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The Birth of the Corporate Franchisee?

May 29, 2012

Are franchises moving out of reach for the little guy? Has the stereotypical franchisee as the local guy who owns and operates the (insert brand name) up the street, who bootstrapped his way into it as the fulfilment of a dream of being his own boss, who hopes to make enough to live on, build something for retirement or maybe to pass on to his kids been replaced by small (and not so small) companies? By the “Corporate Franchisee”?

I have read a several articles over the last couple of weeks that make just that point. The most recent in the WSJ titled The Big Get Bigger. It would seem that the preferred franchisee is now a multi-unit owner – not to say owner/operator. These guys bring their own managers to run each location – just as would the franchisor, if they weren’t franchising. So where is the advantage for the franchisor if this new breed of franchisee essentially does the same thing that they would do themselves? As I talked about in an earlier blog, it’s about spreading the financial risk (other people’s money) and accelerating their growth opportunities (other people’s money – and resources). It is simpler to sell a bunch of locations to one company than one here and there to individuals. There is even a term for it – consolidation. But what do they give up in the process?

When Ray Kroc started McDonald’s he wanted the hands-on owner operator. He even had a franchise purchase concept called a BFL, Business Facilities Lease. This enabled a great (or potentially great) operator who was short on cash but had ability, the fire, the determination, and the willingness to invest his sweat and tears to become a McDonald’s franchisee. This attitude showed up in other  ways too. You could not be an investor. You had to own and operate the business yourself. You could not have or get into other businesses. Full time, best efforts. Sure McDonald’s wanted to see great operators grow. But there was, and still is today, a rigorous qualification process to be considered for growth. Simply having the money and operating the McDonald’s nearest to the target location was not enough. You had to pitch for it and demonstrate why you were the right  person and how you would protect what you had already. Years later when the multi-unit operator became common place someone asked Fred Turner what was the right number of restaurants for a franchisee. His answer? ONE! He knew the essential power of the single operator. Of course he embraced the value of the multiple operators but never wanted to lose sight of need for even them to act as if each restaurant were their only one.

So now it seems franchisors are moving, or have moved, to the risk-minimizing profile of the Corporate Franchisee. The benefits and risks are well documented in the article I refer to so I want to take a look at the other side of the coin. What this means to the little guy.

Let’s go back in time. Way way back. To a time before franchises. Can you even imagine it? The world was a smaller place. Simpler times. But always there were businessmen. They were the shopkeepers, the news agent, the publicans, the hoteliers, the guy who ran the diner, the cafe, the bar (or pub). If they didn’t sleep above the shop they weren’t far away.  Winston Churchill famously called England a nation of shopkeepers – and was praising them. Every big city in America had their local shops, their bodegas. They were a part of the community and the community depended on them. The original win/win scenario. And this provided an opportunity for the entrepreneur. If you could save enough money and had a little ambition and a certain sense of the customer you too could open a shop. And with hard work and a little good fortune you could make a decent living. And some went on to make more than that. But the little guy could always find that first rung on the ladder.

We are all well aware of the demise of the local shopkeeper. My most poignant example was one of my local pubs when I first lived in England. It was the archetypical country pub. Thatched roof, riots of flowers everywhere, a green lawn with tables, great freshly made classic English pub grub, and wonderful local beers. Knew the owner by name, John, and he knew mine. Then one day it all changed. He sold out to a national brewer and became the manager. The food was from the cash and carry, boil in the bag, microwave, counter top oven. The beer was . . .  Business dropped. John was heart broken. It just died. I stopped going. It was too depressing. John later quit as well.

Now fast forward to 2012. Global recession. Rampant unemployment. Ageing Baby Boomers. Tons of talented men, and women, looking for an opportunity. They are struggling to find replacements for their careers, for their jobs, for their means to contribute. Without becoming maudlin, this is the crux of the matter. They are used to having meaningful work, labours that were valued, something that they could take pride in. Unemployment and the endemic rejection that job searching brings is crushing their spirits. In times past, they at least could have opened a shop. More recently and, to an diminishing extent, they could buy a franchise. It is the new millennium version of the shopkeeper. But current trends in franchising put even this option at risk.

I have worked with some big names in franchising, including McDonald’s. So I am well versed in the economic realities of running a franchise business. And as an ex-franchisee I am also experienced in those realities. And when I read about the move toward Corporate Franchisees I get it. It makes sense on many levels. But, again, what is being lost in the process?

