When evaluating franchise development and growing your business through franchise expansion, it seems to surprise business owners that franchise systems are not an all or nothing expansion strategy. Many of the world’s most successful franchise systems have a significant percentage of company owned locations amongst their network of stores. There are a variety of reasons why a company may choose to continue opening company-owned locations as they embark on franchising and certainly there is no right or wrong answer, it all depends on what you as the leader of your company would like to get out of your expansion model.
Franchise expansion requires a delicate balance of managing the operational side of the business along with the strategic side of the growth plan. If you look too far into the future and forget about what’s right in front of you, the business will surely run into operational problems and on the flip side if you are focused entirely on day-to-day operations the vision and long-term goals for the company will fall short.
Looking at the spectrum, there are some franchise systems which leverage franchising as a way to sell off or get rid of company owned locations which don’t match up with their key performance indicators. A good franchisor would never sell a location to a franchisee expecting them to fail, but maybe a market is too far away from the corporate office, or their has just been a turnstile of management and employees in a particular location, these could be reasons why a franchisor leverages franchising not as growth mechanisms but as a way to prevent store closings. Think about TGI Friday’s who recently sold off a large percentage of their company owned stores to franchisees because they just couldn’t make them profitable as employee-managed businesses.
In some cases, franchising is leveraged as a way to extend corporate growth. McDonald’s owns about one third of their locations as company owned operations. Generally speaking these are high-profile, high volume stores which generate enough cash flow to warrant both the investment and the energy to operate. For markets in secondary or tertiary demographic profiles, these make ideal franchised locations and there are very happy McDonald’s franchisees who own stores in more rural communities.
On the far end of the spectrum we have companies such as Anytime Fitness and Subway who are made up almost entirely of franchised businesses. Out of the 3100 Anytime locations, only 28 are corporate stores whereas of the 45,000 or so subway franchises, none of them are company owned businesses. These are brands that have completely transitioned from operating the business they once started to now operating as a franchisor supporting others in starting locations of their brand.
So why the difference? It really just depends on the business and the leadership behind that brand. Typically growth-oriented businesses tend to lean heavy on franchise expansion and push away from company owned growth which can be more capital intensive and slow-growth. While mature businesses which have expanded and begun to slow their expansion might focus more on a balance and buy back stores franchisees or open company locations along the way to maximize profitability in high volume markets. In either case, when considering franchising your business, company owned growth must also be part of the equation. I have found that early stage franchisors should consider keeping about 10% of their locations as company owned. It keeps them grounded, focused on operational issues, profitability and consistency. When a franchisor is able to show franchisees how to operate the business better because they are doing it themselves, it just carries more weight and validity. Whatever route you take when expanding your company, it’s important to weigh all of the options and decide what is best for you and your brand.
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