Franchising is an arrangement where one party allows another party the rights to use its trademark or specific business systems and processes. This allows the party to produce and market a good or service within certain specifications. The party granting these rights is referred to as the franchisor, and the party purchasing the rights is the franchisee.
The franchisee typically pays a one-time franchise fee and pays a percentage of sales revenue as a royalty continuously. In return, they are provided a licensed privilege to do business and receive assistance in management and digital marketing.
The franchisee derives many benefits from purchasing these rights:
- The franchisee gains instant name recognition by using established trade names and trademarks.
- They save resources on research and marketing since they buy the rights to tested products.
- Businesses often do not have to re-design their physical locations as a building and décor framework already exists.
- There are transferrable management and training procedures that will maximize efficiency in a shorter time.
- The franchisee is entitled to advances in new products and helps promote existing ones.
- Because of the proven management and operation system, the franchisee does not have to go through the trial-and-error mistakes many new business owners make.
- Franchisees also enjoy low prices in buying materials and services from the franchisor, which provides them in bulk to their franchisees.
- The franchisor also gains from expanding its revenue base and increasing exposure to its brand and products.
- Franchising allows the franchisor to maximize earnings with minimal spending on acquisitions, repairs, and maintenance.
- The franchisor accumulates a network of affiliated dealers that distribute their products.
- Constant communication with franchisees allows the franchisor to troubleshoot problems and identify trends before other competitors in the industry.
- Being a franchisor is also great for successful small businesses that do not yet have access to large amounts of capital but would like to expand.
- Being a franchisee is suitable for business owners who want to run their business but do not want to start entirely from scratch.
Challenges Franchises Will Face With Marketing and Management
1. Demonstrating Effective Leadership
Franchisors should be in communication with their franchisees, showing empathy and encouraging open communication. In addition, franchisors should be transparent about concerns across their franchisees and promote collaboration.
Drawing insight from across the network of franchisees will be critical as businesses reopen and are ordered into lockdown again. In addition, franchisors can use advisory councils composed of franchisees to demonstrate leadership and receptiveness.
A failure to lead during this time could result in increasing challenges to earnings, a disjointed policy, and a disgruntled set of franchisees. Franchisees must also demonstrate leadership on the micro-level, encouraging employees to voice concerns. They can also share best practices with franchisors, allowing them to be applied franchise-wide.
2. Ensuring the Financial Viability of the Franchise
Any franchise operating in the current pandemic climate understands working in a reduced revenue environment. However, they must continue to assess how much earnings are needed to survive and how they will adapt financially as rules change.
For example, restaurant franchises in states that have reopened realize the importance of temporary investments in outdoor seating. Franchisees should be doing everything they can to cut costs and survive. Franchisors should understand the urgency on the bottom level and show flexibility with payment and opening deadlines.
3. Providing Relief to Franchisees
Franchisors may consider reducing the royalty rates to help franchisees in the current climate. However, they must also balance franchisee concerns with their concerns. Franchisors without significant cash reserves and less access to capital may not be as flexible with royalty abatements.
Franchisors and franchisees will face different financial goals. While franchises try to survive the pandemic’s expected endemic, franchisors seek to protect their brand and minimize widespread closures.
4. Ensuring Lines of Communication between Franchisors and Franchisees
A lack of an organized communication strategy can seriously harm the symbiotic relationship between franchisors and franchisees. In addition, a lack of practical guidance from the top can result in confusion and isolation on the part of the franchisee.
Additionally, if franchisees fail to communicate with franchise management, the franchisor will fail to recognize industry trends and miss opportunities to implement best practices. In the current pandemic, franchisors should have a carefully crafted message that acknowledges their responsibility to protect the safety of franchise owners and employees.
5. Clear Messaging to Franchise Customers
Another reason why communication between franchisors and franchisees is critical is that it impacts consumer perception about how the overall brand is doing. Customers value consistent messaging about how a franchisee plans to address an issue or problem.
Ensuring businesses can adapt their operations to the ongoing health situation will require them to convince their customers that their health and safety are protected. Doing this requires coordination between franchisees and franchisors. Collaborating to send a clear message will be essential to maintaining customer relationships that will survive the pandemic.
6. Increased Importance of Public Relations
While franchisors must be concerned with financial viability and maintaining cash flows, too much cost-cutting will risk long-run damage to the business’s reputation. Franchisors worried about their long-term reputation may consider offering their employees expanded benefits.
7. Building Franchisee and Employee Loyalty
For example, enabling workers to take paid sick leave for possible exposure and bumping up pay schedules are ways to demonstrate organizational empathy. Implementing increased employee benefits shows that the franchisor is committed to preserving the workforce.
