Judging from the performance of Potbelly Corporation’s (NASDAQ:PBPB) IPO on Friday, the franchise remains a popular investment concept in Wall Street. The company operates and franchises Sandwich Works shops in the US.
But as is the case with other investment, not every franchise is successful. And even among successful franchise chains, some fare better than others. McDonald’s (NYSE:MCD) and Yum Brands (NYSE:YUM), for instance, have fared much better (in terms of equity performance) than Wendy’s (NASDAQ:WEN).
What makes the difference? Five factors:
1.The Right Business Model: The way the chain enhances customer value vis-à-vis the competition. Franchise pioneer McDonald’s, for instance, delivers customers a quick, convenient and inexpensive meal, vis-à-vis traditional restaurants. KFC offers the same meal attributes but with a different menu—focusing on chicken rather than hamburgers—though both chains broadened their menu portfolio overtime, adjusting it to the local tastes.
Dunkin Donuts offers coffee and donuts (and in recent years ice-cream) to go at convenient locations.
2. Scale: The Cost savings associated with a larger production scale of a standardized menu–the bigger the production scale, the lower the cost per menu. With 33,510 units around the world, for instance, McDonald’s has a scale advantage over Wendy’s, which has 9,792 stores.
||Worldwide Sales ($M)
|KFC (Yum Brands)
|Pizza Hut (Yum Brands)
|Dunkin’ Donuts (Dunkin Brands)
Source: 2012 Franchise Times: Top 200 Franchise Systems
The scale advantage is reflected in the operating margins of the two companies. McDonald’s enjoys a hefty 30.12 percent operating margin, versus 7.38 percent of Wendy’s.
||Return on Assets (%)
||Qtrly Revenue Growth (yoy)
||Qtrly Earnings Growth (yoy)
Source: Yahoo YHOO +0%.Finance.com
3. Scope: The cost savings associated with the offering for sale of different products by a single corporation rather than by different corporations. McDonald’s and Panera Bread, for instance, offer a variety of products for sale (McDonald’s has added Mccaffe in many locations), vis-a-vis Wendy’s and Dunkin Brands. That can explain the higher return on assets.
4. Location: The benefits associated with occupying primary location sites for franchise stores. In fact, location can support and re-enforce all these advantages. As an older franchise McDonald’s, for instance, had the opportunity to pick best locations. This further explains both the hefty operating margins and the high return on assets.
5. Market Saturation: The degree of market penetration. The lower the degree of penetration, the higher the room for the company to grow by opening new stores. Potbelly and Panera Bread, for instance, have more room to grow, vis-à-vis McDonald’s and Yum Brands.
The bottom line: Successful franchise chains begin with the right business model, and proceed with the amassing of the right scale and scope in the right locations, until they reach optimum market saturation.
Read the full article here.
Shark Tank star gears up to guest judge at the 2018 NextGen Global Franchising Competition
I had a chance to discuss franchising with Daymond John, the recognized TV personality and investor on ABC’s award-winning Shark Tank, the founder and CEO of international hip-hop fashion brand FUBU, Inc., and the NYT and WSJ bestselling author of The Power of Broke.
John talked about how to succeed as a franchise entrepreneur and said that he’s looking forward to serving as a guest judge at the NextGen Global Franchising Competition at the IFA’s Annual Convention in Phoenix on February 10-13, 2018. Applications are still open until Sept. 15, 2017 and can be submitted at www.nextgenfranchising.org.
Why experienced hustlers make the best investments
John hopes to see entrepreneurs present a strong proof of concept, scalability of the business, and a response from the experts in the live audience.
“The ones who are successful at franchises are the ones who’ve failed in the past,” said John. “They’re the hustlers at 5am. They’ve seen what not to do, and so they’ve found something that fits their life.”
“I have people tell me, ‘Running your own business is tough, and I didn’t know what I was doing.’ So these franchisees don’t have a problem paying the 5-10% to have a lot of the details figured out already.”
There’s freedom in spending other people’s money
John is no fish out of water when it comes to evaluating pitches off the top-rated ABC reality show.
“I’m looking forward to the fact that I can actually judge and not spend my own money,” he laughed. “When it’s your own money you get opinionated, like sharks. But I’m going to be objective and straightforward because I don’t have to hide my shortcomings as an investor.”
A next franchise act
In addition to licensing his $6 billion FUBU brand to open five FUBU Mobile stores in Brooklyn, a concept similar to MetroPCS and Cricket, John disclosed that he’s rolling out a new franchise company and plans to launch it at the IFA Convention in February 2018.
“It’s too early to give out details,” said John. “We’re working on the name right now.”
He didn’t say which industry it’s in, but he did say some industries perform better than others as franchises. For example, John pointed out that “lifestyle experiences” are a great fit.
“I don’t see enough dance studios. That’s something you can’t do on your phone,” he chuckled. “Something that offers a community with a physical element is good for franchising, like the Flywheels of the world, or anything related to fitness. I have ownership in a couple crossfit gyms.”
Finding “intimacy” and “symbiosis” in a single business model
John said he prefers the franchise model over the traditional “corporate” business model because it offers a unique intimacy and symbiosis between stakeholders. He referenced the story of his “potentially biggest Shark Tank deal ever”, Bubba’s-Q Boneless Ribs.
After founder and former Detroit Lions NFL player Al “Bubba” Baker appeared on Shark Tank and struck a deal with ribs-loving John, Bubba’s-Q and CKE Restaurants Holdings, Inc., the parent company of Carl’s Jr and Hardee’s, announced a partnership to sell the innovative Baby Back Rib Burger, a burger laden with Bubba’s-Q patented boneless ribs, at 3,000 of their franchise locations nationwide.
John visited a number of Hardee’s and Carl Jr.’s during this deal and met with franchise owners. “It opened my eyes,” he said. “I was fascinated by how entrepreneurial both the owners and staff are and how much they impact the local community.”
John said this “intimacy” is what differentiates franchises from big corporations. In corporations, “It’s a top-down culture with lots of people and lots of rules.”
“Franchising is a more symbiotic relationship where you give an opportunity to other entrepreneurs and they run with it fueled by their own passion.”
However, one’s not better than the other, John points out. “Whether you’re an entrepreneur or an intrapreneur, it’s always about the hustle.”
Being an entrepreneur today isn’t easier or harder. It’s different
Upon mentioning “the hustle”, John reflected on lessons from his own journey as a lifelong entrepreneur, including the differences between today and 30 years ago.
“Today, it’s a lot easier to source manufacturing and manage inventory. You can turnaround good and services faster. Finding financing is easier, whether it’s crowdfunding or Silicon Valley. Analytics is far more advanced. You can know more about your customers today, even down to the color of their hair.”
“Back in my day, I had to do focus groups. I remember going up to people walking on the streets of Harlem and asking them what they thought my products.”
John noted technology has made a huge difference for people starting up a business today. But not without its drawbacks.
“The challenge is everybody can do the exact same thing with a phone and a computer,” said John. “It used to matter that you were in a good city with a strong network but now you can you can do almost anything from anywhere, rural or urban.”
“Couch potato” has a new definition
“For companies to succeed, you have to find the right people. But that’s getting harder and harder, especially for new companies,” said the People’s Shark. “You have to build a culture where people want to work. Otherwise, the good ones will just stay home and make a million dollars from their living room couch.” Read the full article here.