I suggest that it is the sense of the owner being a part of the community. Being a part of the fabric of people’s lives. That something that makes a difference in the choices people make in where to shop. When every thing is the same then nothing matters. But the people matter. And the ownership matters. Back in my McDonald’s day we talked about building the Trust Bank and I suppose they still do as it was such an integral part of their success. It was about being seen as an active part of the community where they do business. And the benefits were manifold. There are numerous stories of restaurants surviving riots because of this. Others where they were able to withstand competition because the community saw them as more than just a place to get a Big Mac. And, sure, a corporate store or corporate franchisee can make their presence felt – but the local owner operator has a multiplier effect.

So here’s to the small franchisee and to all the franchisors who still value the individual franchisee. And to sound a note of caution to those who take the easy road with the “Corporate Franchisee”.

I would love to hear your comments and open the discussion.

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4 Comments
  1. Ron Bender permalink

    I agree that many franchises, especially the higher investment ones, are aggressively targeting ‘corporate franchisees’, and even many lower-investment brands use a 3-unit minimum or something similar. However, there are many great franchises left that only accept owner-operators, and are very careful when approving additional units. Ideally, the success of your first unit will enable you to invest in a second unit, perhaps a family member or trusted longtime employee can run the existing store while the (now experienced) owner can start and grow the new unit.

    Many of these concepts are relatively inexpensive, and with SBA lending opening up again lots of regular folks can again become ‘local shopkeepers’, with the power of a regional or national franchise behind them! I counsel potential franchise owners to invest in their communities and concentrate on local networking, social media and local marketing and to ‘give back’ to the community whenever possible. The personality, motivation and energy of the owner (or local owner’s rep) can and should earn the patronage of the community. This will keep our heritage of independently-owned shops and businesses alive!

  2. David Harris permalink

    I think the concept of the ‘owner – operator’, the single-store franchisee, is country – specific, even (forgive me, Mike) a little Euro-centric. I agree that in community based environments, where a village-like atmosphere can be created even in inner city areas, a single-store franchise can be recognised as an important local element. However, my experience in the Middle East and in SE Asia indicates that this sort of community situation is not so relevant there, and its the power of the brand that drives the success of the units. In Dubai for example I am sure most consumers have no idea who owns the local Macdonalds or Wagamama, their only concern is consistency of delivery of product and service in the store. There is no village – like community in Riyadh that I ever found, or indeed in Bangkok or Ho Chi Minh City.

  3. There are many good points in your article,and I agree that the pasts view of the enterprisng individual as a potential franchisee has changed. Entry level franchising unfortunately has a checkered past that created many of the systems ad regulations necessary to protect those seeking to take a greater command of their future. One of the ugly hidden points of some of the early franchise systems was that an entry level owner operator could pour their life savings into a concept, and by virtue of having that location open, the franchisor has an asset that is somewhat independent from the owner. The franchisor knows that if the owner fails, they will turn over the asset at a loss, and that can happen multiple times before an operator either operates the unit well enough to survive or buys in at such a low price that the current level of sales and operation allow for survival. There are many larger franchise operations that were well aware of this fact, and the level of quality and competition was such that this apsect of growth worked. Fortunately the level of competition and what the public expects from a franchissed operation has come up. Having been on all sides of the equation, franshisee, franchisor, etc..the case for a serial franchisee that is seasoned and has established infrastructure or systems, is very compelling with regard to effeciencies and ability to have quick sustainable growth.

    Many newer concepts require the operating partner to be a significant stake holder and local. The guy who owns 10 units in an area is as much a local owner as the guy who owns one, and often scales both his contribution to the community and his ability to be involved. I know from my past that the greatest marketing I could do as a local chain owner was to be very heavily involved in the community, supporting and enabling events in a way that I was unable to do as an independent shop owner. Things like buying gear for sport teams, or donating food at events, loaning out vehicles, or man power to churches, teams and schools, were very powerful, rewarding and broke down the view that we were just a “chain” concept. Rob’s statement about the individual’s personaity, motivation, energy is dead on, both for owners and those who are not.

    Excellent and timely topic, and a good article.

    Thanks,

    Mark Burkley

    • Ron Bender permalink

      Great post, Mark! I believe that “locally-owned and operated” still has great value in America and I agree that a 10-unit local owner may have a greater chance of long-term success in most industries than a single-unit operator. I just hope that franchise brands give a new owner a chance on his first unit (rather than holding out to sell 3+ unit licenses) so the community can benefit and the franchisee has a chance to grow into a multi-unit owner!

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