Why are some franchisors more successful?

| Hamilton, Ontario
Contributed by Manish Kacker, Associate Professor, Marketing, Michael Lee-Chin & Family Professor in Strategic Business Studies

tims-storeWhen we think of franchising, large chains like Tim Hortons and McDonald’s often come to mind. However, in practice, most franchise chains are fairly small – in 2012, about 75% of the franchisors operating in Canada had fewer than 50 stores. In 2001, researchers in the U.S. found that approximately 45% of franchisors operated systems with less than 50 stores. Researchers in the U.K. and France found that less than 50% of franchisors that survived failure continued to grow at healthy rates. These findings give rise to a research questionwhy are some franchisors able to attract and retain more franchisees and develop a larger network of stores than other franchisors? The importance of this question is reinforced by two factors: First, for partner-based retail systems like franchising, the size of the franchisee network has a significant impact on the ability of a franchisor to reach a large group of consumers; second, franchising is an important part of many developed economies and is a rapidly growing part of many emerging markets. For example, in Canada, over 78,000 franchise system outlets employ more than a million people and account for 40% of all retail sales and 10% of Canada’s GDP.

…franchise systems…employ more than a million people and account for 40% of all retail sales…

The importance of understanding how strategic decisions made by a franchisor influence the size of its franchisee network is reinforced by divergent perspectives on drivers of network size. Findings from a multi-year econometric study by my coauthors and I1 refute the conventional wisdom that a franchisor can develop a large franchisee network simply by lowering entry barriers and fees for prospective franchisees and ongoing fees for existing franchisees. What matters more are franchisor strategies that lower agency costs faced by current and prospective members of the franchise chain. Our findings suggest that a franchisor should take time to develop, refine and test its business format prior to franchising it. This can result in a stronger franchise concept as well as more developed franchisor capabilities for supporting franchisees. Expansion of the franchisee network is also facilitated when franchisor quality is reinforced and signaled through relatively higher royalty rates and advertising fees – these fees communicate and facilitate the provision of key ongoing services and advertising support by a franchisor to franchisees. The use of rigorous criteria and entry hurdles for qualifying franchisees alleviates concerns that new franchisees will abuse their membership in the system. Finally, franchisee network expansion is facilitated when the franchisor limits its reliance on franchisor-owned outlets and embraces structural flexibility in designing exchange relationships with franchisees.

mkacker1 Kacker, Manish, Rajiv P. Dant, Jamie Emerson and Anne T. Coughlan (2013),”How Firm Strategies Impact Size of Partner-Based Retail Networks: Evidence from Franchising,” Journal of Small Business Management (forthcoming).

4 thoughts on "Why are some franchisors more successful?"

  1. While I do agree that “a franchisor should take time to develop, refine and test its business format”, most reputable potential franchisees would like to see a plan for growth. I have more often than not looked into franchises and see that the franchisor has an expectation that the franchisee will drive growth. While in many cases that is a good expectation, it cannot be a realistic expectation if the franchisor itself is not being seen as a catalyst for growth, and that the marketing funds are well utilized to support the franchisee efforts. This plan for growth is a prerequisite for success in any franchise system and should support the business format that you are talking about.

    Just simply adding franchisees should not be the objective of a franchisor. Adding forward looking, serious franchisees and supporting them with a good plan for growth and success for their franchise is a more inclusive and likely a more potentially successful way to attract good quality franchisees. And if higher franchise fees, royalties and marketing fund allocations is a way to attract them – then so be it. But franchisor beware – just getting them into the system will not guarantee success. Helping to make them successful should be a specific goal – then you will likely become successful yourself.

    1. Manish Kacker says:

      Neville..thanks for your thoughtful remarks.

  2. Jeff Lefler says:

    I think your point about a franchisor refining and testing its business format prior to franchising is excellent. Too many start-up franchisors are owned by the founding entrepreneur who sees franchise expansion as a way to grow their company but without consideration for the evolution of their business model. Taking the time to understand and develop a business model around the concept of franchising itself is important for an emerging franchisor.

    As you highlight, almost half of all franchisors have fewer than 50 units. This is due in part to the lack of corporate structure within the franchisor to grow and expand beyond its current limits – primarily because franchisors do not set “rigorous criteria and entry hurdles”. This eventually leads to a lack of funding from royalties and franchise fees stagnating further expansion attempts.

    Another major factor for expanding franchisors becomes their franchise network itself. Once a critical mass is reached, the feedback (positive or negative) from existing Franchisees will be a catalyst for future expansion. Too often, I’ve seen franchisors try and grow at the expense of their existing Franchisees, ultimately leading to costly mistakes and relationship challenges. Those franchisors that balance these challenges tend to succeed in expanding beyond the 50 unit threshold.

    Jeff Lefler
    CEO at FranchiseGrade.com

    1. Manish Kacker says:

      Jeff..thanks for your thoughtful comments.

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