Phil Blain is a principal at Franchise Alliance. Established since 1990, Franchise Alliance is a firm of professional consultants across Australia specialising in the development of new Business Format Franchise systems.

Phil Blain is a principal at Franchise Alliance. Established since 1990, Franchise Alliance is a firm of professional consultants across Australia specialising in the development of new Business Format Franchise systems.

Phil Bain writes a very interesting article about Franchisor’s running company owned stores and they advantages thereof. The article is posted at Franchise Chat. Phil is a principal at Franchise Alliance and holds the Accredited Franchise Executive qualification (A.F.E.) from the FCA programme through the University of New South Wales, in Austrailia.

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 of development.
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.

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.

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.

Generally, the recognised advantages of having franchisor operations alongside those of franchisees are as follows.

  1. The franchisor has the opportunity to trial new products which lessens the risk of inflicting dud products on the franchise system.
  2. 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”.
  3. The franchisor operations provide a healthy breeding ground for franchisor staff to grow and develop into highly knowledgeable support staff for franchisees.
  4. The franchisor has a ready made school to train new franchisees.
  5. 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.”
  6. 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”.
  7. 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”.

Read more at: Franchise Chat