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The Advantage and Disadvantage of a Large Franchise System

The first question I ask those who have invested in a large franchise system is this: “Why did you invest in this system in the first place?” Most of their answers center on brand equity, which of course is an innate advantage of large franchise systems. The brand is well established, making it relatively easy to draw in customers and keep the cash registers ringing. The brand is well known in the market and already has a following. It has the resources for tri-media advertising and promotional placements that guarantee its being seen by a large number of potential customers.

Despite this advantage, however, some franchisees say that they don’t feel its effect on their bottom line. For instance, they say that while system-wide discount offered by large franchisers draw in the crowd, they carry such a high cost of sales. Although all franchised branches have to offer the same system-wide discount, they complain, the franchisers don’t always offer subsidies for costs. Yes, the brand is benefited and the customers are brought into the stores, but the franchisees ask: “What about our profitability?” Indeed, the efforts of large franchise systems to retain market leadership sometimes fail to consider their adverse effect on individual franchisees.

Franchisees understandably expect systematized support and assistance from their franchisers and large systems invariably have big organizations manned by seasoned personnel to provide that support. But in one meeting with franchisees, I was taken aback when one of them commented: “Yes, my franchiser has a large franchise system. We are more than 100 branches in all, but the fact is that I’m only store number so and so.” And when I probed for the reasons for such a telling comment, this is what I found out: When requests are made by the franchisee, they pass through so many layers in the organization before they are acted upon. This franchisee recalled that at one point, she even had to wait for several months just to get the cost of sales of a new product.

For sure, the support system of large franchisers is definitely an edge, but I believe that the needs of individual franchisees should not be overlooked when the operations of a franchiser grows to a much larger scale. Indeed, at one point or another in their business growth cycle, large franchisers go through this stage of neglecting the individual franchisee by default. Even such a successful large-scale franchiser as McDonald’s went through this stage, but its founder, Ray Kroc, dealt with the situation immediately, greatly improving McDonald’s support system to take care of the needs of even its smallest single-store franchisee.

At the fast- track MBA on franchise management for the Certified Franchise Executive Program in Las Vegas that I attended in October 2003, one speaker pointed out that the first set of franchisees in a franchise system normally epitomizes the personality of the founding franchiser. And why is this so? The speaker explained that this is because during the initial stages of the development of a franchise system, the franchiser is very much hands on in the selection process and even in the support and assistance provided to franchisees. As the franchise system grows, however, the franchiser is seen less and less by the franchisee. The few occasions when they would meet, in fact, will be during yearly or quarterly conference; that’s all.

Indeed, one of the things that a franchisee would miss in a large franchise system is the energizing presence of the franchiser that the first set of franchisees usually enjoys and relishes. It is therefore not surprising that senior franchisees normally imbibe the traits of the founding franchiser and his or her love and commitment to the business concept of the franchise. This is the advantage enjoyed by early franchisees when the franchise system is still a young, growing system. Even if there are already set criteria for accepting a franchise applicant, middle managers often have a different way of processing and providing service to franchisees than the founding franchiser.

For their long-term success, large franchise systems have to make their rules for the franchise pretty well established and uniformly implemented. This is actually an advantage since these rules have already been proven to work, and have the track records of so many successful franchisees to back them up. However, large, well-established franchise systems inevitably take a longer time to review, assess, and test feedback and recommendations from its big and growing number of franchisees. On the other hand, a young, growing franchise system is generally better able to handle those feedback and recommendations. This, of course, is to be expected. In growing systems, after all, the franchiser is comparatively within easier reach of most franchisees, thus speeding up the review, validation, and decision-making process.

Now, in the case of large franchise systems, the number of branches is usually a strong leverage for the franchiser in getting bigger discounts from its suppliers for volume purchases. It is therefore normally to be expected that the franchiser would be able to give lower transfer prices to the franchisees or to give them subsidies for promotions and the launching of new products. In practice, however, some franchise systems don’t share these benefits with their franchisees, thus depriving them of what should rightfully be a great built-in advantage of being a part of a large franchise system.

Buying into large franchise systems will definitely have its share of benefits and drawbacks, and pretty much, neither large nor growing franchise systems will have a monopoly of benefits. But whether a franchise applicant is thinking of investing in a large franchise system or in a young, growing one, he or she must make sure of partnering only with a responsible, conscientious franchiser. That franchiser should be one that not only has a proven business model for the franchise but one whose focus is on the mutual benefits of the relationship and who can be expected to continuously look after the success of its franchisees.

About the author: Erlinda Sabio Bartolome is a Certified Franchise Executive through the International Franchise Association in Washington D.C., USA. She is also the Managing Director of GMB Franchise Developers. She can be reached by e-mail at [email protected]

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