Most franchisors and franchise consultants take for granted that franchised points of sale perform better than franchisor's owned points of sale given the franchisee's higher degree of motivation and the business owner being on-site.
However, there are no reliable statistics that confirm or refute this hypothesis.
In an interesting article published in 2014, Australian psychologist, author and franchising expert, Greg Nathan, presents the findings collected by his team who studied 35 franchise networks operating a total of nearly 7,000 outlets, 18% of which were franchisor's owned (managed by the franchisor or by a franchisor's subsidiary). For the purposes of this study, Greg Nathan and his team also compiled data from 71 outlets which, for various reasons, had been converted from franchisor's owned to franchised points of sale, or vice versa.
The following are the six key findings highlighted by Greg Nathan:
- Sales of franchisor's owned points of sale increased when they were converted to franchised points of sale, but, on average, only by 6%. Conversely, sales of franchised points of sale decreased on average by 4% when they were converted to franchisor's owned points of sale, thereby confirming that a franchise may achieve better results in terms of sales, but far from the 30 to 40 percent range estimated by many franchisors;
- Franchised points of sale showed higher profitability than franchisor's owned points of sale, mainly due to better control over labour costs, which were on average 10% higher for franchisor's owned points of sale;
- The state of an outlet before being converted (from franchisor's owned to franchise or vice versa) had a significant impact on its performance post-conversion. As such, outlets that were poorly managed by franchisees experienced an increase in sales once converted to franchisor's owned points of sale. However, outlets that were well managed by franchisees experienced a significant drop in sales after being converted to franchisor's owned points of sale.
- Supporting franchisor's owned points of sale represents a large cost for a franchisor. According to Greg Nathan, supporting a franchisor's owned point of sale requires four times more time and resources from the franchisor, especially for the purposes of HR management and employee training.
- Although the findings seem to indicate that franchised points of sale generate more sales and show better profitability than franchisor's owned points of sale, many franchisors successfully operate franchisor's owned points of sale that are very profitable when launching and operating the business are well planned and managed.
- Lastly, Greg Nathan notes a certain paradox regarding compliance with franchisor standards, the degree of client satisfaction and marketing. Whereas franchisor's owned points of sale are more compliant with the franchisor's standards, programs and systems, franchisees are more committed and proactive in their efforts to grow their client base and improve customer loyalty and are less receptive to franchisor programs that they feel are ineffective for these purposes. For the franchisor, this presents a real management challenge, but it will ultimately help achieve better results.
Moreover, some university studies conducted by American researchers on the purely economic aspects of franchising found that, to maximize the franchisor's profitability, approximately 2/3 of its network should be composed of franchised points of sale and 1/3 of franchisor's owned points of sale.
The results of these studies, however, must not be taken at face value because a franchisor with a large number of franchisor's owned points of sale is confronted to many very serious challenges when it comes to managing its relationships with its franchisees. It also creates legal challenges (e.g. competition law) when any of the franchisor's points of sale are located in a market in which there is also a franchised point of sale.
In short, the findings show that there is no perfect ownership model between franchised and franchisor's owned points of sale, and that each model has its own advantages, risks and challenges.
Many franchisors are very successful despite not having any franchisor's owned points of sale, while others, with numerous such points of sale, are equally successful.
And, among some particularly successful franchisors, there are also several that simultaneously use several different ownership models in developing their networks, such as, franchisor's owned points of sale, points of sale held in partnership with business operators and franchised points of sale.
What is important, therefore, is not the ownership model used by the franchisor, but its understanding, from the outset, of the issues, risks and challenges of each model the franchisor intends to use and how it can adapt the way the franchisee's or partner's relationships are to be managed based on the model that is adopted.
Fasken has all the necessary expertise and resources to assist and advise you in implementing and managing a franchise model adapted to your needs, resources, management style and objectives.