The Franchise Model is Dead, Long Live The New Franchise Model

by Mike88Apr 7, 2015

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Once upon a time when I was a young apprentice in the Royal Australian Navy (some 3 lifetimes ago) for some strange reason I caught the Entrepreneurial Virus which as you all know is impossible to eradicate.

I often moonlighted on weekends when my fellow Navy mates were playing football or out partying and I remember driving 100km on a Saturday morning to attend a meeting to discuss buying a franchise called EnZed which was an engineering franchise where the franchisee had to buy a very expensive truck and stacks of equipment and pay a big upfront franchise fee and then the Franchisor would basically give you “right” to provide services to a certain local area and in exchange required you pay them significant % of your net profit.

I didn’t sign that day, it was well beyond my financial means at the time and I am glad I didn’t, I can imagine it would not have ended well.

30 years ago a franchise was a marginally good way to get into business, in a time when starting a new business wasn’t as accessible as it is now.

I say marginally because in most cases franchise owners were sub-optimally self-employed not building a real business and there are numerous horror stories of franchisees loosing the family home and getting signed into terrible deals by their franchise group.

Some franchise chains did well, particularly if they were tied to a well located physical shop or workshop, but the majority were an expensive form of indentured servitude where you basically paid a stack of cash upfront to wear their uniform and use their brand and worked harder, took more risk and earned less than you did when you had a day job.

The Franchise Model As We Know It Is Dead

All industries eventually change dramatically and permanently and the players don’t realise that life as they know it has changed forever and will never return.

When I was 19 I remember reading one of the seminal strategy articles published by the Harvard Business Review in 1960, written by Theodore Levitt titled “Marketing Myopia” (if you haven’t read it, please take 10 minutes and do it now, it will change your view of business).

He made the case that most growth industries that boomed and subsequently declined (as they all do) did so because they focused on their own product and their belief in its superiority and neglected to continue to solve their customer needs even when the products and industries they wanted changed.

And so it is with franchising.

Which leads me to the inspiration for this post, over the last 6 months an extremely persistent entrepreneur has been pitching me to do a profile on his new company which was a version of Local Marketing Franchise meets Linkedin meets FourSquare meets Yelp.

I don’t want to denigrate him because I admire his persistence, enthusiasm and commitment but the model just didn’t sit right with me and I couldn’t bring myself to get enthusiastic about it, when he told me last night he has pivoted to another business and sold the rights, the penny dropped.

The Franchise Model as we know it is dead.

My thesis doesn’t apply as much to the MacDonalds, KFCs of the world and other multinational Franchises with massive brand equity where a substantial capital outlay basically gives you a big storefront in a popular location and the world already knows what they want to buy.

But they too recognise the consumer is changing and are rapidly iterating to keep up, witness Burger King’s “Have it your Way” campaign.

However for the other 95% of franchise arrangements, Lawn Mowers, Taxi drivers, Pool Cleaners, Handymen (or is it HandyPeople), Real Estate Agents (its going to take a few years to unwind this but it will happen), Home Care, Aged Care, Registered Resellers, Authorised Stockists, Approved Distributors, Coffee & Juice chains, shitty Franchise donut and milkshake shops in the high street my belief is that these capital upfront, long term arrangements are going to die within 10-15 years.

Why? Four things are changing very quickly.

Consumers don’t want a homogenous experience

Franchises were built on the promise of a nationwide branding about a consistent reliable product offering, they offered the consumer a standard branded experience and the operator the promise of centralised lead generation and branding.

In this age of mass customisation people think they are special (and all my readers are 🙂 they deserve and must have something special, customised to their needs. They want a special experience made just for them.

They want their own guy or girl helping around the house, not someone in a cheap uniform and a brightly colored van who was stupid enough to buy the Wally’s Home Care franchise for the local postcode.

Implicitly consumers also realise the branded franchise comes with an overhead cost structure they don’t want to pay for if they can find a better alternative.

When it comes to food the average consumer has realised the homogenised franchises stores they loved 10-20 years ago have resulted in a boring average or substandard experience.

They don’t want to buy a Dunkin Donuts Chocolate Donut and a cup of filter coffee, they want a brioche with a double soy chai late with a twist of lemon made specially for them by their own tattooed barista with multiple body piercings in a funky cafe with long beards and fixies out the front.

The consumer is moving to customisation, special, something that is personalised to their needs, they are increasingly rejecting the corporate franchise and their bland offerings.

E-commerce, Channel Cost Pressures & Disintermediation Will Kill The Product Franchise

Back in the day Franchise systems were a good way to help a new entrepreneur operate a business when they had little experience with building and designing the business processes needed to create leads and provide a service or product to their customers.

For product based businesses, they provided an efficient local method of introducing new products to the market and providing support.

