THE FRANCHISE TRAP

THE FRANCHISE TRAP

A recent well written and entertaining article by Janelle Nanos in the Boston Globe (exploring the difficulties of a local Franchise, Craft Beer Cellars, with its Franchisees) should be read by anyone thinking of franchising their small business.

For years I have told people looking to finance the expansion of their small local business that the standard franchise model (big up front payment for a license to use name and business plan) has a poor risk reward ratio. The Globe article suggests that Craft Beer Cellars might be the poster child for this conclusion.

Craft Beer Cellars, according to the article, was a successful local business retailing craft beers run by two intelligent and hard working women who understood the product, its marketing and its merchandising. Not surprisingly they were, to whatever extent, successful in this business. I suspect they would have been successful in ANY sensibly chosen business plan simply because they are hard working and able to grasp the nuts and bolts of their undertaking. I would probably finance something they wanted to do in a New York minute.

They were even good at selling franchises (something that looks a lot easier than it is), probably because they had a transparent passion for their business and their business appeared well run.

Unfortunately, according to the article, many of the Craft Beer Cellars franchisees (like oh so many franchisees!!!) have not fared well and blame the franchisors (for various not too interesting reasons) for their franchisee failure. The franchisors retort to this, essentially, was I gather that the franchisees don't work hard enough and don't pay enough attention to detail.

Interestingly, one Plymouth franchisee is quoted as saying of the complaining franchisees: "they love craft beer but they do not have the 500 other skills needed...." Bingo!!!!!

My first thought is that loving something, while no doubt providing motivation to work harder, is not a skill. I get a couple of calls a month from people who want to open a restaurant or some other business only because they are a REALLY GOOD cook or other artisan. Explaining to them that being REALLY GOOD at cooking or arranging flowers or repairing things, while important, is not the only thing that makes a business successful. THERE ARE A MYRIAD OF OTHER LITTLE BORING THINGS THAT NOBODY EVER THINKS ABOUT.

I suspect that the franchisors of Craft Beer Cellars made the same mistakes that most franchisors of local businesses make: (1) they oversold their franchisees; (2) they assumed that brand name and business uniformity were important.

(Please note that I am using the term "Franchise" here only in the broadest sense of a satellite related business and not in the more legal sense of the sale of a license to do business.)

Overselling the franchise is 100% fatal to long term success of the roll out. The extra money that it brings in on day one does not come free. The money paid for the franchise is money that will not be available for business development. Secondly, the ability to come up with the franchise fee is very apt to immediately become the sole criteria for qualifying a potential franchise applicant. Much more important to the eventual success of the roll out (and long term profitability for all) is GETTING THE RIGHT PEOPLE WHO CAN MAKE A SUCCESS OF THEIR BUSINESSES, Money PUT INTO THE BUSINESS is in the long run much more important than money put into the franchisors pocket. A succesful potential franchisor DOES NOT NEED THE MONEY: he needs FRANCHISEES WHO ARE GOING TO BE SUCCESSFUL. Franchisees who fail are going to be a serious long term problem for the roll out.

The assumption that the use of the name, the BUILDING OF THE BRAND, is important is usually, at least in the short run, simply wrong. Very few people know the name of any local business, even a very successful local business. A few miles away this name is going to have no value. On the other hand if the franchised store fails, some people are going to relate the failure of the franchised store to the parent, and this is going to be very adverse to the success of the roll out. Also, uniformity is important only ONCE A FRANCHISE IS ESTABLISHED IN MULTIPLE LOCATIONS. In the initial roll out, there are no customer expectations of uniformity and there is definite room for experimenation. The initial model may not be perfect, or suitable for another location. (The history of the Coca Cola bottlers is well worth studying on this point. See The Real Thing, Constance L. Hayes, Randon House, 2004.)

Instead of trying to get as much money up front from a franchisee, a franchisor should:

(1) understand that a franchisee who does not succeed is going to be a real liability, that the money pocketed up from is not enough to pay for this liability; that the long term success of most of the franchisees should be the franchisors paramount concern SINCE THAT IS WHERE THE REAL MONEY IS GOING TO BE MADE.

(2) clearly understand that putting a third party in charge of a satellite or cloned operation only makes sense where the franchisee is BRINGING SOMETHING IMPORTANT to the venture, that what is important is HARD WORK AND ATTENTION TO DETAIL, essentially the ability to develop the "500 other skills".

(3) structure the business so that every chance of success is given to the franchisee. the business model should aim for LONG TERM SUCCESS AND MUTUAL PROFITABILITY FOR BOTH FRANCHISOR AND FRANCHISEE.

(4) understand that while eventually long term control might be very important (usually where institutional advertising becomes important) control of franchisee initially is to a large extent only accepting responsibility for their failure.

(5) consider that TAKING OVER A FAILING FRANCHISE should always be considered a possible probably least desired necessity and that before approving any location or business plan a franchisor should be certain that in the long run this will be profitable or at least not too painful (best if it can with certainty be resold in fact). To this end, good location, low rent and good quality initial equipment and construction are very important.