Is investing in a franchise a surefire success opportunity?

Q: WE’RE a retired couple looking for where to invest our retirement money. We have been told of all sorts of fascinating stories about franchising like the Mini-Stop or 7-11 franchise. We decided to read a couple of books on franchising as well as attend seminars. Everyone was talking about success and how we stand to earn good and quick money. But most of the talk was about the franchise owner and how franchising was good for him. It’s assumed that “what’s good for the franchisor is good for the franchisee.” And we thought that doesn’t necessarily follow.

We’ve seen successful franchisees of course. But we’ve also seen franchisees who closed shops in less than a year. There have been a lot of closed lechon manok franchise stores, bake shops, donut kiosks, burger stands, shoe repair stores, and even Jollibee franchise stores.

We’re a regular reader of your column and when you diagnose a marketing problem, you always deal with both sides of the issue. Here, those two sides are the franchisor and the franchisee. So please tell us. For the prospective franchisee like us, is investing our retirement money in a franchise a sure success opportunity? What should we watch out for and be careful about?

A: When you refer to “sure success,” you don’t mean 100 percent sure. You certainly know that in investing there’s no such thing. You simply want to learn the realistic amount of risk you are taking in your contemplated investment.

As a franchisee, what does the franchise owner require of you? You’re to pay a fix-plus-variable franchise fee. In exchange, the franchisor allows you to use his known brand including training in store operations and money matters, as well as provides you with other business-growing support services.

For a successful franchise, the industry’s “rule of thumb” is for a franchise to have access to at least 100,000 “potential qualified customers.” This should be your first danger sign. Remember that business “rules of thumb” are short-cut means for business decision-making. They work best for recurring decisions like what to do when your supply of goods suddenly gets out of stock. But they’re terrible for making new business decisions, which is your case.

Big potential

Consider, for example, your friend’s recommendation in favor of a convenience store franchise like 7-11 or Mini-Stop. Josiah Go and Chiqui Go, husband-and-wife authors of the best-selling book “Fundamentals of Marketing,” tell us that the Philippines has a very low population density per convenience stores. That’s just one for every 200,000 residents while Japan has one per 3,000. Taiwan has an even higher density: one per 2,000. In the specific case of 7-11, the book tells us that in 2009, there were only 447 7-11s in the country versus 5,270 in Thailand and 4,744 in Taiwan. The husband-and-wife Go draws the conclusion that there’s “a big potential in this store category which is growing faster than other types of retail store.”

As far as “potential” is concerned especially for the convenience store industry, no one will debate with this conclusion. And this is not the business issue for you. It’s turning the potential into the probable that’s your concern. How do you make sure that investing your retirement money in a 7-Eleven or Mini-Stop franchise will grow your money?

Harvard Business School Professor Michael Porter, author of “Competitive Advantage,” speaks of the key to success in a retail store business in terms of the title of his book. Your convenience store franchise must have a competitive advantage over other convenience stores and even other retail grocery stores in the neighborhood market area. For a retail store, that’s really about “locational advantage.”

Locking out

Locational advantage is having the “best” location so that your store gets the most sales as well as being the most profitable. It gets the most sales because it has the access to most customers in the area. It is the most profitable because it does not have to lower price to sell more. Having such a “best” location is effectively equal to “locking out” the competitor retail stores in accessing the most customers in the trade area. Examples? There are many that we’ve come to just take for granted. There’s the popcorn stand that convinced 2, 3 or 4 movie houses in the same floor of a mall to be the only popcorn stand for their moviegoers. Or the donut kiosk right next to the exit of the LRT or MRT stop. Or the pork and chicken barbecue stand by the same exit. And so on.

So this locational advantage is not a matter of quantity. It’s not about having many retail stores that counts. It’s about having a “quality” location. That’s your case. It’s also taking into account that our investment money can’t afford more than one retail store.

Danger signal

Having many franchise stores and increasing their number is generally good and will grow the business. But that’s true only up to a point. And it’s the franchise owners’ main preoccupation because their concept of growing the business is scaling or being in a race toward an ever-increasing number of franchise stores. This is the other serious danger signal you should watch for or even protect yourself during your negotiation with the franchisor. When the franchise owner agrees to another franchisee to locate its store too close to yours, the typical consequence is a reduction in per-store sales figure although the franchisor’s sales and franchise fees go up.

But at your level, you or your nearby franchisee or both of you may feel the pressure to raise total revenue. You’ll find out quickly that the only way to do this is to lower prices, which will provoke a similar move with your “competitor” and back to you and so on. Soon the little price war escalates and before you know it you’re both worse off than before. Of course, there’s your franchise owner who will referee and try to bring back harmony in the family. But why wait until this point is reached. Why not anticipate and provide for this sad ending at the very start so that things don’t turn sour.

So there’s our version of the “real score” you’re asking for.

Keep your questions coming. Send them to us at [email protected] or [email protected]. God bless!