Are Company Stores a Good Idea?

Just over a year ago a client walked into a meeting shaking her head. “Our boss wants us to look at the viability of opening more company owned stores.” She was exasperated because she held a belief, shared by most franchisors and consultants, including me, that franchisees will always drive better performance in a business due to the “skin in the game” factor. The logic is, while an employed manager may be motivated by performance bonuses or the possibility of losing their job, this pales into insignificance when compared to the fear a franchise owner has of going broke and possibly losing their home.

When my client asked if I could provide some stats to demonstrate franchised stores were still the way to go, I had to admit I didn’t have any data to prove the skin in the game theory. So I started asking colleagues and clients if they had evidence showing franchised stores performed better. I heard lots of opinions and anecdotes, several clients quoting sales increases of 30% to 50% whenever company stores were franchised. But no-one could provide me with actual data to prove their claims.

A new study is born

After discussing this with my team at FRI we decided it deserved further study. The research question we asked was “Is there a difference in the performance and ROI of franchised versus company operated units?”

First we reviewed data from 35 established franchise networks operating nearly 7,000 stores and found 67% ran company owned stores. Within this group, 18% were company owned.

We then gathered further information from 19 established franchise networks, including performance data from 71 cases where stores had either converted from company owned to franchised, or vice versa. Here are six of our more significant findings.

1. Sales did increase when stores were converted from company managed to franchised, but only by an average of 6%. On the other hand sales dropped by an average of 4% when franchised stores converted to company managed. In other words the differences between the two scenarios was around 10%, not as large as commonly believed.
2. Franchised stores showed significant improvements in profitability, especially by controlling their wages, which were 10% higher in the company managed stores.
3. The state of a store prior to conversion made a huge difference to later performance. If a franchisee’s business was distressed due to extenuating personal or financial circumstances, converting it to company managed increased its sales. However if it was operating within normal parameters, sales dropped significantly if it became company managed.
4. There is a large hidden resource load in supporting company managed stores. For instance they required four times as many field consultants as well as additional head office support staff to manage HR and training issues.
5. While there is strong evidence that franchised stores do drive higher sales and profitability, we also identified a significant number of franchisors that operate successful and profitable company managed stores. In these cases, careful planning and resources are devoted to site selection, staff incentives and HR management.
6. One paradox to emerge related to compliance, customer satisfaction and marketing. While company managed businesses were more compliant with marketing and systems, making them easier to manage, franchisees were more committed to winning customer loyalty and pushed back on compliance or marketing programs they believed would be ineffective. While franchisors said this was more of a challenge, they also admitted it probably drove better results!

In summary, the “skin in the game” factor clearly drives better performance. But for franchisors willing to invest in suitable planning and infrastructure, company managed stores can perform as well or better. If you’d like to hear more on this topic, this short article and video by Sarah Stowe, Editor of the Franchising Magazine, also summarises the findings from a Forum we ran with many of the franchisors that participated in the study.