The question of whether to run a mix of franchised and company
run operations is a question which every franchisor inevitably faces.
In most franchise systems the issue arises in the earliest stages
The franchisor has an operating and proven model which he wishes
to replicate and grow the business via franchising. Even amongst
seasoned franchisor's the issue of how many, if any, company operations
to keep remains an issue of strong debate.
In the conventional retail model this is relatively straightforward
as, finances allowing, another outlet can be opened and run under
staff before franchising it off. If finances don't allow this, the
franchisor is faced with a burning question. Do I franchise my existing
model, or do I keep it?
Where the franchisor has several outlets this is less of a problem
as one can be franchised without overly affecting the franchisor's
income from the group. In most systems where Franchise Alliance
has been involved with their development, the franchisor is forced
to keep the "cash cow", best store or territory, purely
for financial reasons. This can bring its own problems to the table
as it can be interpreted by franchisees that the franchisor is only
franchising the less profitable, or even problem outlets, and is
keeping the best for themselves. This perception is not conducive
to strong franchising and will not be overcome until a franchisee
can reach the same level of success, or better, from a new outlet.
It is thus well worth considering franchising the best performing
outlet and foregoing the income. The supporting rationale behind
this being that the particular franchisee will be highly successful
and, by validating the system, will be the best resource possible
to refer potential franchisees.
The service style franchisor often finds it more difficult to sell
off the originating territory as it is frequently their sole source
of income. They are then faced with selling off new territories
against the existing proven model. Whilst the retail franchisor
needs to do thorough demographic research, it is even more important
for a service franchisor to do so in these situations. Sadly, it
is our experience that retail franchisors recognise this need, but
service style franchisors tend not to.
Situations usually dictate the path in the development stages,
but what about when a system is more mature and can actively address
the issue of how many company operations to run, if any?
Generally, the recognised advantages of having franchisor operations
alongside those of franchisees are as follows.
- The franchisor has the opportunity to trial new products which
lessens the risk of inflicting dud products on the franchise system.
- The franchisor can trial new systems and procedures before
introducing them to the system. Scott Meneilly of Body Bronze
says "My feeling is that on one hand, company operated
salons can be a distraction; but on the other hand it keeps you
understanding the business. Company operated stores enable us
to try out new ideas before releasing them to the network."
Diana Williams of Fernwood puts it, "One of the main advantages
of having company owned outlets is to enable us to trial new procedures
and systems which we are always working on to improve the way
we do things. Trialing them in our own clubs allows us to make
sure that all of the problems are ironed out before we roll it
out to the franchisees".
- The franchisor operations provide a healthy breeding ground
for franchisor staff to grow and develop into highly knowledgeable
support staff for franchisees.
- The franchisor has a ready made school to train new franchisees.
- The franchisor can keep a source of income from the company
operations. Meneilly again "The company salons also provide
us with a great source of income further to franchise fees alone."
- The company operations can enable the franchisor to grow assets
which can be franchised with a strong goodwill component attached.
But there is always the old reason why franchising is so powerful
and Diana Williams contributes "While our company owned
clubs are generating healthy profits, generally franchised clubs
are far more profitable than company owned clubs. This has been
proven to be the case where we have sold a company owned club
to the existing manager and without any change of management,
staff or location we have seen an immediate increase in both the
turnover and profitability." Peter Fox, General Manager
of Autobarn agrees, "The franchise model is far more profitable
for an owner operator than a corporate store is for the franchisor".
- The franchisor experiences the same day to day problems that
the franchisees are experiencing in their franchises. This gives
the franchisor the opportunity to fix problems before they fester
and damage the system and impact on franchisees. Similarly, when
a franchisee takes a position "that can't be done",
or "that won't work", the franchisor has the capacity
to show how and why it can be done and thus can see through franchisee
excuses. However, Peter Fox adds "We have also found that
if a corporate store is in any way non compliant with the system,
franchisees use this to justify an endless array of excuses as
to why they may do things differently or work outside the system,
ultimately to it's detriment".
Martin Rose, an ex Master for New Zealand Natural Ice Cream, summarises
the above points as follows, "Company stores allow a franchisor
the ability to control and profit from a successful concept. They
can provide cash flow and a training facility to showcase the business
for both the market and other franchisees".
But it's not all rosey in the garden as there are certainly some
disadvantages in keeping franchisor operations running alongside
- If the franchisor is not careful, franchisees could complain
that the franchisor is in fact competing with its own franchisees.
- Running franchisor operations ties up capital which may otherwise
be used for system growth and development.
- The resource demands on a franchisor running their own operations
are obviously substantial. Whilst there may be some absorption
of these tasks by the franchise support system, there is no doubt
that time and money are soaked up by running the franchisor operations
alongside that of the franchisees. In reality this is more like
running two systems instead of one.
- Without question, the worst part of running company operations
are the issues that more staff bring to the fore. Many franchisors
went into franchising initially to lessen or remove this issue
as far as possible. For these people, running company operations
may be decidedly unattractive, no matter what the bottom line
contribution may be. Scott Meneilly sums it up. "Staff
cause us the majority of our problems on a day to day basis, however
I think this again is a burden we need to feel because it is a
real problem that faces our franchisees every day. How can we
give our franchisees advice if we are not gaining any experience
in running a salon?"
- Having too large a company operation network can initiate an
"us and them" mentality which manifests itself at gatherings
where all the franchisees sit on one side of the room and all
the staff on the other. This is a highly destructive cancer in
Running a system with master franchisees, who are often required
to own and run their own operation, can alleviate the franchisor
from needing direct experience, but only if the masters are highly
communicative and responsive.
Martin Rose comments again "A combination having both management
resources and capital tied up can often lead to a poor return on
investment - most particularly in difficult trading times. Further
challenges exist in ensuring staff perform as well as an invested
So, what is the right answer?
Well sadly, there isn't one. There is no formula which provides
the magic solution and every system is faced with differing opportunities
and needs with circumstances often dictating the path forward rather
than a conscious decision being made. However, Peter Fox has this
interesting viewpoint; "It is fine to have one, or maybe
two, corporate stores to operate as a model and/or training store
and these can generally be accommodated within the existing infrastructure
with little cost impost to the franchise model, but if numbers increase
over and above these, a strict corporate model with specialist infrastructure
In balance at Franchise Alliance we have to say that we believe
running at least one company operation can be easily justified and,
in our view, the advantages outweigh the drawbacks.