Business Franchise

While thinking about modern trends in global economy I came to rather logical to my mind idea. Business needs to combine popular ideas or try to satisfy different wants together. I don’t say that I’m the first person who thinks about this. I only want someone with a creative power (not me as I’m too fond of exact sciences) to invent something that will improve our lives.
 

For example, one person invented a “sports-bar”. He combined the food (eating) with entertainment (ability to watch football or baseball matches, to talk to other fans – like at the stadium but in your town).
When I was writing this another thought came to my mind. Under the same title “sports-bar” we can see an extremely different idea. The businessman can combine the food with a sports training or fitness. Just at one place… I haven’t seen this before. And you? Just imagine: you cycle and eat pizza at the same time (certainly if you wish)…
 

Another good to my opinion combination of ideas is audio books. It takes together two different needs – education (as it’s important for career growth or example of entertainment) and free time (as it’s the thing of the greatest value in the modern society).
 

Healthful eating consulting plus retail selling also provides good opportunities for earning money. When someone explains you the benefits of healthful eating it’s almost impossible not to buy something fresh or full of vitamins and microelements!
 

I promise to think more about this synergy and add more ideas to this post (or will start a new one…). Any suggestions are highly appreciated too .

I hope to finish commenting franchise survey carried out by Franchise Recruiters Ltd. (FRL) today. If you read till the end you’ll know if I manage to do it. Check my previous article to know the beginning.
 
The next idea expressed by top franchise leaders was dedicated to old and branded franchise systems. In order to remain in a good position they have to prove that they are worth of it. Nothing can guarantee them a success in today’s fast-changing world. To hold their loyal customers they need to revamp, rehabilitate and regenerate their business systems. The respondents pay attention to the fact that most of the franchisors are concentrated on their first ideas rather than looking ahead an opening new products and technologies. It’s clear that they will face a rigorous competition.
As it’s mentioned it’s very important to adopt franchise business to demographic trends. Changes in today’s lifestyle and demographics help the development of the following business spheres:
-adult and senior day care,
-health care,
-home care,
-beauty, skin, aging treatments, and spas,
-different forms of entertainment.
 
My comments:
The survey shows the contradiction between main strategies of consumers’ behavior. These strategies are widely used in marketing while speaking about market segmentation. It’s evident that there are different types of people buying the same product. Each group of buyers has different reasons for purchase. The ones are driven by fad, fashion, and mood. They usually want to try something new. The others are very traditional and don’t change their tastes so fast. So if franchisor wants to develop his business he needs either choose the one group or to satisfy both.
The industries mentioned by respondents are rather predictable. There can be a lot of reasons why people become more self-oriented (exactly “self” not family- or community-oriented). Maybe this happens because of decreased role of Christianity and other constructive religions in the society in general. The advertising also influences the modern mentality saying that YOU are worth of this or that. Anyway the picture is very clear. People don’t want to take care of their parents and children themselves. Career plays the biggest role in dreams and aspirations. So the winning strategy is to provide people with more free time and with additional career opportunities (like better education on the one hand and better appearance on the other).
 
All the previous statements were dedicated to franchisors. But what about franchisees? The survey respondents decided not to avoid them. In the answers they pay attention to the fact that today prospective franchisees are “better capitalized, have better management experience, better education, and are increasingly diverse investors”. Also it was noticed that more and more seniors are coming into franchise business. They do not want rely only on government and social security. But most of them are not so aware in their talents to invent good and enough modern business idea themselves. The survey provides the following statistical information about older Americans: “the number of workers age 55 and above rose to nearly 24 million in 2004, up from 22 million in 2003, and from 20.7 million the year before. At the same time, the government is forecasting a significant labor shortage nearing the end of this decade. Franchisors tell us they want and need seniors as a reliable work force for years to come”.
 
