INVINCIBLE FRANCHISES FACE TOUGH CHALLENGES
by Callum Floyd

Franchising has had an unquestionable impact on many countries economies and is widely acclaimed for its contribution to GDP, retail sales, job creation and training. Many chain operations utilising franchising have grown large franchise networks, and some global companies like McDonald's (with 29,000+ restaurants in 119 countries), Subway, Blockbuster and Century 21 have reached 'King Kong' or invincible proportions - or so we may believe, given their level of size and brand awareness.

This perception of invincibility is, however, misplaced. Indeed, the business environment facing most companies is actually exceedingly tough and challenging, and some fundamental changes to franchise business concepts have been made. There are several reasons or factors for this situation. This article explores four factors (namely, competition, technology, customer needs and the legal environment) that are currently providing franchise companies with the impetus to undertake substantial change.

Competition is intensifying in many sectors. Perhaps nowhere is competition more prevalent than the market for fast food - which also happens to be where the greatest brands in franchising preside. As illustrated with Domino's recent entry into the New Zealand pizza market, increased competition generally means less sales and price wars develop as companies attempt to protect and/or build market share. Competition based on price, however, is rarely productive, and inevitably results only in an erosion of profit and investor patience.

Smart companies operating in competitive environments are working very hard to operate more efficiently, test high yielding new initiatives, and differentiate themselves from competitors. Recent initiatives by McDonald's, for example, include menu changes, operational changes, restaurant layout tests, operating certain support functions offshore and the introduction of new services like wireless Internet access. McDonald's is also promoting a much greater focus on quality in a further attempt to differentiate itself from others. Interestingly, the increased emphasis on quality monitoring has reputedly led more US franchisees to leave the system in the past twelve months than had exited in the previous five years. The quest for quality is obviously a serious one. Globally Starbucks, the café chain, is also testing a variety of initiatives in an effort to increase both turnover and profitability. Examples include testing Internet access in NZ, and removing comfortable seating in order to increase throughput in the UK.

Franchised chains also face challenges through advancements in technology. New Internet and email advancements have provided an added and effective new medium for internal communication, as well as an important marketing opportunity. On the flipside, however, the Internet has also spawned new competitors, like Amazon.com the Internet retailer, to compete with many retail and service-based bricks and mortar operations - often with lower overheads. Other technological advancements, like automated stock management systems, customer relationship management tools, global positioning systems and digital closed circuit television variously provide franchised operations with opportunities for improved efficiencies, security, and increased revenues - but also require effort and expertise for successful implementation throughout franchised chains.

Consumer wants and needs are also providing a moving target for many franchised operations. Coupled with the threat of lawsuits and legislation, an increased number of consumers watching their weight and/or seeking to eat healthier has resulted in radical changes to restaurant menus. In US examples, McDonald's has introduced fruit, salads and wraps, Wendy's is testing milk and fruit with its Kids Meals, Burger King is introducing low-fat baguette styled chicken sandwiches, and Subway has a new Kids Pak substituting fruit for cookies and 100% juice for fizzy drinks.

Clearly, there are a number of trends and changes in the air that must be considered by prospective/existing franchisors, franchisees and their advisors. Some trends do require quite fundamental changes to the way businesses operate. In franchise terms, this means a big job testing, gaining acceptance and implementing changes throughout an entire franchise company involving multiple business owners.

Prospective franchisees should attempt to assess the companies and markets they are interested in before setline on an individual franchise opportunity. A franchisor should know its industry, and trends affecting it, and demonstrate a clear vision for how future challenges will be addressed.

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