive until it is well established and operating smoothly. They may get rich some day (many do) but it will take many years of hard work and a significant loss of any "real" life outside of the franchise.

[Foolmewunz]

Franchises most assuredly can and do succeed. I'd be very interested to see a sidebar statistic on the number of failed franchises of known and successful products, but with some data as to underlying pre-conditions, for instance :

How many were under-capitalized?
How many were owners who wouldn't put in the work, e.g. thought they could do this in their leisure hours and rake in the cash?
How many didn't do any market research to determine, as someone mentioned, if there was a competitor opening right around the corner from what they thought was their prime location?
How many didn't think to get their own landlord to put in a non-compete agreement? (A friend in NJ. Bar in a brilliant location. High turnover at lunch and happy hour. The bank moved out of the other side of the main lobby, and the landlord opened his own bar/pub/restaurant.)
How many didn't even do the basic market research to determine if the product was needed. (I'm thinking of a friend who opened a laundromat franchise in Montreal in an area where there were high rises and free (no coins required) washers and dryers in most of the buildings in the '70s!)
How many ignored the best case practices and decided to try to do their sales and promotions in some totally nonconventional method? (Yeah, I'm thinking of a specific person, here...)
Alternately, how many blindly followed the formula from HQ and didn't try to do anything to localize the business? (Mickey D is renowned for this. They will take a franchise away if you don't do things to engage the community and promote business.)


The first two are, IMHO, behind many failures. The second one has been mentioned already. It's a business and it's a job. It won't run itself and it won't develop itself.

As to money? The rule of thumb, for instance, in opening an eatery in New York is that you need sufficient capital to take red numbers for six months. I'd imagine any number of franchisees don't go into the deal with a spare quarter of a million to cover rent, insurance, overheads, salary (and a profit!) over that sort of period. Most people looking to open a franchise will spend their last dime to get a better location rather than to have any fallback financing.

My favorite franchises in Asia are 7-11 stores. If you've never been here, you have to see them to believe them. Hot Dim Sum, Boiled Tea Eggs, BBQ Pork Buns. Standup tables to eat at right in the middle of the aisle. Etc... This is not your father's 7-11, believe me! They have the logo and the concept. (Stay open and be in a convenient location and sell all the little things that people need all day long...) After that, they think local. (I'm not sure, can you buy a bottle of Remy Martin at a 7-11 in the USA?)

Invariably, though, 7-11 sold their Asian franchises, by country, to great huge successful businesses. They had the capital, they had the local market expertise, and they could hire the staff. But they still opened specialty divisions in their own corporations to handle it as a specific product and to approach it from a different angle.

My favorite negative-side example is Zum Zum (imagine umlauts over the u's). Right when North America went for fat free, they were trying to sell franchises in a large lunchcounter operation that specialized in German Sausages, Potatoes, Sauerkraut, etc.... Great idea! The sausages were bitchin'! But t'weren't nobody gonna go there every day for lunch and consume two more kilos of pork and starch every week!

[bigred]

The big franchisers don't want investors, they want people desperate to keep their initial investment (and hopes) alive. Like young couples who have spent their life savings to get in and can each spend 60-80 hours a week keeping their investment alive until it is well established and operating smoothly. They may get rich some day (many do) but it will take many years of hard work and a significant loss of any "real" life outside of the franchise.
I don't disbelieve you per se and excuse me for using a phrase whose overuse I'm frankly tired of on this site, but:

"evidence?"


Franchises most assuredly can and do succeed. I'd be very interested to see a sidebar statistic on the number of failed franchises of known and successful products
Me too - hmm

[balrog666]

I don't disbelieve you per se and excuse me for using a phrase whose overuse I'm frankly tired of on this site, but:

"evidence?"



Me too - hmm


Pick your favorite top dozen franchise operations and ask for their information package. Most have an application and/or post a FAQ online. They will use words like "young", "ambitious", and "opportunity" and not "investment" or even "experience".

Here's a recent survey of smaller franchises. Note the "experience" and "hours worked" graphs: http://www.franchisebusinessreview.com/content/files/F50Bro080.pdf

[The Atheist]

I'll just echo Foolmewunz's excellent post.