In the same survey we found interesting information about so-called third party, not a franchisor and not a franchisee… For example, respondents notice that investors are considering franchise sphere to become rather interesting deal. They even called this a “new golden goose”. Why? Because of very short start-up period in many spheres. Think of it! Franchisor provides with a training program that lasts for 2 weeks. During the same time it’s possible for a franchisee to make all other necessary arrangements and he is ready to start! The only thing that can slow him down is money. So for both of them – investor and prospective franchisee – the goals are coinciding. They can start earning money very soon. TIME! It explains the investors’ interest toward franchise sphere, as I think.
 
Another third party is employees. Both franchisors and franchisees understand that employees contribute the biggest part to the company’s costs (directly and indirectly) and as a result to the company’s profit. When I say direct impact I certainly mean salary and corresponding expenses. As an example of indirect impact I will mention training expenses for every new employee.
At the same time for many businesses employees’ productivity influences the results most of all. That is why survey respondents expressed the opinion that franchisors of the next years will pay a lot of attention to different forms of health care insurance to their chain’s hourly employees. Also they will help to establish relations with banks opening accounts and contacting with financial institutions.
 
My comments:
I like this. When I’ve read this information I was thinking about inventing a high school program (or even senior school) to help franchisors and franchises to provide teenagers with the necessary information and to prepare them to their future jobs in that sphere… It can be based on “learning by doing” ideas and include a lot of practice…
 
And finally the last tendency was related to management. The top US franchise leaders believe that the previous years’ tendency will continue and more managers will be motivated not by strict annual bonus payments but by some reward programs depending on the results. As I understand that tendency is not a franchising innovation but overall trend in business.
 
Ok… I’m done with this survey. Will I get any comments on my comments?..

***If you read my blog for the first time I need to notify that it’s the second part of my comments for the Franchise Recruiters Ltd. survey. If you are interested in the beginning check the post before the previous.
 

So the next tendency in franchise business pointed by respondents (top 100 franchise leaders) is that franchise chains will have to increase the range of their goods and services. Some will even decide to combine goods and services from different franchise systems. They will fuse the channels and attract new buyers saving their time. They will operate under the slogan: “You can get everything in one place”. As an example they mentioned stores that sell ice cream and fresh flowers, coffee and offer top selling music CD’s, and video rental brands, cell phones and accessories.
 

As for me I like that idea from both points of view. As a consumer I prefer to park my car once and to do all the shopping, hairstyle, and so on at once. If to speak about business benefits the main advantage is that they can choose the best goods, services, technologies and practices from every franchise idea and decrease costs. Economists call this economy of scale (the situation when a company’s average costs decrease while company grows).
 

The next feature of modern franchise business according to the concerned survey is so-called “self-service” opportunity. The central place is given to kiosk technology which becomes ubiquitous for retailing products, packaged food, hotel reservations, and franchisor branded gift cash cards. It’s rather convenient for both sides. Consumers can get their favorite branded chocolate or order a ticket near parking lots, outside and inside big stores, gas stations, and malls. And certainly through the Internet… Franchisor can send his/her product to any part of the country. This strategy also saves salary costs as kiosk  doesn’t need to be trained, to get social security, and can work 24 hours 7 days and will never be late because “of terrible headache on Monday”… The only disadvantage of kiosk technology as I think is its inability to operate as a human. The artificial intelligence is too expensive today. But I will not be surprised to see a chocolate and drinks kiosk that will have its own opinion and advice me what to buy and how to get to the point of destination better.

OK… too much of a good thing is good for nothing. More tendencies you will see in the next post.

The friend of my parents at last decided to franchise… And as he is rather ambitious person he wants to choose among the top and the most well-known. He looked around and found nothing better than 7-Eleven, Inc.
 

I was asked to collect as many as possible facts about this franchise (he is not so good in Internet). It was not difficult and I decided to publish this information in my blog too (to kill two birds with one stone).
 

