Switching Over to Franchise

Here's how to convert a dealer organization into an opportunity-charged franchise.

In recent years, a significant trend has gone unnoticed in many business circles. Dealer-based manufacturers have been converting to franchises in significant numbers. In fact, not only have dealer organizations begun to convert to franchises, but we've also observed an increasing number of licensing organizations making this shift.

Manufacturers have found that franchising allows them to exercise more control at the unit level while increasing dealers' overall commitment to both branding and to their product lines. Moreover, franchising allows manufacturers to develop additional revenue streams (fees, royalties, etc.) needed to pay for enhanced support provided to converting dealers. Such support can help the new franchised channel to differentiate itself and outperform competitors.

If It's Not Broke, Break It
So if you are one such manufacturer, why would you want to convert a perfectly good dealer organization?

If you're like most manufacturers, your primary impetus is to increase revenues and sell more products. The simple fact is, as a franchise, you can increase unit-level purchases by exercising more control over your distribution channel.

Chances are, your dealers promote their own name in their local marketplace and carry a number of competing product lines in an attempt to "better serve" their consumers. And there's probably little in the way of brand loyalty. The brand that gets promoted at the store level is often the one that offers the best opportunity for margin, forcing you to drive primary demand (through product innovation or your own increased advertising--both of which cost you money) or to lower costs. Either way, if you want loyalty, there's a cost associated with it: reducing your margins.

At the same time, because dealers operate under their own name, you're nearly powerless to control the way in which they operate. If you stop supplying a poorly performing dealer, you'll likely lose market share. If you don't, shoddy merchandising, dirty stores, substandard installation, inaccurate product claims, poor service and even price gauging may end up being "blamed" on you by consumers who simply don't understand the manufacturer/dealer relationship. All the while, these same dealers are clamoring for more support--which, if provided, again eats directly into your hard-earned wholesale margins.

If you face these problems, franchising offers the opportunity to be in control of your own destiny--and your own brand--in the consumer marketplace.

Franchisees operate under a brand designated by you. To the extent that you have a branded product line already, you may have some significant brand equity that can be capitalized upon within a franchise channel. More important, because your name will be above the door, you can now control the way in which the franchisee operates in exacting detail and standardize operations around "best practices."

By providing enhanced systems of operations, training, standardized marketing and other support services, you can improve unit-level sales and increase brand awareness while promoting a common identity--and your products--to the consumer. And, in some cases, you can even do this while obtaining additional sources of revenue and a contractual commitment for product line exclusivity and/or purchasing minimums. Done right, the incremental benefits provided to dealers (and the incremental returns that these best practices provide) can be substantially greater than any incremental fees associated with franchising--providing a win for both you and the franchisee.


Step on a Crack.
That said, however, you must address some significant concerns about franchising before determining if it's an appropriate business model for you. Since most manufacturers considering conversion will rely significantly on their existing dealer channel, this decision isn't one you can enter into without thoroughly examining all the implications of such a strategy.

First and foremost, you need to assess what impact the introduction of franchising will have on your existing channels of distribution. If, for example, you anticipate a significant number of defections among your existing dealer base, you need to carefully measure how these potential defections might affect the viability of franchising. You also need to decide which dealers you'd be willing to grant a franchise. You certainly want to be selective in this process, as each of these dealers will soon be wearing your brand and affecting your image in the eyes of consumers

And of course, you also need to decide on the ultimate disposition of any remnants of your current dealer channel that don't convert. In most instances, manufacturers have opted to run two channels of distribution simultaneously, although many (but not all) manufacturers will opt to stop awarding new dealerships once the franchise channel is introduced, and some will seek to rationalize the channel over time.

Assuming the current structure of your dealer channel will remain intact, a second major question you need to address early in the process is whether or not you can adequately differentiate the franchise channel from the dealer channel. Given the increased control (and perhaps even fees) the franchise channel will command, you need to accurately assess the "incremental value" you can provide to converting franchisees in the form of best practices, branding and support--and, to the extent possible, assess how that incremental value translates into incremental returns for your converting dealers.

The provision of this value can be complicated by a concept we call "channel bleed"--where pieces of the exclusive value proposition designated for a specific channel (such as franchising) migrate over time into a channel that is not entitled to them. For example, any employees who are charged with serving the dealer channel, upon seeing greater results from a newly instituted best practice, will often want to implement that same best practice within your dealer channel--especially if their compensation is affected by dealer performance. But if all the pieces of the franchisee's value proposition are given away to the dealer channel without charge or control, you'll find it virtually impossible to sell franchises without incurring significant ill will--especially if dealerships are still offered. Thus, you need to spend some time developing appropriate internal controls to ensure this new channel maintains the integrity of its value proposition.

You also need to address the question of channel conflict between existing dealers and the franchise channel. Questions related to territory, of course, will top the list. As a franchisor, you need to decide how to respond to the allocation of territories when two or more qualified dealers are interested. And, of course, when a franchise and a dealer are located nearby, a raft of additional issues will arise around the subject of preferential treatment.

Again, assuming you'll maintain two channels (at least in the short term), the name issue is also significant. Presumably, you'll want to capitalize on the brand equity that has been established in your product lines, and thus incorporate the brand name into the DBA your franchisees use. If the existing dealer channel uses the brand in its advertising, however, you again need to focus on differentiation so the best practices of the franchise channel don't get confused with the advertising done by the dealer channel. Unless you want to develop an entirely new brand, you may opt for a "premium channel" designation, such as XYZ Platinum.

In making the decision to franchise, you also need to understand whether your dealers are even willing to re-brand. In some networks, dealers may have a tremendous amount of emotional investment in their own names, creating further complications. In some cases, this emotional investment may dictate a need to "co-brand" franchised locations, or may even have more profound implications for the introduction of the franchising.

And lastly, you want to take into account the different nature of the franchise relationship. You need to make specific decisions about the support services you'll provide--and how you'll provide these services--before finalizing your decision to franchise.

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Mark Siebert is the CEO of the iFranchise Group, a franchise consulting firm that has worked with 98 of the nation's top 200 franchisors. He can be reached at 708-957-2300 or at info@ifranchise.net.
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