Franchisors Are Digging Their Own Graves Through Inaction

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First, let me just say I’m lazy. I didn’t bother to ask a large number of people on the expected roles of franchisors in the retail business, so I just copied this list from a website instead:

The roles and responsibilities of a franchisor

  1. Business advisory and supportive role

The franchisor is responsible for providing adequate training on a continual basis to franchisees. Franchisors are also responsible for providing ongoing support, whether it’s by listening and responding to queries, or providing the necessary tools and resources. The franchisor also plays a troubleshooting role for any problems that may arise, such as technical difficulties with a product.

  1. Focus on ongoing business expansion and innovation

One of the many benefits of buying a franchise is that the franchisor shoulders the responsibility of innovating and staying ahead of the competition. This includes new and updated products, and monitoring competitors and industry trends.

  1. Be a well-oiled machine

A well-established franchise business structure plays an integral role in helping both the franchisor and franchisee. Effective and standardized operating procedures are necessary in providing guidance and unity across all the franchise businesses. This is why it’s important for the franchisor to implement a system that can easily be adopted by new franchise partners.

  1. Brand reputation management and growth

One of the other benefits of buying a franchise is that the business will already have a reputable brand or trademark. The franchisor is responsible for maintaining overall brand reputation, awareness, and development. This eliminates one of the key steps in setting up a new business.

It seems good enough for our purposes here. So if you can forgive my indolence, we can continue. 

When we look at these expected, theoretical franchisor value-adds, we have to ask what the franchisors are doing in reality. Are they providing adequate value in a changing landscape? Are they successfully upholding their end of the bargain? We’ll begin by dissecting each of the stated responsibilities against the status quo and then postulate how these approaches will fair as the market changes.

1.          Business advisory and supportive role

Franchisors are supposed to provide training on a continual basis, including the necessary tools. We estimate that, at least today, 95% of franchisees are finding the selecting the necessary tools to remain relevant. They’re teaching themselves how to use these new tools and are not actively being supported in these endeavors by the franchisors.

It thus seems the opposite is occurring: franchisees evaluate and vet new systems that the franchisor then adopts after many months of proof points and contentious input.

2.          Focus ongoing business expansion and innovation

Franchisors own the responsibility to innovate and stay ahead of the competition. But again, it’s the franchisees doing all the heavy lifting. Marcato’s complaint against Buffalo Wild Wings gives teeth to this very argument: corporate is dragging its feet and doing every possible thing to the utter disservice of its franchisees.

More simply, one could look to see why XYZ brand has online ordering in New York, but lacks the feature in Los Angeles. That’s because the franchisee of XYZ in New York has realized the product benefits, while the corporate stores in Los Angeles are recalcitrant. This adds confusion, complexity and drives away customers who are increasingly demanding more convenience. By lacking online ordering in all their locations, XYZ corporate is giving customers a reason to write off XYZ categorically:

If I find you don’t have online ordering at one location when I need it, I’ll just assume you don’t have it when I need it again and write you off. The market is saturated, and I will easily find substitutes with a quick Google search…

3 .         Be a well-oiled machine

This needs serious reconsideration as the brick and mortar world goes through the largest paradigm shift since the advent of QSR. Customers are now ordering online and seeking delivery options. Implementing these business model changes is not trivial: it requires a total rewrite of the logistics and operations within a store’s four walls. Look no further than ExactTarget’s former founder Chris Baggett who, after exiting to Salesforce for $2.5B, decided to apply his learnings of software optimization to a delivery-only restaurant concept.

Franchisors will need to decide the strategic position of their brand, and how to optimize the customer experience accordingly. They will need to significantly update their operating manuals as they reconfigure their stores.

The most memorable franchisor-led approaches I’ve seen in this regard have been at Domino’s and Panera, with the latter identifying the right problems but choosing the worst possible path of execution. But at least they’ve done something. Why, for instance, has olo been around for over 12 years and McDonald’s is just now thinking about online ordering? From what franchisees have told us, McDonald’s forbade franchisees to do anything with online ordering (though some quietly did anyhow).

