Starting Up in an Urban Market
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Q: I live in an urban area and am interested in starting a franchise, but I don't see many franchised brands, other than fast food, in my neighborhood. Are franchise companies interested in opening up in the inner cities? How do I find them? Are there any advantages to opening up a franchise in an urban market?
A: A few years ago, a major franchisor called us to discuss expanding its franchise internationally. The company had stores open all over the United States, and executives were beginning to worry that it would run out of locations at home and wanted to be prepared. A few months into the assignment, two things became apparent: 1) the decision to go international was right, would take some time and would require the franchisor to invest heavily in developing an international expansion and support program, and 2) the company was looking in the wrong places at home.
We invited some of the executives to take a trip with us and spent the next two days driving through Harlem, Brownsville and other inner-city markets in New York. By the afternoon of the second day, the conversation in the car had become interesting. Like a mantra, in each neighborhood we visited, all they could say was, "Where's the competition?" They had gotten the message. The expansion jewel for major companies in the United States is not Berlin or Beijing; it's at home in the emerging markets.
Other than the fast food industry, most branded retailers, service providers and restaurants are just now discovering the emerging markets. They're finding that people who live and work in these areas spend money differently than their traditional customers do. Even where the average income in the area is lower, per-capita spending on certain products or services may actually be higher than in their suburban stores. The benefits don't stop there:
- Retail space: Large areas of the inner cities are underdeveloped, and often locations can be found at a lower cost than in the suburbs. Not only are retail locations available, but so is warehouse space, and many of these locations are near highways and other well-developed transportation networks.
- Labor: Available labor is everywhere. With a shortage of retail and service providers, many of the residents in the emerging markets travel away from home to find jobs. Local jobs are attractive to everyone.
- Outside opportunities: Even where demand is not yet strong for their products or services in the local community, many companies-particularly those that travel to their customers, such as janitorial, maintenance, repair and delivery companies-are finding they can service their mainstream markets from the inner cities.
- Government programs: The federal government and most states and cities have programs to assist new businesses, including tax advantages, training programs and grants.
Aside from all these advantages, the lack of branded merchants often means that the merchandise available locally is of poor quality, and people have to travel outside their neighborhoods to get what they want. Local merchants mean a place for local customers to shop locally. Having a pent-up consumer demand the day you open your new location is every businessperson's dream.
Getting an opportunity to sell their products and services in new markets is clearly important to franchisors. But there's an advantage to expanding in the emerging markets that may not be as apparent: Franchisors already have a support network in place domestically. Their headquarters and field operations, distribution facilities, training programs and everything else they use to assist franchisees is already established, and they can leverage that in new markets. That means their investment in supporting franchisees in Harlem in New York City or the Crenshaw area of Los Angeles is a lot cheaper than locating franchisees overseas and providing them with the same services.
Most franchisors today are starting to look for franchisees for the emerging markets. Many have special programs to help those franchisees get started. So where can you find these franchisors? A great place to start is the Emerging Markets department of the International Franchise Association. The IFA has invested heavily in training programs to inform franchisors about inner-city opportunities and has recently launched a Diversity Training program sponsored by Coca-Cola Co. You can also find plenty of franchise information and news at Entrepreneur.com's Franchise Zone.
Most important in making your selection is to visit the neighborhoods you're interested in and determine what demand is not being met. You're likely to find opportunities in family dining establishments, printing and small-business support, children's clothing, tax preparation, pharmacies and so on. Discuss with the franchisor what markets they're interested in and what types of support programs they have available for you.
Michael H. Seid, founder and managing director of franchise advisory firm Michael H. Seid & Associates, has more than 20 years' experience as a senior operations and financial executive and a consultant for franchise, retail, restaurant and service companies. He is co-author of the book Franchising for Dummies and a former member of the International Franchise Association's Board of Directors and Executive Committee.
Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.