Industry:
Food
 

Franchise package includes:
a) initial training to franchisees on how to operate and manage their stores; training includes practical part of 6 weeks working in one of the stores;
b) operational consulting, assistance and help in all business aspects; meetings every week;
c)  franchisor develops the building, provides the store equipment and pays the utilities.
d) franchisor owns or leases the land;
e) franchisor provides credit resources on everyday basis if needed;
f) franchisor prepares all financial documents (income statements and balance sheets, financial activity summaries (e.g., daily sales receipts, purchases, cash expenditures) and even some marketing reports; everything operates under special information computer automated system.
 

Fee:
a) initial franchise fee to 7-Eleven (averaging approximately $70,000, depending on the store’s gross profit, but that may vary significantly depending upon the area);
b) a typical initial cash payment is about $83,000, which includes a down payment on the store’s opening inventory, supplies, business licenses, permits, bonds, cash register fund and the initial franchise fee.
 

Franchisee rights and responsibilities:
a) store business decisions are made by the franchisee himself but he can turn to franchisor for advice in any business sphere;
b) A 7-Eleven franchisee does not own the property, store or equipment, but leases or subleases it from 7-Eleven, Inc. as part of the franchise agreement.
 

So the program is OK especially for those who have poor economic background. You are not responsible for financial documentation, credits, real estate and equipment. But at the same time this franchise provides you too little freedom. Do you agree to obey all the time? If so, the business is right for you.

Every year Franchise Recruiters Ltd. (FRL) conducts a study and analysis of the tendencies of franchise business. Unfortunately I managed to get access only to the materials for the year 2005 but I hope they will allow making some interesting conclusions. As I think the main tendencies and relations remained the same for thus year too.
 
The procedure of survey was rather usual. The main data were collected while asking questions about the current situation and business forecast. But unlike International Franchise Association FRL interviewed 100 of the top U.S. franchise executives. On the one hand it increases the statistical error of the survey as they asked only leaders. But on the other hand I think the information can be useful at least because the leaders understand the market and the business, they have enough experience to predict what factors will benefit or hurt them. Why? Because they are the leaders…
 
So the first thing to say about concerns general growth. Top U.S. franchise executives predict 6% growth in net new unit development. What do they mean by “net”? They subtract closing companies from new ones. It means that number of new franchisees will grow even more than by 6%. If to compare this to the growth of GDP as the main economic indicator the interesting thoughts come to my mind. The U.S. gross domestic product growth was projected to be 3.3% in 2005; it’s two times lower than franchise number growth and also lower than the same indicator in 2004. My comments:
- growth in number of franchises is not caused by high revenue expectations of prospective franchisees; maybe they think franchise way of starting a business to be more attractive or easier in comparison with the standard one; it becomes more evident against a background of slowing of the economy in general;
- growth in number of franchises will increase the level of competition, especially in such traditional franchise industries as food and retail sales. As a result the market can see the decrease of prices (better variant for consumers) or decrease in quality (in order to provide at least any profit to companies). Anyway I think that at least in traditional franchise industries new companies can get much less profit than they assume.
 
The respondents also mentioned some other negative factors that can influence business development:
-slower overall economic retail expansion;
-relatively high energy prices;
-real estate tribulations;
-shipping cost surcharges
-and rising interest rates.
Also they mentioned prices as a very important factor. People are already hurt by increased oil prices and are not ready to inflation in any other industry.
My comments:
Franchisors (based on franchisees requirements and their own researches) have to think a lot about the ways to decrease the other costs and to increase the productivity. Maybe they need to examine the following variants:
-introduce new technologies (better equipment, informational and electronic systems, new materials, etc.);
-look for new suppliers of equipment and materials (check the opportunities provided by countries with cheaper labor force);
-outsource the less competitive parts of their business and so on.
At the same time they really need to shift the main accent toward attracting consumers. As I see it would be very difficult to hold the winning position without interesting advertising campaigns, better package, additional services, and improving public position and company reputation. It is the responsibility of almost every franchisor: the time will never forgive that delay, and another franchisor in the same industry will get the benefits of 6% growth I wrote about in the beginning of that post…
 
I’m going to continue commenting that survey later as it contains many other interesting facts and forecasts. But for this moment I wish to make a short conclusion. The situation in a franchise sphere is very controversial. On the one hand we see that more people believe in franchising as a way to start their business. On the other hand we understand that they will face an extraordinary competition supported by other negative factors. I suppose that in a short period of time it will result in a greater differentiation among franchisors. Those using new methods in business will take a bigger part of the pie. The others who rely only on traditional instruments and approaches will loose their positions.