It will also help build future loyalty not only from employees but also from the public. The public is watching how franchisees treat their employees during this expanded need, so businesses must weigh maintaining their image with financial concerns.
8. Maintaining an Adaptable Franchise Model
In the food services franchise industry, franchises have been forced to adapt to deliver their goods and services. When businesses began to shut down this past spring, many franchises proactively shifted to delivery-only and to-go business models.
Franchisors who tried to hold out faced public scrutiny in being perceived as putting the community and employees at risk even if legal requirements were being followed. Therefore, one challenge is anticipating changes and being among the first in the group to move.
In this age, it is better to err on the side of caution, even if that puts a more significant financial toll on the franchise. This makes it critical to have a flexible model and anticipate multiple operating environments.
Since the franchisor distributes operating models, they are responsible for adopting new models to reflect the new reality. Therefore, they must carefully communicate these changes and how customer interactions should look. For example, developing a uniform cleaning policy and a standard response to possible exposure requires effective communication.
9. Maintaining Sufficient Capital for New Franchises
In the first years of a franchise, the costs of supporting franchisees typically exceed revenue from royalties and fees. As a result, new franchises will face the challenge of building enough capital to cover the infrastructure needed to support their franchisees. This includes support for marketing, accounting, and operations.
Franchisors should know these costs and how many franchisee units can afford to operate at a loss or break even. Therefore, they should be cautious of expanding and consolidating franchisees if necessary. It is better to maintain the same level of support for fewer franchisees than to provide weak support for more franchisees.
10. Retaining and Recruiting the Right Franchisees
In building a franchise network, franchisors will develop strong relationships with some franchisees and weak connections. They must ensure that franchisees with whom they maintain strong relationships continue to be supported through the current health crisis.
Franchises should be wary of recruiting new franchisees to recoup losses quickly. Without proper due diligence, the franchisee may be poorly run, and it may divert support from successful franchisees. On the other hand, building a team of happy franchisees will provide invaluable feedback that is needed more than ever.
With the advent and maturation of the internet, brick-and-mortar retail operations seem to be fading in popularity as people order products and groceries online. Books are delivered via the mail or downloaded to a tablet, and eateries are shutting down in droves with the pandemic. Such things as digital consumption of delivery of goods and services and the growing need to maintain social distance can wreak havoc on established business models involving franchising. However, franchising itself is not a business. It is a type of business model. As such, franchising is alive and well, as they say, even if it is undergoing various transformations.
Franchising Trends
1. Health
Perhaps because of the sudden emphasis on remaining healthy, franchises focusing on a combination of health and wellness are expected to thrive throughout 2023 and beyond. Franchises concentrating on exercise and spa experiences are expected to do well, as those focusing on high-tech markets like bio-hacking. Finally, franchises that offer sports therapy are expected to maintain high popularity among people who can position themselves within this niche.
2. Learning
The pandemic has pounded schools, and a healthy segment of parents is not interested in returning their children to an environment where they can ultimately carry a virus back home. As such, home-education and parent-teaching franchises are expected to gain and maintain popularity.
Specifically, franchises that provide exceptional learning aids and online learning solutions are beginning to thrive and are expected to be among the top performers in 2023. In addition, tutoring franchises are also likely to experience increased popularity as some teachers are not likely to return to the classroom. Although this shift from a traditional educational environment to a home-school climate will not entirely disrupt educational institutions, the change will be significant enough to provide double-digit growth and profits for various learning-based franchises, including the following.
- home gyms
- self-defense
- computer programming camps
3. Eateries
Although franchises that rely on an eat-in or sit-down experience are increasingly becoming common casualties of the pandemic, wheel-based restaurants or eateries see double-digit growth. Serving such fare as submarine sandwiches or pizza, hot-food vans are becoming valuable investments to anyone wanting to launch a franchise.
Additionally, these small operations are more successful than a typical brick-and-mortar restaurant as the overhead is substantially lower. Consequently, in terms of market, food-delivery franchises can quickly become a mainstay business for small towns that could not otherwise support a location-based business.
4. Technology
Although few franchises center around a technological product, relying on existing technology to increase sales helps establish a back-to-basic formula for business. For instance, video conferencing is being used successfully by gyms and paint companies needing to provide customers with instant quotes. In addition, franchises that center their deliveries around an app are also experiencing a more consistent uptick in their sales. Finally, virtual conventions are becoming so popular that virtual seats will likely still be an option even when in-person attendance is once again commonplace.
5. Relief
One of the most critical needs for an existing franchise is to receive assistance from the parent company until the pandemic is under control. This assistance might involve deferred franchise fees, as the ability to pay these fees is a genuine concern for franchises experiencing fluctuating revenue levels that do not adequately meet a fixed-fee system.