4.          Brand reputation management and growth

Franchisors spend a lot of money building a brand. They also get involved in larger promotions, menu pricing and new offerings. Of course, most franchisors don’t have access to much POS transaction data, so when they come out with these initiatives by definition they haven’t put any real analytical rigor behind them.

And when we consider where the market is going, one has to wonder if franchisors are making themselves obsolete by remaining unsophisticated.

First, the current trend.

Franchisors are ridding themselves of stores, franchising as many as they can. 3G franchised as many of their corporate Burger King stores as possible, and there’s a long list of other examples. This means franchisees are now controlling the brand direction as they own the majority of units. Sun Capital, a PE firm, is an example of someone rolling up units to exert their size and dictate strategies to their franchisors.

Now for the only future trend that matters: POS is going to cloud, and this is how it can crush the value franchisors are supposed to offer. Here’s how that matters to the four values franchisors are supposed to add.

1.          Business advisory and supportive role

Service for cloud products get easier, not harder. Remote monitoring, simplified systems, and more sophisticated providers will make less pain of prior headaches. Franchisees are already needing to train themselves on operational changes from online ordering and delivery, so franchisors have little to offer in the way of input. As we’ll see in the next bullet point, franchisees are leading the way with new innovations.

2.          Focus ongoing business expansion and innovation

With access to aggregate POS data (and external data), site selection becomes a much more automated process driven by analytics. Companies like TXN and SafeGraph can build relevant profiles for new store openings much better and faster than franchisors ever could. And since these third party firms will need access to aggregate POS data, it’s the franchisees again who have the data and can do something with it.

Innovation happens 1000x faster now that POS data is liberated. Integration to new, innovative services take a matter of seconds via API. Franchisees don’t need to wait on laggardly corporate to tell them what they can and can’t do since it’s such an easy integration to pilot out potential solutions.

From open POS access, franchisees will be able to leverage machine learning to improve labor, inventory, menu/item pricing, new item introduction, hours of operation and promotions (more on this below).

3 .         Be a well-oiled machine

Franchisors are suffering from analysis paralysis. Not only do they not have much of an idea for where the market is going (if they do they have certainly failed to show any public conviction), they have much less confidence in testing potential solutions because they lack access to POS data. How are they going to determine the economics of a potential business model shift if they can’t monitor the operational impact on the business to being with?

Because franchisees again have access to operations data in their POS, they will be best-suited to make business model decisions. Working together, franchisees can figure this out more efficiently than an operationally-removed franchisor.

4.          Brand reputation management and growth

Once the POS data is liberated, merchants will be able to plug into automated marketing platforms like Google and Facebook. With access to this data, these giant marketing companies will be able to recommend promotions and even measure lift from your own sales transactions.

Just like machine learning is making the operations side of the business prescriptive, marketing will also become much more prescriptive. A/B testing of campaigns will be done automatically, recommending initiatives that will best increase revenue of whatever KPI is of interest.

And because cloud POS data is becoming more available generally (i.e. from even outside the franchisees of the brand in question), the entire ecosystem is going to get smarter.

Now granted, there won’t be anyone throwing lots of money on media spend for general brand awareness, but really how hard is that? Couldn’t the franchisees just hire an agency at a fraction of the cost of the franchisor fees?

By refusing to acknowledge industry changes and get sophisticated on where the market is going, franchisors aren’t doing themselves any favors. We might even say they’re digging their own graves.

What needs to change?

Franchisors need to get smart on data. Data is the future lifeblood of the industry. You think Amazon and Google sit around and make all their decisions with “gut feelings”? Of course not! They’re using data to measure and optimize every part of their business.

Franchisors need to recognize that the POS is the hub for data extraction and integration. I can’t imagine running online ordering or delivery where some poor schlep needs to manually key in orders to the POS from an online portal, but this represents the preponderance of use cases. Why? Because most POS systems are a pain in the ass to integrate into. Franchisors should standardize on POS systems that are open to integrations and aligned with where the industry is going.

Franchisors need to be more open to learning how to improve from any source that offers it. Put aside ego, fear and uncertainty.

If you don’t get better, your franchisees will do it without you.

RIP to franchisors who don’t pay homage to the changing market.

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