I found the information on two more eBay franchises. In my previous posts I described iSold, NuMarkets Franchise Program, QuickDrop Franchise Program and Ebay Drop Off Stores.

Today I want to write about an interesting one. They decided not to take a franchise fee and as I understand consider this as the main point of their franchise program. The title says for itself: “Auction Post Inc.’s No Franchise Fee Program”.

To tell you the truth I’m not sure that I completely understand why they do this. It seems for me that they operate like educational courses explaining how to use eBay for drop-off operations. This training will cost you $9,995 but as I see it’s the only money you have to pay them. Maybe it’s a part of their promotional strategy and they are trying to attract franchisees on the first stage… Maybe it’s the way they are trying to get a bigger market share… Maybe this is not the only program created by the company and they are promoting other Internet projects with the help of this one… Anyway the idea seems to be rather attractive.
Franchise program includes:
- guidance on setting up and running your store;
- training program based on their e-auction experience:
- operational consulting.

So I can find only the following risks when starting this franchise:
- their experience can be not enough for you and as a result training can be not so good;
- as their operational consulting is free for you can’t make high demands to its quality.

But you can get more information on that points (as you know them) asking other franchisees and studying the documentation.

The other eBay franchise I’m going to write about is called Snappy Auctions Franchise Program. As I realized it’s not so famous (maybe rather new one but I couldn’t find the information). It’s very common to the other eBay franchises. The franchisee has to follow their guidelines strictly when setting up the store. The program includes both types of payments to the franchisor:
- franchise fee is $15,000;
- Royalty payments are 2 - 4%.

My conclusion:
If you want to start a drop-off business based in the modern informational technologies (like e-auctions, Internet bidding and so on) you have a lot of franchise programs to choose from. They only thing you have to do is to compare the money you spend with the services and help you get from your franchisor.

As I mentioned before it’s necessary to evaluate the franchise statistics censoriously and critically. It can be too optimistic because of the procedures of such surveys when questionnaires are sent to franchisors and franchisees. It means that only existing companies will answer and express their opinions. So the results are not including the rate of bankruptcy. And I think that it’s possible to divide that optimistic numbers by 1.3 or even 1.5 to get more realistic picture.
  Here I’ve decided to compare my opinion to the official information of the International Franchise Association for the early 2006. Their results are on the left graphs and mine are on the right.

 What do franchise companies think about current business conditions?What do franchise companies think about current business conditions for franchise business?

 What do franchise companies think about future business conditions?  What do franchise companies think about future business conditions for franchise business?     

It was clear even before that graphs but I want to lay stress that when I made the results not so optimistic the opinions became almost equal. I mean that half of the companies believe in prosperity of their franchise business and 50% do not…    

Relax a bit! America and Canada are not the only places for franchise development! Europe provides good business opportunities too. I found that franchise game on one of the main franchise sites of UK and decided to put a link here. You’ll play and get some information about the most famous and successful franchises in UK.

It seems for me that I spent enough time to express my opinion that it’s necessary to evaluate an idea before investing money. This statement completely refers to franchise business. Success of other franchisees doesn’t guarantee your success because as I mentioned before it depends on a particular region and particular conditions of that region.

Now I think it’s time to say a few words about conditions that make business idea practically acceptable.
1. Technological practicability. If to speak about business ideas in general there can be a lot of reasons for inability to realize them. Sometimes it’s too expensive, sometimes there is not enough space to build the plant and locate all the necessary equipment and so on. Even one of the most outstanding producers George Lucas faced the technological problem while realizing his creative ideas. He had to start his Star Wars from Episode IV and only after many years he found a good technological decision to shoot Episodes I, II and III.

