You’ve seen the lines in front of White Castle, In-N-Out Burger and Starbucks. These places are packed with customers! How many times have you thought “I want to own one of these!”, only to find out, that company doesn’t franchise.
So today, we’re going to answer the question: Why do some companies choose not to franchise?
Let’s start with the opposite question:
“Why do companies franchise in the first place?”
They can grow at a faster pace
Many companies choose to franchise so that they can grow at a faster pace. By implementing a franchise model, they can increase their numbers by taking on franchise partners. Each partner opens one or more units and before you know it the concept has exponentially grown in a short amount of time.
Franchisees foot the bill for the start-up costs
Another reason companies choose to franchise has to do with cold, hard cash. That’s right, generally speaking the franchisee is footing the bill for the construction, inventory, and in most cases training, for the franchise.
So with that in mind, let’s go to our original question:
“Why do some companies choose not to franchise?”
1) They don’t need the capital
This doesn’t require a lot of explaining. If a brand is already well off and capable of expanding without a capital infusion or partners, they simply don’t need to franchise.
2) Companies stand to make more money by not franchising
Royalty rates for franchises can be all over the board, but typically they hover around 5 to 10 percent of gross revenue. So for a store that pulls in, lets say $1M in gross revenue, the Franchisor gets anywhere from $50,000 to $100,000 per year from that unit. If that same unit is a corporate unit, the profit may be 20% of the stores revenue. The company stands to make substantially more from a corporate unit, at $200,000 than a franchised unit.
3) Strict operating standards or procedures
A third reason some companies choose not to franchise is that there may be Strict operating standards or procedures that are difficult to replicate.
Many young companies try franchising and do an about-face soon thereafter. They buy back their franchised stores, make them company owned and move on. Why? One reason is quality control. If they product or service rendered at a franchise location is substandard to the original, the damage to the brand image can outweigh any potential profits that the franchised unit may bring. In short, it isn’t worth it.
4) They don’t want to deal with business partners (this includes Franchisees)
Sometimes dealing with business partners can be tough, and you, as a Franchisee are a business partner to the Franchisor. Imagine that your business partner wants to change the menu at his restaurant or he wants to make his own marketing campaign using your logos. You’d likely object or at least ask to review the change. When a brand chooses to franchise, they get these types of requests daily. As a Franchisor, It can be tough to regulate the actions of your franchise partners.
5) Branding, Culture, and Perception
Creating a brand takes a good amount of time and a lot of hard work. Destroying a brand takes very little time and hardly any work. That notion is why many companies choose not to franchise. Company culture is a cornerstone of the brand. The experience is often just as important as the product or service. Cultural differences between a Franchisee and Franchisor reverberate in a big way in day-to-day operations. This idea is so prevalent, it is featured on most episodes of Undercover Boss.
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