The Birth of the Corporate Franchisee?

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being his own boss, who hopes to make enough to live on, build something for retirement or maybe to pass on to his kids been replaced by small (and not so small) companies?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.