Franchising has changed dramatically in recent years, and like most industries, the sector remains subject to the whims of public taste and technological advancements. Here are some of the most important international trends which have been observed during the past year.
Developing franchise brands in different geographical areas is one of the new avenues franchise companies are pursuing. Instead of recruiting many individual local franchisees, franchise companies in the United States are partnering with overseas developers who can navigate the local culture in those countries, and open and operate numerous units at the same time.
According to research company, Frandata in the United States, more than 50% of franchises are held by multiple-unit owners, and many of them act as area developers. Area developers have the benefit of economies of scale and additional efficiency in terms of operation.
Other economic factors driving area development is the fact that financial institutions are more likely to finance franchisees with successful track records, and franchisors also reduce their risk when they allow proven operators to open stores.
More than half of all franchise units in the United States are run by multi-unit operators, some with hundreds of units. These operators then manage a company which employs a staff of field and unit managers, while they focus on strategy and growth.
Multi-brand franchisees are also a rising trend. These franchisees have often saturated the market in their area with their first brand, and to continue their growth, they must take on a second or third brand. Others add additional brands to improve their cash flow, or diversify their risk by creating a hedge against market cycles, changing consumer tastes, and shifts in the economy.
Refranchising, in which a franchise sells its company-owned stores to franchisees, is often seen as a sign that a business is in distress. But, in recent years, many high-profile global franchises have divested themselves of corporate units, including Burger King, Pizza Hut, and KFC.
The trend should not be interpreted as weakness, but rather as a sign of vitality. There are certain economic incentives involved in getting out of running company stores, and some securities analysts are far more enthusiastic about royalty streams than store revenue.
Mergers, acquisitions and alliances
Mergers and acquisitions involving franchises happen on a regular basis in the United States. In fact, some describe it as being at epidemic proportions. Large well-known systems often acquire both individual and groups of outlets in areas where they are not represented, to build accelerated market coverage, with the objective of franchising them later.
The reasons for these mergers and acquisitions are varied. They can be used to nurture and protect distribution channels, expand, and to cement co-marketing opportunities. Strong opportunities also exit for shared services and efficiencies in purchasing and marketing.
Healthy fast food
Franchises are finally creating healthy fast food with lasting appeal. Fast food franchises have managed to come up with more innovative products and appealing flavours, to accommodate consumers who want to take control of their diets. Large franchise companies want to lure health-conscious consumers who see these menu items as smarter choices than the traditional fast food options.
Franchisors and franchisees alike must adapt to the major changes taking place in customer demographics to find new opportunities for growth. These include:
- Millennials: Members of this generation are coming into their own as a potent economic force as they begin their careers and raise families. They represent a huge opportunity for franchisors and franchisees, who can provide goods and services related to their growing needs.
- Baby Boomers: As this generation ages, its members will demand many new services such as health and fitness programmes; financial and retirement planning; assistance with aging parents, child care for younger children and educational services for tertiary education-aged children; legal and tax services; nutritional, cosmetic and ‘anti-aging, products and services; etc.
- Seniors – People are living longer, more active lives today, a trend that will only accelerate. This will create an ever expanding demand for services from this affluent, growing demographic. Healthcare-related services, offered at home or frail care facilities, will continue to grow. Other areas include home renovations for seniors, and health and fitness programmes tailored to aging bodies, etc.
Some franchise sectors are more likely to succeed in the foreseeable future, than others. Consider these options:
- Recession-proof brands: These include hair styling; tax consulting; accounting; shipping and packaging; child and pet care services; automotive maintenance and repair; home repair and renovation; computer-related services; real estate; and staffing and employment services. Used goods also tend to do well in any economy.
- ‘Green’ businesses: Energy-reduction services for both the home and the commercial sector will continue to expand.
- Fitness, health, and personal care: This sector includes fitness centres, nutrition, recreation and sports, beauty salons and spas, as well as ‘healthy’ fast food, provides targeted opportunities for each of the demographic groups mentioned.
Advancements in internet and email technology have provided an added and effective new medium for internal communication, as well as important marketing opportunities. Other technological advancements, like automated stock management systems, customer relationship management tools, global positioning systems and digital closed circuit television systems, provide franchised operations with opportunities for improved efficiencies, security, and increased revenues. However, these systems also require effort and expertise for successful implementation throughout franchised chains.
On the other side of the coin, however, the internet has also spawned new competitors, like internet retailers, that compete with many retail and service-based bricks and mortar operations – often with lower overheads.
An increasing number of franchisors are also entering the e-commerce arena and selling products/services to customers on-line because many customers now expect to buy on-line. By establishing their own sites, franchise not only build their brands, but also protect their market share.
Some franchises are also collaborating with competitors in an effort to build critical mass on-line. Other franchises are also collaborating with complementary product/service providers to explore co-marketing and other strategic opportunities.
One of the most tangible trends the internet has generated, is a new class of franchised businesses established to cater for a variety of new niches the internet has created. These include products and services aimed at an aging population. These concepts centre on health and fitness, travel, financial planning, eye wear, and a range of home services.
Some franchises have gone further and added new products and services specifically tailored to this electronic medium. A further illustration of the importance of this segment is the emergence of whole new franchise concepts geared to the internet.
For certain franchising food trends the saturation point may be approaching, such as frozen yogurt franchises. The problem with frozen yogurt franchises is that are location-driven and largely undifferentiated. They also have low barriers to entry and there a lot of players in the market, specifically in the United States. For this reason the concept is reaching a point where the ‘winners’ will be sorted out from the ‘losers’.
Another franchising craze, quick-serve ‘better burgers’, also seems to be close to saturation. According to observers, consumers in the United States don’t want to have a long, drawn-out meal with table service, but they don’t want a cheap environment, either. So-called ‘better burgers’ are not necessarily cannibalising sales at fast food outlets, but are rather directly competing with casual restaurant concepts.