How Franchising Transformed Itself
By Dr. Benjamin C. Litalien, CFE, FranchiseWell
Keep up with changes in franchising.
The history of franchising includes the unique relationship between the franchisor and their franchisees. For decades, the franchise relationship was based on developing trust between individuals. Most franchise companies were started and owned by an entrepreneur, and the typical franchisee was an individual or couple. Many long-term personal relationships developed over the years between franchisors and franchisees. It was a simple approach that served franchising well through decades of strong growth. Yet, the relationships in franchising have become more distant and complex due to shifting market forces. There are three shifts that have changed franchise relations for good, requiring all who work in franchising to revisit the approach to fostering good franchise relations.
During the 1990s, franchising began to undergo fundamental changes as successful single-unit franchisees increasingly began acquiring additional locations, and soon discovered that leveraging their assets into multiple units changed their role and their returns. Moving from “behind the counter to behind a desk,” multi-unit operators gained more influence within the franchise systems and with the franchisor.
As franchise systems continued to mature, multi-unit franchises soon found availability of existing units within their brands diminishing. This led to multi-concept franchising, where multi-unit franchisees began acquiring franchises from other systems. Franchisors now had to deal with “joint custody” of franchisees. It caused franchisors to take stock in the relationships with their multi-unit/concept franchisees to consider their loyalty to the brand. It was clear that the fundamental relationship was going through significant change.
Awakening Wall Street
As dramatic shifts were taking place with franchisees, franchisors began to undergo some changes. Wall Street awakened to the financial realities of the franchise model, showing that the long-term contracts, steady cash flows, and brand equity that developed through the years was an attractive combination. This led many financial firms to begin identifying potential franchise companies for investments. This caused founders to leave the brands and be replaced by professional managers, many of whom had never worked in franchising before. This made the familial type relationship between the franchisor and the franchisees become more distant and corporate. While much good has come from the capital infused by financial firms, it has fundamentally changed the relationship between the franchisees and the franchisor.
Another shift has been the rapid advancement of broker networks. The traditional method for purchasing a franchise had been to work directly with the franchisor and their staff from inception to consummation of the deal. This was a very personal process, where both parties could determine if they were comfortable joining forces. The number of franchise concepts that entered the marketplace started to increase. According to FranData, there are well over 3,000 unique franchise concepts available today in over 100 categories. This has led many franchisors to begin enlisting the efforts of professional brokers to identify qualified candidates and guide them through the sales process. As brokers became proficient at finding candidates and bringing them to the franchisor, the number of franchise systems using this approach expanded rapidly. While the franchisor still needs to develop a relationship with a qualified candidate, much of their education on franchising is coming from the broker.
Know Your Franchise Network
There is no “one size fits all” in franchising anymore. Most franchise systems are highly diverse ecosystems with an increasing broad mix of ages, genders, races, nationalities, financial positions, education levels and experiences. This is why many Franchise Advisory Councils have become ineffective as they were contrived during a time when franchise networks were much more homogeneous. Communicating in highly diverse environments requires different communication strategies and starts with knowing the network. The messages being sent to Millennials must be different than Baby Boomers; likewise, franchisees from a U.S. mindset are going to respond differently to a message than those with a global perspective. Communications from the franchisor should tailor to the recipient.
Rethink Your Franchise Support
Franchisees require differing types of support throughout their journey with a brand, yet, all too often franchisors don’t recognize or provide what is needed, either with the staff or the tools they offer. Segmenting franchise networks into groups, whether it be new franchisees or experienced ones, thinking deeply about the type of support that is needed for each is key to developing stronger franchise relations. Recognizing when franchisees transition through the stages and helping them understand how the business model changes allows them to take ownership of their outcomes. Franchise networks are data rich environments and evidence-based decision making will empower franchisees through each stage.
Understanding the shifts in the marketplace that have led to these changes is a good first step to determining the type of relationship you need to develop with franchisees. Focusing on crafting messages and providing support based on the key segments within a franchise network will set you on a path to rise above the ordinary.
Dr. Litalien is the founder and principal of FranchiseWell, a specialized consulting practice supporting franchise companies with strategic initiatives. He created and teaches the Franchise Management Certificate Program at Georgetown University in Washington, DC for franchise professionals across the globe. For more information, please visit franchise.org/suppliers/franchise-well-llc.