When franchise systems map out their expansion plans, they'll either choose a fast, multiple-unit-openings-at-a-time method or opt for a slower, more manageable growth strategy. Both options have their advantages and disadvantages, which can make choosing between these two growth strategies tough for franchisees.
How do you know if you're better suited to a fast- or slow-growth system? Franchise Zone spoke with Mike Duncan, principle with Lexington, Kentucky, hospitality consulting firm KMH Partners LLC, a consultancy that has worked with casual-theme restaurants on their franchise development plans, about the pros and cons of these growth options.
Is there any one right answer about whether a fast- or slow-growth franchise system is better?
I don't think there's one right answer. It depends on the individual goals and needs of the franchisee.
What are some of the benefits of going with a franchise that's experiencing fast growth?
You can feel good about their success criteria. There's a large franchise database you can talk to to understand the pros and cons of the system, and you can feel pretty good, generally, about their unit level economics. Something is fueling that growth, whether it's consumer demand for the product or a strong financing structure.
What are some of the downsides of going with a faster growth system?
There are several. One is that you're certainly not going to get individual attention. If you're a successful multiunit operator, you don't need that kind of attention, but if you're not, you [have to realize] as this franchise grows, it's going to generally be outstripping their resources in terms of their ability to assist the franchisee. You may wind up with a territory you're not comfortable with; the market area you want may be sold.
Who would be an ideal franchisee for a faster growth system?
People with experience in this particular field, who have had some success in a franchise system, understand how to get things done within a franchise system and don't have a problem with the lack of attention they might receive. They obviously, as in any franchising situation, need to be well capitalized and to truly understand the product or service they're providing.
Sometimes with faster growth systems, there is a fear of oversaturation. How can potential franchisees be sure the system they join won't grow old fast?
The first thing you want to understand is the consumer demand curve--where the product or the business is in its life cycle and whether you're getting into it on the growth side of that curve. Also, you need to ask what their market penetration plans are, on a population basis. For example, if you have one restaurant per 100,000 people, but if they're saying they have the ability to reduce that to one per 80,000 people, that's something to be concerned about. Ask about their market selection criteria and also figure out whether you can develop at the rate you're going to be asked to develop at. Is it a realistic development schedule?
If franchisees get into a fast-growth system and then feel overwhelmed, and don't think they can keep up with their development agreement, what can they do? How can they approach their franchisor about their concerns?
You need to approach the franchisor on a proactive basis and say, "My resources don't fit this. Let's take a look at this together to see what solution we can come up with. Let's renegotiate this development agreement." If you are a franchisee in good standing, have provided some value to the franchisor and developed a unit or two, most franchisors typically allow you to renegotiate a development agreement if you do it on a proactive basis versus them having to default you.
What's a benefit of going with a company that has slower growth plans?
The disadvantage of the fast-growth franchise is the benefit of the slow-growth, which is you're probably going to get a lot of personal attention. If it's a good company and the concept makes sense, they will do everything in their power to ensure your success. If you're only going to do one or two units with a particular chain, you'll get a lot of support, be it training, marketing support or all the other things a franchisor typically provides.
What are some of the negatives associated with a slower growth system?
Something you have to ask upfront is, why are they growing slowly? It may be that the consumer proposition is not as viable as some others in that particular segment or industry, so it's vitally important that you understand the reasons for slow growth. If it's not a viable consumer proposition, it's not a good investment for you as a franchisee. But if they're growing slowly because it's a conscious decision not to outgrow their human resources as well as their capital resources, that's much more understandable.
Who would be an ideal candidate for this kind of system?
A franchisee who has a little less experience in a particular industry, is a little more conservative, really pays a lot of attention to the details and has realistic designs on his or her growth strategy, who wants just to be a successful businessperson, not necessarily the largest franchisee in the country.
How can a prospective franchisee find out why the concept is growing slowly?
The first thing you should do is somewhat obvious, but, unfortunately, a lot of franchisees don't do it. You should read the UFOC and determine what the franchise's unit level economics are and then compare with other systems to see if there's a significant difference in the sales and profitability of this particular slow-growth chain's individual units compared to their competitors. The second thing to do is to truly understand the consumer demand for the product or service--it may be a regional product or service, and the reason for the slow growth is they're not trying to be all things to all people. Or the product may not carry well outside of a particular marketplace.
If a franchisee is already in a slower growth system and is thinking of purchasing multiple units, how can they approach that with their franchisor?
If you have one unit and want to ramp up your growth in a slow-growth system, the best way to do it is, one, to maintain the dialogue with the franchisor and, two, to be a model franchisee with that one unit. Then the franchisor will want you to build additional units--if you're operating it correctly, making money for both the franchisor and yourself and presenting the brand in a positive way, generally if they have the territory available, they will gladly sell it to you.
Do you believe it's possible for somebody who has more of a slow-growth mentality to be part of a fast-growth system, and vice versa?
Yes, I do, but I believe there are inherent difficulties down the road. You have to understand whether you're risk averse or aggressive and make sure when you're looking for a franchise that your goals and directions and the franchisor's goals and directions match as much as possible.
What are some questions franchisees can ask themselves to pick between these two types of systems?
What's my capitalization plan--how well capitalized am I? What is the maximum number of outlets I can develop based on the capital I have available today? Second, what's my human capital--what's my human resource capability? Third, what's my appetite for growth? You have to look yourself in the mirror and honestly ask, "Do I have the wherewithal and the desire to build X number of units?"