Going back to franchise ideas I think that this problem is not so important as franchisor has already created the technological system and tested it. But still potential franchisee has to check the local situation. There can be some legal restrictions for particular region or ecological situation can influence technological practicability or inability to hire personnel of proper qualification can create barriers for the success.

2. Long-run future viability of new business. Starting your business you need to be aware that it will exist for some period of time. It’s important to see the difference between a project and a business. Project can last for several days (like organizing a show or a party) or for several years (like house construction). But when you plan your business it’s a good idea to create it for years and to foresee the conditions for its growth. Maybe one day you’ll sell it and get more money than invested or hand down to your kids.

3. Acceptable economic efficiency and payback period. One survey said that only 30% of all the small businesses were started in order to earn money. The other 70% of new-born entrepreneurs presented the following reasons:
-want to be “my own boss”;
-want to realize my personal ideas;
-want to achieve something in my life and to make a business career, and to help other people… and many other “bombastic” reasons.
As I think it’s possible that people really think that way and do not consider money and profit as important factors of small business. But my experience (not so big but enough to have an opinion) says that most of them will change their minds during the first year of business operations. As the owner of a small company you’ll deal with money everywhere – paying salary, rent, public utilities, and interest for the credit, administrative costs and Internet, advertising and promotion expenditures and many others. You’ll charge prices, calculate revenue and taxes, and so on. Of course, it’ll take some time. I even insist that it takes a lot of time. And every reasonable person wants to get something for the time spent. His family also wants to see the pecuniary results not only self-realization or happiness of other people.
That’s why I suggest everybody to think about economic part of any idea even if you really believe that money is the last thing in the world you want to speak about.

4. Acceptable idea from public or community point of view. Take it seriously! Today people as never before feel very lonely. As a result they try to solve this problem participating in different public organization and community projects. I do not recommend you to start any business that may conflict with public interests. You will loose in 99% of cases…

My conclusion:
Some of these factors are limitations; the others (like economic efficiency) can be used as the main criteria for a franchise idea evaluation. Want to add something? If so, I will highly appreciate your comments.

Ok… Few more words about declining a business idea. I’ve already mentioned very important factors: demand for good or service, possibility to win the competition, capital requirements and economic results, and risks. The last I want to speak about are the following:
A) problems with raw materials;
B) ecological problems;
c) public opinion.

For most industries and businesses raw materials play a big role. They represent costs and influence price of a product. Of course, for services they are not so important but still you need to think about them:
-where you plan to buy them;
-who are your main and alternative suppliers;
-is the price for each item stable or it fluctuates;
-is there a deficit material and is it easy to find a substitute and so on.
The main thing about materials is that your customers are not interested in your problems with them. Buyers want cheap products and that’s all… And if you can’t satisfy them you’ll loose your business.

Ecological movement is growing in strength. You need to evaluate your business idea from the following conditions:
-will my business pollute the air, water, and so on;
-is there any risk of accident that can do harm to the ecological situation in the town or city, or region.
While evaluating a business idea it’s necessary to remember that ecologists and environmentalists live among your prospective buyers. They can either improve or worsen your reputation.

Public opinion is the last but not the least in that list . It’s clean that it influences demand greatly. I’m not going to explain such an easy thing but will give only and example. In early 90s the market economy came to the former communist countries. At the same time most people had not enough education and business way of thinking. But everybody wanted to live better and to earn money. Many people were involved in network marketing and….. many of them lost money. Why? There were many reasons and I don’t want to discuss them in this article. The main thing I want to bring to notice that till today many famous network companies (already successful in US or UK) face the problems to overcome the public opinion that states: “Network business is not a business but a skullduggery”.

I hope I proved that it’s necessary to evaluate your business ideas before even thinking about investment. And thank you for your patience while reading all of my thoughts!