Sitting at Shake Shack this morning I started wondering if franchising this brand turned out to be profitable for the franchisee. I quickly started weighing the pros & cons of franchising in my head, and thinking whether it is really feasible to make such an investment.
The reason I thought about this was a very creative burger concept that started in Dubai a few years back and is now becoming very popular. They are very creative in their marketing (check their instagram account) and that’s how they are winning customers, but they are essentially very similar to shake shack, when it comes to products.
Another thing that got me thinking about this is watching this video about “The Rise & Fall of Subway” a few days back.
A Franchise is a licensing agreement between the owner of a brand (The Franchisor) and another business owner who wants to use the rights to operate this brand (The Franchisee). The agreement details all the rules that govern this relationship and also the fees/royalties the franchisor receives for granting this license to the franchisee.
Franchise vs Startup
Having switched from working at different franchised brands to a homegrown brand myself, I could firsthand witness all the differences between a franchise vs a startup, so let’s go ahead and see the pros & cons of franchising vs starting your own business as an independent retailer.
1. Brand Recognition
The first, and most important, advantage of running a franchise is operating a brand that is already known by the customers. This of course should save you a lot in marketing & branding costs, and give you a great head start for your business from day one.
When we opened Bath & Body Works in Egypt (and same for Victoria’s Secret) we got huge traffic on the opening date itself and all we had to do was running a single campaign informing customers that this brand is finally opening in Egypt.
On the other hand, when I started my own e-commerce business I had to be on all the relevant social media showcasing my products, running multiple campaigns of paid ads and convincing customers to try my brand for the first time. I had to give them concessions to win their business, such as money-back guarantee and cash on delivery payment method.
Having said that, with the rise of digital advertising, you can easily get the word out about your business at much lower costs than before. Also the head start that the franchise will give you doesn’t mean that you will never need to advertise the business offerings, because you will always need to keep the communication going with the market, whether you run a franchise or your own brand.
2. Product Sourcing
When you run a franchise, you will not need to worry about sourcing products or be involved in product development. The franchisor will conduct all this and either sells you the products that they had manufactured for them or gives you a list of approved suppliers to buy from (in case of locally sourced food products for e.g).
You might expect that this would mean benefiting from the collective buying power of the big business and getting the products cheaper, but you should also know that the franchisor will not sell you the product at the price they bought at, but rather take a cut for themselves.
If the franchisor is doin a great job in product development, then you got yourself a huge advantage here. If not, then this will turn out to be one of the biggest cons as we will explain below.
Learn More: Open to Buy: How Much Inventory Do You Need?
3. Training & Support
Because the franchisor has a brand name to protect and standards to maintain across all markets, they will give you all the support that you need in order to replicate the brand experience in your stores.
This will involve multiple visits by franchise managers and training sessions for your store teams. You will also be supplied with all the training materials and guides to conduct additional trainings at your own pace.
4. The Boss is You.. or is it?
I kept this point till the end, because I read it at almost all the articles that detail the pros & cons of franchising, but I have to say that I am not totally convinced with it and will probably refute it in the cons section.
A business owner was recently expressing his frustrations to me about the food franchise he is running for a UK brand here in the Middle East.
He said: “Rasha, the OPEX (Operating Expenses) in my P&L are killing me, and the business is not turning profit, and all these people care about is asking me why I didn’t open another location”
Read More: P&L Management
Simply said: Being the boss means making ALL the high level decisions for a business, which is not the case for running a franchise, unfortunately.
Also some franchises, like Chick-Fil-A will require you to work in the store yourself, so you will not really be a boss or business owner, but rather an employee who has just bought a job for himself.
This takes us to the first con of franchising.
Because you are essentially running under someone else’s name, but in your own market and with your own money, they will tend to have a say in a lot of things. From products, to marketing message and visual representation to the number of locations and the detailed process of operating the stores. I can’t blame them! It is the right thing to do to protect their standards and I would be doing the same if I am giving someone else my name to operate with.
If you operate a Victoria’s Secret you can expect to even be told how to stock the products in the drawer according to the brand guidelines, based on rainbow (ROYGBIV) colors.
One of the ways the franchisor benefits from this business agreement is through the royalties they receive from your sales.
Having run multiple retail businesses myself, I keep wondering how risky it is to be giving away 5-6% of your sales, when even the most successful retail operations will eventually yield 7-10% of its sales budget in net profits.
Returning to our original example, Subway actually takes 12.5% from your sales. 8% royalty and 4.5% ad fee.
Learn More: Step by Step Sales Budgeting Guide
It should also be noted that, in addition to the royalty fees, there is the upstart fee of buying the license, which can be in millions like in the case of Mc Donald’s.
Apart from that franchisors typically require you to contribute to the collective marketing budget of the brand. So you really need to be doing all the math, with very realistic figures, before deciding if this is good for you.
When you watch the video above about Subway, you will see that the brand didn’t control the expansion of its franchised stores. this resulted in too many stores opening at very small distance from each other.
Read more on Cannibalization
This can only be good for the franchisor, who takes percentage of sales, but for the franchisees who get their market share taken and being smaller and smaller with every new store in the area, it can easily turn some of them unprofitable.
On the other hand, when you run your own business, you decide whether or not to expand.
You already battle with outside competition with other brands, so imagine adding another internal competition with stores that are selling exactly the same thing.
Franchisors are keen to protect their reputation and brand image, but there is always the risk of doing something stupid by any of their senior management, or even by one of their franchisees, that can tarnish the brand reputation worldwide (See also the Subway video). As a franchisee, you will suffer badly although you had nothing to do with it.
I hope I have covered the most important pros & cons of franchising, but I would still like to discuss one more point that might be good to consider while making the decision about whether or not to franchise.
Changing Consumer Behavior
When I was young, when you wanted to buy a jeans it had to be one of the three most popular brands at that time. If you bought a “brand-less” jeans you were not fashionable or stylish enough.
These days when we buy jeans, we don’t look at the brand, but rather the fit, comfort and style of the jeans. This is just one example, and there are many, when it comes to consumer shopping these days.
Just think about how online only brands like Fashion Nova could make such a hit, while positioning themselves as a cheap alternative. They could sell their jeans basically because the jeans had a good fit that makes your body look good. People no longer care if this jeans is Levi’s or Armani or whatever, as long as it “fits”.
I also noticed that a lot of people are leaning towards local/small food brands, because they tend to “try harder” and offer fresher food.
This makes one of the most important, if not the most important, advantage of franchising, namely brand recognition, seem to be slowly fading already.
The Bottom Line
I personally loved working as part of franchise brands. You get that sense of pride that you are part of such a big, global business.
When it comes to investments, however, the numbers are what matters at the end of the day, so here is my opinion on it:
Small Business Owners
If you can kill it at product sourcing and product development, then you are better off starting your own business and rather than paying the high franchise fees, hire a marketing genius to get your brand out.
This is especially for food & beverage businesses, which are very easy to compete while being local. See the example I mentioned at the beginning.
If you can have enough bargaining power with the franchisor, so that you can keep your costs to the minimum and put some terms to get exclusive rights over certain geographic areas, then go for it! Before you do, make sure to check all the numbers first to estimate your returns (For quick service restaurants you can check out the QSR50 Report).
Retailer & Founder of Retail Dogma, Inc.
Rasha has 14 years of retail & ecommerce experience. She has started an ecommerce business in 2008, and later worked at H&M, Bath & Body Works, Victoria’s Secret and Landmark Group. She’s lived in 4 different countries, speaks 3 different languages and holds an MBA in Strategic Management & Marketing.
You can connect with her on Linkedin.