Franchises, as long as the franchisor is a reputable and successful firm, are fine - but like everything else in life, the success is dependent upon the effort put in.

[bigred]

Pick your favorite top dozen franchise operations and ask for their information package. Most have an application and/or post a FAQ online. They will use words like "young", "ambitious", and "opportunity" and not "investment" or even "experience". Which proves nothing, really.

Here's a recent survey of smaller franchises. Note the "experience" and "hours worked" graphs: http://www.franchisebusinessreview.com/content/files/F50Bro080.pdfInteresting, but a small sample size.

Again I don't necessarily disagree, just wondering what "typical" is, as well as how it varies w/diff kinds or sizes of franchises.

[Shiftymruzik]

I'm sure that many people wanting to work hard can make money doing business, however I'm skeptical about how valuable name recognition really is. Is the franchise really worth the money involved? Does anyone here know the marketing research involved? It seems in my limited experience that those who do well in business are those who do things differently, not those who follow a pattern. Does anyone know how the franchise fee weighs against mean profits?

[The Atheist]

I'm sure that many people wanting to work hard can make money doing business, however I'm skeptical about how valuable name recognition really is. Is the franchise really worth the money involved? Does anyone here know the marketing research involved? It seems in my limited experience that those who do well in business are those who do things differently, not those who follow a pattern. Does anyone know how the franchise fee weighs against mean profits?

I think you're a little off-track; franchises aren't for the entrepeneurial, they're for people who think they're entrepeneurial but actually don't have the talent to do something original.

Because of that, people often succeed in smaller franchises merely by doing a 40-hour week - lawnmowing, gardening, ironing, cleaning, windscreen mending, a plethora of small, owner-operator franchises work really well. Royalty payments do lessen the income, but given that many franchisees wouldn't know how to market themselves, the deal often works out pretty well.

Name recognition varies. In the case of smaller franchises, the name's worth nothing, it's the business and marketing plan that costs money. Obviously, if you have a McDonald's franchise, the marketing/name aspect is a little more important!

[Francesca R]

You have to rent the name recognition of course. You don't get it for free or even particularly discounted (unless the franchiser has sold you royalty rights too cheaply).

If the name is really worth nothing, then it would be a shame to sign up for it.

[Foolmewunz]

Well, you buy the recognition, but you have to decide if it's worth it. Want an average KFC outlet.... read up on it. They want you to take multiple outlets in your area, do not allow absenteed operators, and want about 1.5 million. On top of that you pay them a royalty of 4% in the USA.

If you want to start a Cluck-U outlet, you can get it for 1/10th of that amount, but have you ever heard of Cluck-U? (And no royalties because they don't have any national recognition or advertising that I know of - you'd be required to do your own.)

But if I was in a university town, I think I might go for a Cluck-U.... especially a known party school... It's drunkfest delight. Wings (damned good and damned popular when they were in NYC), gravy fries, cheese fries, etc... Perfect student fare. And I could afford the franchise fees for, say, Madison WI. But, your point may be accurate (and add that to TA's point....).... If I'm a true entrepreneur, why not start up FMW's Wings and save the franchise fee as the brand recognition is negligible, and with a little elbow grease and kickass promotion of my own, I could build my own trade.

Agreed.

But if you've got a few mil lying around and want a shop that people remember by location when they see it off a bus, and look up and down the street for that familiar logo when they're craving their critters a la grease.... then KFC is where you go. You still have to work at it, but you can rely on that national brand recognition to at least give you your first baeload of clients. Making the place a pleasant experience and someplace people want to return to is the way you're going to make serious money.

[drkitten]

But, your point may be accurate (and add that to TA's point....).... If I'm a true entrepreneur, why not start up FMW's Wings and save the franchise fee as the brand recognition is negligible, and with a little elbow grease and kickass promotion of my own, I could build my own trade.

And, of course, the answer to that is .... do you know how?

