I’ve been working with this incredible category of business people for about 40 years now. Franchisees, from one standpoint, are some of the best folks I know, and at the same time are some of the most frustrating. Allow me to share some common denominators of their successes and failures. Hopefully, this perspective will help brand-side leaders build a stronger group of franchise operators, and agency-side account managers understand the needs of their clients. Who knows? Some franchisees might be interested too.
Let’s define some key things first.
When I refer to a franchisor, I mean the owner of the brand.
- It usually has a headquarters full of people
- Sometimes it’s a publicly traded company, sometimes privately held
- The franchisor seeks franchisees to invest in its brand and expand its distribution
- When it comes to Quick Service Restaurant chains (QSR), some are all company-run, some are all franchised, some are a mix. Each model has pros and cons
When I refer to a franchisee, I mean individual, independent restaurant operators who have chosen to invest in the franchisor’s brand.
- They might own one or 1,000 units
- They’re hard-working entrepreneurs and their organization usually involves their family
- They don’t play “corporate” games or like listening to marketing “wack-wack”
- They’re direct, sometimes arrogant and in most cases very, very good business people
Personally, I think franchisees are the salt of the earth, and the epitome of what the American Dream can be.
Why the franchisee business model still works, in most cases.
We all know your old friend ROA, as in return on assets.
The franchise model works for restaurant chains because it decentralizes the development paradigm and facilitates fast unit expansion. A brand recruits franchisees to take the risk of real estate, construction, equipment, staffing and operations. Therefore, franchisor/franchisee models maximize a company’s return on assets deployed, thus growing the QSR-owned assets – branding, recipes, process, customer loyalty, etc.
Franchisors, in turn, provide support and resources:
- Intellectual properties with value and equity
- Name and logo, restaurant look and feel
- Purchasing leverage for food, paper goods, equipment, facilities
- Product research and development
- Local, regional and national marketing support, if applicable
- Training and operations help
- Real estate development advice
- Product research and development
Some franchisors do a great job at these, some, not so much. In return, the franchisor receives a percentage, let’s say 5%, off of topline sales in a royalty. That’s where business tension can come into play. Franchisors are constantly challenged by their franchisees to bring value to the relationship.
CMOs of major QSR brands are tasked with brand development, comparable sales and profit growth, as directed by their CEO and board. New promotions and new products are often the levers they pull to get results. These strategies regularly provide a short-term spike in sales and cannibalization of existing products but no real growth. Much to franchisees’ dismay, these strategies often drive sales which, in turn, increase royalty payments, but not profits. Royalty fees (based on sales) go up, but restaurant profits don’t always rise.
Field marketing is a much discussed dwindling resource in the restaurant-chain world. I’m referring to corporate staff that travels to markets and stores. They communicate, and if necessary, sell-through upcoming plans and provide executional guidance. These folks, for the most part, have been drastically cut or eliminated all-together. Reasons are both a function of business reality and technology:
- As margins have decreased, everyone is challenged to do more with less
- More of the marketing spend has been pushed up to the regional or national level, leaving little or no funds to spend locally
- The co-op structure (a group of franchisees in the same market) which creates a local budget managed and spent by a local agency, is diminishing. It’s just too labor intensive and can lead to brand-consistency drift, if not managed properly.
With, at best, a smaller staff, field managers’ effectiveness is diluted against too large a portfolio of stores to manage. Top-down chain leadership is in effect, and centralized marketing plans are handed to field marketing managers to carry out in a homogenous way for ease of execution. Unfortunately, this approach seldom considers local demographics, market conditions or competitors.
Personally, I think that’s a shame. Some of the best promotional ideas and new products have, historically, come from franchisees and their local agencies. Franchisees don’t have the venues to cultivate and discuss common denominators of success like they did in the past. The McDonald’s Happy Meal and Mac Tonight programs came from local co-ops and Sonic’s ice cream line addition came from a franchisee.
Some chains choose to operate without franchisees.
There are good points to only having “company stores,” brand continuity and compliance being the most significant. It’s a simpler communications chain, and it’s easier to make things happen. Many CMOs feel like franchisees just get in the way. My field marketing director at KFC would say, “The good thing about franchisees is that they’re independent business people. The bad thing about franchisees is that they’re independent business people. You have sell them on the plans.” With company stores, you tell vs. sell.
There is a downside to having all-company operations. I’ve found that a well-run franchised restaurant will most likely out-perform the same restaurant in the same location, run by company operations. Probably because franchisees have more skin in the game. Local business owners are always going to do a better job than employees who are managed from afar.
This is a small piece of what I know to be true in the QSR franchise business. It’s crazy, it’s fun, it’s fast-moving, competitive and it can be incredibly rewarding. It’s generally about smart folks and their family. Folks who have come from humble beginnings. Fun people, again, generally. Franchisees represent the salt of the earth. To me, they’re the perfect example of what the American Dream can mean. If you’re meeting a franchisee for the first time and want to get to know him or her, here’s my advice. Just ask one simple question, “how did you got into the business?”
The answers to that question, I’ve come to find, come in the form of:
- A great story, funny sometimes and sad other times
- A story they love telling. After all, it’s about their success
- A story that gives invaluable insights into their personality and what’s important
Here’s my advice to franchisors:
Don’t forget the value of brand localization. You might get your hands dirty. You might have to spend some “windshield time.” You might have to hire people. In today’s ever-changing media landscape and over-saturation of restaurants, the key brand differentiators will always be product quality, service quality and relationship to the local market.
Here’s my advice to franchisees:
Participate and voice your opinions. Join some committees. Continue to demand support from your franchisor, and spend incrementally to support your local markets. If your franchisor isn’t providing resources and guidance, find it for yourself.
I recently talked with one of the biggest franchisees in the country regarding what his franchisor provides. It turns out face-to-face meetings have become too costly, and have been replaced by massive conference calls. Technology now provides portals to access ad slicks, social media content and media templates. What he’s looking for is help. Someone to sit down with him and his boss and talk strategy.
Coming in Part 2: Brand Wack-Wack
- What is the real definition of a brand?
- Why is it so important to maintain brand consistency?
- What is the definition of value in the restaurant business?
Greg Haflich is a 35-year marketing veteran with agency and client-side experience. Some of the brands he’s had an impact on include: Rent-a-Center, Chrysler, Applebee’s, Sam’s Club, KFC, Pizza Hut, On the Border, Krispy Kreme, Sonic, Subway, PF Chang’s, Pei Wei and Shoney’s.
Callahan is a brand strategy and digital marketing agency in Lawrence, Kansas—34 years strong—with expertise in the chain restaurant, beverage, pet and home & garden categories. It drives sales for clients using a wide range of tools, including traditional advertising, in digital spaces with a nationally acclaimed social media team. Callahan proprietary brand health tool—the Brand JuJu Index—was launched in summer 2016 to help clients outsmart vs. outspend the competition.