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Making Demographics, Research and Modeling Work for a Franchise System
Franchising World Magazine, December 2006
One of the most critical ways to “know” customers is to understand their preferences and purchasing behavior. By John Orton For a franchise system to grow and improve its business, it needs to have control of the complicated relationship between sales performance and customers. Being able to identify, analyze and, ultimately, predict the relationships between restaurant or store sales performance and the underlying drivers of the business can deliver tremendous competitive advantages in the marketplace. By utilizing demographic data, together with research and modeling, companies can develop the strategic knowledge that benefits all facets of the organization.
Understanding Your Customers One of the most critical ways to “know” customers is to understand their preferences and purchasing behavior. There are a variety of consumer research methods, both quantitative and qualitative, that offer answers and feedback from customers regarding likes and dislikes, purchasing patterns, satisfaction with merchandising, pricing, service issues and competitive patronage. Companies that gain that level of detail into their entire customer base can leverage these insights to make more informed decisions based on researched proof, not gut feelings. In addition, it is important that franchise organizations understand their entire customer base, not just the top and bottom 10 percent of customers. The only way an organization can be successful and react to the changing dynamics of the marketplace is by understanding all of their customers. Most marketing departments can provide a fairly-accurate view of their target customers. However, the utility of this information is often under-utilized and not optimally-used by real estate, operations and merchandising departments. The use of demographics, research and site selection techniques (modeling) allows an organization to answer all of the following questions, which most often complements existing knowledge: • Who are my best customers and how are more attracted?
Using Demographics, Research and Modeling as Tools In general, QSRs have fairly-compact trade areas that are largely based on convenience. While residential-based sales typically provide the majority of sales for these units, the contribution of other sales (worker, shopping and other generators) should not be overlooked. Utilizing demographics, research and modeling, QSRs can understand the different drivers of their business and their relative importance to the brand as a whole.
Demographics and Research • The size of a trade area in different situations (urban-suburban-rural are useful for managing cannibalization and store deployment). • The impact of distance to consumers (as illustrated on the following chart ) on sales potential (distance to consumers impacts frequency and per capita spending are useful for understanding the affect of real estate decisions and the trade-off in sales between prime and sub-optimal locations). This is especially important in franchising, as real estate and lease costs are primary considerations to franchisees; however, the benefit of prime locations should be considered, relative to the sales potential and costs, rather than just costs, as these may be more than offset in the prime location. Inferior real estate typically stays inferior, and decisions to pursue low-cost deployments, while disregarding areas of higher potential can be unhealthy for the long-term success of the brand. • The percentage of sales from residential, worker, shopping and other generators (useful for determining deployment opportunities) is an important consideration since most franchising concepts are dependent on sales from different generators, but can be successful in varying situations. As a franchise system or franchisee, it is important to know if the brand successfully operates in situations where one is seeking to deploy. For example, if a concept is not conducive to attracting working populations, then being located next to major employment nodes may not deliver the expected sales numbers. • The impact of competition on a brand (synergistic and negative are useful for determining how to treat competition). In addition, geographic and demographic research can answer the question, is the competition perceived or real? The answer really depends on the brand and the deployment strategy. For most QSR brands, for example, the positive impact of synergistic locations with other restaurants far outweighs any negative impact from competition (depending on circumstances). This varies from QSR category to category, but has generally held to be true in our research. There is a certain “tipping” point where too much competition dampens the effect, and understanding this relationship is key to exploiting it. Understanding that sales can originate from all consumers, even those deemed out-of-profile, is important as it helps determine the balance between potential contribution from in-profile and out-of-profile consumers. Too many times franchise organizations believe in the perceived importance of the “heavy users,” at the expense of the light to medium users. Depending on the profiles of target customers, the heavy users will tend to be a smaller component piece than the remaining users (and less in numbers). Therefore, while they may provide the highest per capita contribution, in order to be successful, franchise companies must include a focus towards the average and light users, as well.
Modeling Tools • What type of sales volume can one expect at this location? These are just a few of the questions that companies can use to come to a full understanding by leveraging the proper marketing tools. Where spatial relationships exist, demographics and modeling tools can be used to make more informed decisions. As users of these services, members of the franchising community should have an understanding of what is available and how best to utilize these tools. The tools should be logical and intuitive so that the user has an understanding of what matters and how things work, rather than relying on a closed or “black-box approach.” And remember that these are tools, and should be used with a company’s intellectual capital, not instead of it. In the end, the benefits of using site selection tools (demographics, research and models) far outweigh their non-use. A small initial investment can produce significant returns, and there are many ways to access these resources. Smaller companies that have a single unit up to those that have thousands can benefit from the use of demographics and site-selection research. From basic consultation and mapping to turn-key modeling systems, there is a product or service for every price point. For single-unit operators, the significance of the next unit opening is likely more important than that of a major chain, so they consider the use of more information in the decision-making. Poor real estate decisions can be lessened with an upfront investment in site or market knowledge, and there are a wide variety of tools available to help. Talk to counterparts in the industry to find out what tools they use. Avoiding bad real estate decisions only strengthens the long-term profitability of a company. John W. Orton is a director of client management at MapInfo. He can be reached at John_Orton@mapinfo.com.
Does a franchise company really know its customers? While everyone usually says “yes” the answer can be confusing because “knowing” the customers usually means different things to different departments—even within the same organization. However, regardless of whether it’s the real estate or the marketing department, being a customer-focused organization means incorporating each of these definitions into the overall business strategy.
• Who are the worst customers and is there anything that can be done to make them better customers?
• How far do customers travel to frequent the restaurant or store?
• When do they come to the restaurant or store (morning, afternoon or evening) and how often?
• How much do they spend during each visit?
• Are there operational or merchandising decisions that may be influenced by the unit’s location?
• What are the impacts (positive/neutral/negative) of the unit’s site characteristics?
• How far apart should units be to optimize sales performance and minimize sales cannibalization?
The use of demographic (census data), psychographic, competitive and shopping center data, together with a brand’s own sales and site-related data, can answer each of these questions. The answers and insights supplement existing knowledge, but also enable operators to better understand the dynamics affecting unit sales performance. Let’s use a generic quick-service restaurant to illustrate.
By utilizing demographic information, along with sales data, a company can answer a series of questions that will better help understand real estate, operational, marketing and merchandising questions. For example, by tying sales to neighborhoods (census geography), it can analyze the distribution of sales and develop trade areas around units. By correlating sales levels against demographic characteristics, it can determine those characteristics that are associated with high, medium and low sales. And by analyzing site characteristics, it can analyze those variables that can enhance or detract from sales potential. Here’s an overview of areas geographic and demographic research can address, along with their relevance for the franchising community.
Another key piece to successful marketing programs is modeling tools. Modeling tools enable organizations to synthesize reality and are useful for helping to determine the success of a location. The best models have a strong predictive capability, while being grounded in intuitive statistical relationships. By bringing together the component parts discussed in the previous section (relationships between sales and demographics, psychographics, competition and site characteristics), a restaurant or retailer can use these predictive capabilities in a modeling environment. There are a number of modeling and sales forecasting options available to the franchising community, but rather than focus on the options, let’s focus on the questions that models can help answer. Here are a number of ways in which modeling can help a generic QSR example.
• What impact (sales transfer) will a new unit have on an existing unit?
• If a franchised unit is being affected, what are the allowable guidelines for impact, and what are some store spacing rules that should be used?
• What are the sales implications if one takes a “B” location instead of a higher-priced “A” location?
• If entering a new market, where are the best locations and how many can fit into the market?
• Which new market holds the most potential for a concept?
