Franchise Business Models Face Increasing Pressures

Posted on 06. Apr, 2010 by in Franchising

As a distribution model, franchising is certainly a proven method, contributing significantly to GDP, employment and brand expansion across the globe. Given its past achievement however, the industry is in the midst of an era of great change and as a result its future is unclear. What is clear, is that organizations who focus on innovation and reject the status-quo will have a better chance than those who do not. Question is what franchise systems will be able to adapt to the changes and which ones will not.

Franchising is tough right now. Its not just that lending has dried up for many franchise concepts. It isn’t just a function of the recent recession in general that is increasing economic pressures on franchises. The fundamental environment most companies face is becoming exceedingly difficult overall, requiring core changes to business concepts. These changes don’t just pertain to the franchise company itself but as importantly to the business models they promote and franchisees operate. Some key trends make it unclear wether many established and growing franchise systems are sustainable, as shocking as that sounds. The following four factors are providing most of the impetus for fundamental changes that franchise systems must make:

Increased competition
Advancements in technology;
Evolving consumer needs and wants; and
A more complex and demanding legal environment.

Increased competition

Competition is intensifying in many industries. An example is the fast food market where the most established franchise brands reside. As illustrated by tough competition in the U.S. pizza market, increased competition is resulting in flat to lower sales and discounting as companies attempt to protect or build market share. Ultimately this exercise is unproductive and will inevitably erode profit and sustainability.

Smart companies operating in highly competitive environments work hard to improve efficiencies and differentiate themselves. McDonald’s, for example, has been rapidly evolving its menu, operations, and offering of new services like wireless Internet access. The chain is also focusing more on quality to differentiate itself from others. But this is McDonald’s, the giant of the industry and a true exception. What will franchise systems a fraction of their size, which represents the clear majority of franchises today, be able to do ?

Curiously, more US franchisees have left the McDonald’s system in the past twelve months than in the previous five years. This is a telling trend and may be a clue for other franchise brands with lesser brand leverage and resources who attempt to respond to change. It just will not be an easy environment for franchise systems to navigate or survive.

Technology advancements

Advancements in technology is also increasingly impacting franchises. For example, the ubiquity of the Internet is radically shifting how smart competitors market their products or services. Conversely, the Internet has spawned new competition, like, which competes with traditional bricks and mortar operations. Other advancements, like inventory management systems, cloud based CRM systems, GPS devices and digital closed circuit television provide franchised operations with opportunities for improved efficiencies, security, and more sales. However, these tools also require effort and expertise for successful implementation throughout a franchise. They also require additional capital investments. Something many systems are incapable of or without.

Evolving Consumers & Legal Environment

Consumer needs are shifting rapidly posing a real problem for franchised operations. Coupled with the threat of lawsuits and legislation, an increased number of consumers watching their weight has resulted in radical changes to restaurant menus. As a result McDonald’s has introduced fruit, salads and wraps and Subway has introduced Kid Packs which substitute fruit for cookies and 100% juice for soft drinks.

There are obviously a number of trends and changes that must be considered by prospective and existing franchisors and franchisees. Some of these trends require quite fundamental changes to the way businesses operate. Navigating this change requires huge patience and resources to gain acceptance and implement. When applied to multiple business owners with limited resources and whom are dealing with great frustration this is quite problematic.

Bottom line is the SOP is not going to likely work for most franchise systems given the degree of change going on. If you are a manager, executive or franchisee, how aware are you of these pressures and do you concur with the analysis that your business models are feeling significant and greater pressures requiring fundamental change ?

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