What's the best menu for FMW's Wings? How much batter should you stock at a time? How often should you throw out the old fries and make new ones? How much ice do you put in a drink in order to maintain your profit margin? Is it better to run a promotion for one week or for two weeks at a time?

And so forth. These are the kinds of questions, the answers to which are readily apparent to anyone who's been "in the industry" for a while, but to which I could only answer "damfino." It's called experience, and I don't have it.

Cluck-U, however, has a three-ring binder called something like "Managing a Cluck-U Franchise" that answers all these questions and more. That's the "forumula from HQ" you mentioned earlier. Is it worth $150,000 to you? It's probably worth that much to me given my ignorance of the subject....

[Foolmewunz]

And, of course, the answer to that is .... do you know how?

What's the best menu for FMW's Wings? How much batter should you stock at a time? How often should you throw out the old fries and make new ones? How much ice do you put in a drink in order to maintain your profit margin? Is it better to run a promotion for one week or for two weeks at a time?

And so forth. These are the kinds of questions, the answers to which are readily apparent to anyone who's been "in the industry" for a while, but to which I could only answer "damfino." It's called experience, and I don't have it.

Cluck-U, however, has a three-ring binder called something like "Managing a Cluck-U Franchise" that answers all these questions and more. That's the "forumula from HQ" you mentioned earlier. Is it worth $150,000 to you? It's probably worth that much to me given my ignorance of the subject....

And tips on shift management, layout of the kitchen so you don't trip all over yourselves, efficient counter management, etc... I absolutely concur.

The value in the franchise is all of those things. The higher pricing is the global brand recognition. Cluck-U gives you minor brand recognition, a good recipe book, and some best practices they've learned. KFC gives you all that, plus all those TV ads, billboards, press events, etc...

A related anecdote:
I was shipping the batter for their chicken watsitz out of the USA to Australia for a certain humongous hamburger chain. The US company selling to them had this brilliant plan to produce the stuff in Australia at their own facility. A nearly identical product (emphasis on "nearly") and much cheaper. They were down for the Melbourne Cup and were intending to make their great pitch the next day.
Out comes the champagne and of course, some mini-burgers and some chicken watsitz, as a tribute to the CEO of the burger giant, who was also at the event. The CEO of the burger group picks up a chicken watsitz and says, "Now this is US! Same product you get in Chicago, you can get in Capetown or Brussels or Melbourne!"
To the credit of the suppliers, they cancelled their ideas of the great whiteboard session right there on the spot!

That's why you pay multiple millions for the buy in to their chain.

[Just thinking]

Just a side note ... I've seen the following franchises fail in my neighborhood:

1) Full size Path Mark supermarket ... it's now been empty for over 3 years.
2) Super size Acme supermarket ... vacant for over 18 months (closer to 2 years).
3) Steven's Furniture
4) Blimpy's
5) A CVS drug store
6) 2 BP (Amoco) gas stations ... both sitting vacant for over 2 years.

It seems you're not safe even with big national names and/or commodities.

[joobie]

neither pathmark nor acme are franchises.

[Just thinking]

I find that somewhat surprising ... are we being just a tad too semantic? No, really, how are they different? They do have multiple locations and I believe they can be individually owned.

From here (http://www.thefreelibrary.com/Pathmark+Reports+Fourth+Quarter+and+Fiscal+1999+Re sults.-a060501273) ...

"We believe a timely and efficient financial restructuring will have virtually no impact on day-to-day operations and will enable us to realize the significant value that exists in the Pathmark franchise."


And then check out who's on the list of these franchise opportunities (http://articles.directorym.com/Retail_Franchise_Milford_DE-r548-Milford_DE.html).

[joobie]

there are no individually owned pathmarks or acmes. pathmark is owned by A&P and acme is owned by supervalu. there is an unrelated chain called acme fresh markets that operates in and around akron.

[jimbob]

I think we can say they are a better bet than MLM...

Anyone more qualified than me wish to cross post comparing the conventional franchise model with MLM on the MLM thread?

[dudalb]

there is an unrelated chain called acme fresh markets that operates in and around akron.

Does Wile.E. Coyote shop there?