Additionally, leadership by the franchisor should include measurable problem-solving to meet the new needs of a product or service fulfillment. Some solutions involve converting counter service to drive-thru windows. Many food-service franchises and even junk-retrieval franchises attempt to rethink their delivery system and implement no-contact fulfillment methods to ensure customer safety.
6. Use of social media to advertise community accountability
Mainly for consumers aged 20 to 30, corporate ethics and morality determine factors that help people decide what to buy and from whom.
Such buyers are increasingly loyal to franchises that donate to charities or help protect the environment. Additionally, franchises that actively recruit a diverse workforce and implement non-harassment policies will increasingly attract better employees. Finally, franchisees and franchisors are increasingly attaining better market penetration by sharing their stories of community accountability via social media to reach such consumers.
7. Viable supply lines
The most successful franchises will continue a long-proven strategy to heal the environment while making current franchise operations more environmentally viable. Doing this involves using green energy and products, but the most critical factor in this strategy is making supply lines more efficient. This combination is compelling because social responsibility attracts customers while the more sustainable supply line serves them. Consequently, even non-green franchises can see huge profits by making small changes in their production or delivery processes.
8. Protection against the pandemic
Pandemic-safe franchises encourage social distancing, but many travel franchises have social distancing built into their business models. For instance, various RV and campsite franchises are experiencing tremendous growth as people are attempting to overcome the stir craziness that sets in during quarantine. Many family and friends explore nature via travel trailers and recreational vehicles to remain safe. The destinations are away from the city and toward the vast outdoors of rural America.
9. Diversity
Multicultural franchises will likely have a better chance of launching and thriving than non-diverse opportunities. This trend is because a broader cultural consciousness is evolving, and the fact that people finally recognize that multicultural markets are largely untapped.
In particular, franchises that can tap into the desire for ethnic cuisine while helping the environment and maintaining strategies to keep people safe from the pandemic will likely thrive throughout 2023.
10. Home renovation and delivery as essential services
Serving a vital need involves the end product, which must be critical to the buyer’s situation. Food, for instance, is necessary. However, it also requires delivery, which means how the product is fulfilled.
The franchises predicted to thrive will follow pandemic-safe delivery methods. Therefore, the best businesses focusing on home renovation while accomplishing pandemic-safe delivery methods will trounce the competition.
Top 10 Statistics and Forecasts For Franchises
- The top two franchise industries outperform all others combined – For 2023, the top two franchise categories are personal care and travel. Personal care is projecting a rate of growth of 111 percent. Travel is projecting a growth rate between 214 percent and 318 percent.
- Travel equates to low competition – Restaurant franchises are the top attraction for anyone interested in opening a franchise. However, they are only projecting a growth rate of 28 percent. Conversely, only three percent of new franchisees open a travel-related franchise. However, as noted above, travel franchises are slated for triple-digit growth. Consequently, you will likely have less competition and more growth with a travel-related business.
- Size depends on the definition – McDonald’s is a most prominent franchise in terms of revenue. It currently brings in an average of $1,800,000 gross profit per restaurant. With over 38,000 restaurants, the franchise is the world’s top earner. Regarding the number of restaurants, Subway operates over 41,000 locations, making it the most common eatery on the planet.
- Elite – The total number of franchises in the United States tops out at approximately 750,000. Another way, the number of people in America who own a franchise is roughly .002 percent.
- Top franchises are food – Although you can buy into any industry, out of the top 10 most profitable franchises, seventy percent are in the food industry.
- Real estate – Home-selling franchises are still taking a beating after the 2020 pandemic. In total, the average brokerage can expect a loss in revenue ranging from .7 percent to 2.6 percent. For franchises like RE/MAX, this loss totals $71,000,000. That said, pending contracts have increased by 16 percent, meaning homes are, indeed, selling, but they are selling for lower prices.
- Just shy of a quarter-million – Although you can start many low-cost franchises for approximately $10,000, the average cost to open and successfully launch and maintain a franchise ranges between $50,000 and $200,000.
- Average net worth – Being able to buy into a franchise is only the first financial obstacle a franchisee will face. The most significant is attaining sufficient net worth to be approved to purchase a franchise license ultimately. The average net worth of a new franchisee ranges from $30,000 to 300,000.
- Average salary – The profit a business makes is much different than the salary a franchisee owner pays him or herself. Profit must be partially put back into the business to grow it adequately. Of course, the other part of the profit will go to overhead, including employee and owner salaries—the average wage for food-related franchisees peaks at approximately $120,000 annually.
- Uncharacteristically high survival rate – For new businesses, the overall success rate is approximately 15 percent, which means one in six will eventually go under. However, this performance reverses itself for a franchisee. The average success rate is roughly 90 percent, meaning there are very few setbacks a franchisee will experience severe enough to cause the business to fail.