Most people buy a franchise because they feel it is less risky than starting a business from scratch. They recognize that their work experience has not prepared them with the knowledge or skills needed to begin and run a business of their own. In addition, many are unwilling to spend time, effort and money reinventing what is already available.
Franchising is also attractive because, to some extent, a franchise is a cooperative, a community of common interests—from centralized national advertising to common products, operating procedures and quality control standards. Because of the protective nature of franchising with its intensive training programs, written standards and procedures and national name recognition, people who otherwise would not have risked entering the business world have taken the leap and opened their own businesses, and done well.
Government statistics bear this out. Although it has been the subject of recent debate, the chance of surviving in a small business is greatly enhanced by membership in a franchising system. The failure rate is reported to be far lower than that of small businesses unsupported by a franchising parent.
Combined annual franchise sales will be well over one trillion dollars at the dawning of the 21
Today, more than one-third of all retail businesses are part of a franchise system. By some estimates, this figure will increase to one-half of retail businesses by the turn of the century. Based upon previous industry predictions, combined annual franchise sales will be well over $1 trillion dollars at the dawning of the 21st century.
Originally it was repackaging existing products and services that resulted in some of the most successful franchise systems around today (think of how many hamburger places existed before McDonald’s helped make fast food a way of life). Tomorrow’s success stories will probably come from capitalizing on new ideas and new technologies.
There seems to be no limit to where and how the franchising concept is applied these days. Real estate, clothing, sports equipment, computer goods and services, packaging services, business services and lodging—these are only some of the hundreds of businesses that use franchising to distribute their goods and services.
International franchising is the next wave. As franchise systems saturate the United States, they look for new opportunities in new markets. Using modern communication and computer technology, franchisors are able to cast a wider net; there are no boundaries. The “info-structure” of the 1990s is likely to catapult franchising into the next century with as much vigor as the infrastructure of the 1950’s did in the latter half of the 20th century.
The following are descriptions of the elements usually responsible for a franchising system’s success, and some of the reasons why buying a franchise can be a sound investment:
SUCCESS ELEMENTS
Defined/Proven Business Format. What most franchisors are selling is a defined and proven business format or method of operation. Although some offer a unique product or service, many franchisors have simply come up with a “new way to slice bread.” The founder of Dunkin’ Donuts was recently quoted as saying: “Howard Johnson’s didn’t invent the ice cream cone. Colonel Sanders didn’t invent fried chicken. I didn’t invent coffee and doughnuts. We just did it better, we had a passion for building a concept.”
It has been said that the simpler the idea, the better the franchise. What each of the business leaders mentioned by Dunkin’ Donuts’ founder did was develop a proven, recognizable format that was easily duplicated. They standardized the presentation of their products and the services that went along with them. This is the essence of a proven format in the world of franchising, and it is at the top of the list of reasons for franchising’s success.
Franchising is attractive because it is a community of interests
Many of the original franchises began with people who operated their own independent business, refined it and demonstrated—to themselves and others—that it could be successful.
A defined format is what is passed on to franchisees and strictly enforced. It is what creates a positive public image and identification. It is the prime building block of a successful franchise.
Today, while many systems still have grass-roots beginnings, franchise-making has become big business. Major corporations buy and sell franchise systems like so many pieces on a huge chess board. But, at the heart of every successful franchise system, you will still find a proven format.
The failure rate of franchise businesses is reported to be far lower than that of small businesses unsupported by a franchising parent.
* Specialization. Another reason franchising has found such a solid niche in our modern economy is that it caters to specialized needs. Many American consumers no longer want a muffler installed by a service station, a hamburger from a diner, a pizza from someone who won’t deliver it within 30 minutes or their hair cut by a local barber. Specialists, it seems, “do it better,” and the franchise industry is only too willing to accommodate this belief.
While the early foundations of franchising were built upon standardization, the success of modern franchising depends on finding ways to meet the ever-changing needs of affluent consumers.New businesses not even thought of 10 years ago, are sprouting wings and taking to the sky. Franchising organizations capitalize on this era of specialization by expanding through sales to independent parties (who become franchisees) rather than by investing their own money. The capital saved is used by franchisors to develop new and better ways to serve consumer’s specialized needs.
NEW NICHES
Specialization helps franchisees because it creates new marketing niches for franchises to pursue. Offering products and services to those niche customers works for the common good of all in the system. The ongoing trend towards specialization will lead to the creation of new franchises and keep franchising at the forefront of business distribution methods.
*Uniform System. As mentioned earlier, franchising will continue to succeed in the era of specialization by calling upon its traditional roots to see that consumers receive uniform quality—efficiently and cost-effectively—through uniform systems of operation. A uniform system brings with it the advantages of mass purchasing power, brand identification, customer loyalty, and it capitalizes upon the proven format.
To serve our mobile society and continue to attract loyal, repeat customers all over the country—and world—franchise systems must utilize uniform systems to provide uniform products and services.
*Advertising Network. The term “strength in numbers” aptly describes franchise advertising. Because of collective advertising funds and cooperatives, franchisees—who normally could only afford to advertise locally, if at all—can take advantage of national and regional advertising (which is exorbitantly expensive). Franchisees also benefit from the creative talent that large corporations draw upon to effectively market their products and services. On the other hand, franchisors benefit because they can consolidate their advertising efforts and fund expensive advertising campaigns with the financial help of their franchisees, to both parties’ benefit.
Both the national and regional success of a franchise depends largely upon the franchisor’s ability to develop name recognition and product or format acceptability. Local, regional and national advertising instills in consumers the confidence that they can go across the country and find—in a franchise outlet—the same quality as they would in their own neighborhood. Advertising networks, therefore, are a vital part of every franchise system.
James A. Meaney is an attorney with Alkon, Rhea & Hart, St. Croix, United States Virgin Island. He is a member of the American Bar Association’s Forum Committee on Franchising. This article is excerpted from his new book, “How To Buy a Franchise,” published by Pilot Books. |
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