A new study is providing fresh insights into the question of whether having franchisee operated businesses is a more effective retail strategy for franchisors than running company owned businesses. The research, conducted by the Franchise Relationships Institute (FRI), was aimed at testing a common belief in the franchising sector that franchised stores perform better than company operated stores under similar conditions.
The research, which looked at what happens when businesses are converted from company to franchisee operated, or franchisee to company operated, included 19 established retail networks that control over 3,000 franchised and company owned stores.
“Most franchisors enthusiastically talk of stores achieving an immediate lift in sales of over 20% when they change from being managed by the company to being operated by a franchisee” says Greg Nathan, Research Director of FRI. He says franchisors and franchise consultants also regularly claim that franchisee operated stores outperform company stores due to the “skin in the game” factor where franchisees invest their own money in a business and are responsible for its profits or losses.
“Our hunch was many of these stories are exaggerated to suit the biases of people who want to push the franchising model” he says. “So we decided to put the proposition to the test using longitudinal data of stores that were converted from one model the other.”
Nathan says the study did in fact find that when businesses convert from being company managed to franchisee operated, performance does improve, especially in the areas of sales growth and cost control. On the other hand performance generally dropped when stores went from franchisee operated to company managed, especially when the business had been performing well as a franchise.
But the story is more complex because another part of the FRI study involved comparing clusters of franchised and well-resourced company stores within the same franchise system over the same time period. In these cases no significant differences were found in performance. Nathan says this shows that company managed operations can be a good business strategy for franchisors under certain conditions.
“Where a franchisor is willing to invest in solid management support and incentive systems for company stores, and the locations of these stores are strong enough to generate the sales to support this type of investment, they can perform as well or better than franchised stores” he says.
The next part of the research will involve a series of best practice sharing forums for franchisor executives in Melbourne, Sydney and Brisbane. Details of the research and the Forums can be obtained from FRI’s website, www.franchiserelationships.com.
