Most franchisors and franchise consultants take it for granted that a franchised outlet will perform better than a corporate outlet because of the franchisee's higher level of motivation and the owner-entrepreneur's on-site presence.
However, there are no reliable statistics to confirm or refute this proposition, which guides many franchisors in their decisions.
In an interesting article published in 2014(which you can read by clicking here), Australian psychologist, author and franchise expert Greg Nathan reports the findings of research conducted by his team on 35 franchise networks operating a total of almost 7,000 outlets, 18% of which were corporate(either operated by the franchisor itself or by a subsidiary of the franchisor). For the purposes of this research, Greg Nathan and his team also collated data from 71 outlets that, for various reasons, had to be converted from corporate to franchised outlets or, conversely, from franchised to corporate outlets.
Here are the six findings of Greg Nathan's research:
- Sales of corporate outlets increased when they were converted to franchised outlets, but only by an average of 6%. Conversely, sales of franchised outlets fell by an average of 4% when they were converted to corporate outlets. This confirms that franchising can deliver better sales performance, but far from the 30% to 40% estimated by many franchisors;
- Franchised outlets posted higher profitability than corporate outlets, mainly due to better control over labor costs, which were on average 10% higher for corporate outlets;
- The state of the outlet before conversion(from corporate to franchisee, or from franchisee to corporate) has a considerable impact on its performance after conversion. For example, poorly run franchise outlets saw their sales increase following conversion to a corporate outlet. On the other hand, a well-run franchisee outlet saw a significant drop in sales following its conversion to a corporate outlet;
- Supporting corporate outlets represents a significant cost for franchisors. According to Greg Nathan, supporting a corporate outlet requires 4 times more time and resources from the franchisor, especially for human resources management and employee training;
- While all the evidence suggests that franchised outlets generate more sales and show better profitability than corporate outlets, many franchisors successfully operate corporate outlets that are highly profitable when well planned and managed;
- Finally, Greg Nathan noted a certain paradox in terms of compliance with franchisor standards, customer satisfaction and marketing. While corporate outlets were more compliant with the franchisor's standards, programs and systems, making them easier to manage, franchisees are more committed and proactive in their efforts to grow their customer base and improve customer loyalty, and offer some resistance to franchisor programs that they feel are not effective for these purposes, which presents a real management challenge for the franchisor, but also ultimately leads to better results.
A few years ago, I had also read the results of(somewhat complex and theoretical) university studies carried out by American researchers on the economics of franchising, many of which concluded that, in order for a franchisor to achieve the best possible profitability, around 2/3 of his network should be made up of franchised outlets and 1/3 of corporate outlets.
I invite you to contact me(by e-mail at jhgagnon@jeanhgagnon.com or by phone at 514.931.2602) if you have any questions or comments.
Jean H. Gagnon, Ad.E.
Lawyer | Mediator | Arbitrator
jhgagnon@jeanhgagnon.com
514.931.2602
