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David vs. Goliath

Can a small startup franchise compete with an industry giant?

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In 1971, a young upstart decided to challenge the McDonald's juggernaut. McDonald's, with almost a 20-year head start, had thousands of units, a billion-dollar advertising budget and one of the most recognizable brands in the universe. Nonetheless, today, Wendy's is among the largest franchisors in the world.

In fact, examples of startups succeeding in the face of established competition abound. Who would have thought Popeyes could take on the Colonel? Or that Papa John's could enter a market dominated by the likes of Pizza Hut, Domino's and Little Caesars? More recently, names like Quizno's, Curves and Cold Stone Creamery come to mind.

I am often approached by potential clients who have developed a successful concept but are leery of franchising in the face of established and entrenched competition.

The Nature of Franchise Competition

In theory, each new franchisor competes with every established franchisor for franchisees. While this is probably not true in practice, even the most unique new concept will compete with companies in a similar market or a similar investment size. In fact, some studies have indicated that the average franchisee will look at between six and 12 franchises before making a decision.

So how do you get your concept to be on the short list?

While the task is daunting, being big is not always advantageous. In some cases, desirable territories may be sold out. Smaller franchisors can pay more attention to their franchisees, and those franchisees will likely be working directly with senior-level management instead of junior-level staff. Moreover, larger companies may find it harder to adapt their concepts to a rapidly changing consumer market.

The Differentiation Factor

The first and most important rule is to start with a better mousetrap. Franchise buyers facing two franchise opportunities with "identical" concepts will usually choose the more established competitor. So differentiation is essential if a startup is to succeed.

Think back to our initial example. On the face of it, Wendy's was just another hamburger joint. But on closer examination, success in the hamburger market was entirely about differentiation. McDonald's succeeded by offering their food fast and cheap in a clean environment. And while the "me-too" competitors failed (remember Burger Chef?), several years later, Burger King was able to compete by touting their ability to let the consumer "have it your way."

So how did Wendy's compete with both of these giants years later? They realized that both McDonald's and Burger King, with their clowns and advertising, were focused on the children's market. They differentiated themselves by offering an "old-fashioned" hamburger served with "plenty of napkins" (which might not be the right message to send if you have children).

Think about how Papa John's carved up the pizza market. Pizza Hut succeeded by being the biggest-family food for everyone. Domino's succeeded by being the fastest, with their now-defunct 30-minute guarantee. And Little Caesars succeeded by being the cheapest. So Papa John's decided to compete based on quality, and the big three became the big four.

The fact is you can differentiate a franchise company based on numerous factors. The first place to look is at the product or service, but we have also seen franchisors succeed based on reduced investment costs, unique marketing strategies or differing target markets.

Dealing with Risk-Return

One particularly effective way of differentiating a concept is through the use of improved financial performance. Remember, there is a risk-reward paradigm at work here. The greater the perceived risk, the greater the reward required by your prospective franchisee. So if you've got it, flaunt it. Use an earnings claim. (Of course, speak to your attorney before finalizing this decision.)

The flip side of this paradigm calls for newer franchisors to reduce perceived risk by doing everything they can to establish their credibility. Credibility can be reflected in a number of ways aside from the size and age of a company: Franchisees take into account corporate image, the look of the prototype unit, publicity and strength of management.

With this in mind, the new franchisor must do whatever it can to establish its credibility. Recruit the best management possible as soon as possible. Hire the best franchise attorney. Work with established franchise consultants. Join the International Franchise Association and subscribe to its code of ethics. And retain a franchise PR firm if the franchise is truly unique and newsworthy.

Going against these bigger competitors will require you to look better as well. Web sites, brochures and other marketing materials should look better than those of your closest direct competitors. And don't forget the little things: professionally designed logos, letterhead and other "image pieces" can have a huge impact on a potential franchisee.

Remember, success at franchising is something that happens over time, not overnight. The next crop of these startups is already making their presence felt-one franchisee at a time. Could your company be next?

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