With companies like Amazon selling so many brands directly and logistics developed to the point in most Western countries (and definitely China) you can have anything delivered within a day, where does the local product franchise supplier fit?

E-commerce sites and platforms will kill the small local franchise provider of generic or branded product and its only a matter of time.

The first signs are when the franchise product manufacturer starts to sell some of their product directly claiming “thats what the market wants”. (during 20 years of channel sales experience I saw this backflip from every channel vendor I have been involved with in some cases numerous times).

Relentless pressure from the best e-commerce companies in the business like Amazon will kill all but the hardened competitor with niche expertise or a local advantage.

In years gone by you purchased your appliances from an Authorised Stockist, but that is rapidly changing. Very few people talk about being Authorised to sell a particular brand, the concept is disappearing.

I can’t see myself buying appliances from Amazon anytime soon, the double shipping costs are make this prohibitive, unless they start drop-shipping out of Australia, which is entirely foreseeable.

I purchased my last 3 whitegoods/brown appliances from a local White-goods retailer who has made the transition to E-commerce very successfully.

Appliances Online is part of Sydney’s Winning Appliances group, which has been retailing appliances for most of last century.

Buying big box product off these guys is a fantastic experience, the Washing Machine or Fridge gets delivered next day by two big blokes who unpack it, plug it in, test it and take your old one away.

I would hate to be a traditional Authorised Stockist competing against these guys.

Car dealers in the US are in the beginning of this process. 50 years ago owning the local Ford or GM dealership was the beginning of a family empire, yet in the last few years Tesla has been going direct to buyers and finding massive legislative roadblocks which were created 70 years ago by the dealer associations lobbying to keep the car companies under control.

So arguably the best car in the world is not allowed to be sold directly to consumers in a high % of US States, even though thats what both the company and the consumer want.

But its going to be. The Tesla sales model is working in many states, the walls will come crumbling down and the dealers and their manufacturers will be disrupted.

It might take 15 years for the car industry but for many franchise segments its happening already.

Loose Confederation of Independent Contractors with Location Aware iPhones and Marketplace Apps Will Kill The Services Franchise

Services marketplace Apps driven by GPS location aware smart phones are rapidly taking over the yellow pages, local classified and mailbox advertising as the way to source local services.

Apps with rating and bidding systems are a much better consumer experience than picking the franchisee in your local area and getting the only available person in a truck or a classified ad with no recommendations.

The perfect example is Uber, essentially a loose federation of contractors that bring their own cars, they are wreaking havoc on the traditional Taxi & Hire Car Government awarded franchise model and is it happening at a mind blowing rate.

Consider this, in December 2014 a few short years after launching, Uber has more than 160,000 drivers and cars working for them in the US and provides more rides in San Francisco than any of the taxis combined. In December alone they added 40,000 new drivers and paid out >$650 million to drivers in the last quarter.

There is no way a franchise group can recruit and scale like this without killing their existing model.

But they wont. You see its like changing the engine in an aircraft while you are flying it. You cant kill the thing thats keeping you alive, so you gradually decline and one day its over.

I was having a vigorous discussion with an entrepreneur friend last week who has long term experience in his market.

He is trying to launch a new services app and keep an existing expensive channel partner happy, the channel partner is expensive, is not going to act in his interest and isn’t serving the customer well.

I think he will struggle unless he decides to bypass the channel.

If he doesn’t he will miss the opportunity to massively increase the service levels and drop the price of his service by 50% just by reactivating service providers who have left the market thereby making the market more efficient and due to price elasticity growing the number of customers who can afford to use the service regularly.

This is doing the right thing by the customer. Using an app to try to support an inefficient expensive delivery channel is not going to result in massively happy customers and global domination.

Apps like Airtasker.com and Fiverr.com are providing a great way of lead generation for small businesses, why on earth would prospective entrepreneurs sign up to a fixed Franchise with a large upfront capital payment, ongoing franchise fees and all the restrictions that go with the Franchise agreements.

The answer is they wont.

Double Sided Markets are Winner Take All

Double sided markets are usually winner take all, users/consumers want to use the site/app where all the best inventory/service providers are.

You can’t get the consumers without the service providers. Service providers go where the best leads are and the market consolidates, there is usually only room for 1-2 marketplaces and the rest die.

If you don’t believe me look at Online Auctions, not long after Ebay launched there were many competitors launching online auction sites, they almost all died.

In the Australian Jobs, Real Estate and Automotive markets there are only 1-2 really viable businesses per segment, the others are sub-optimal existing on scraping listings and a bit of ad revenue and lead generation.

Even the winners are now being attacked by free classifieds of which there is one dominate leader in Australia (Gumtree) and the US (Craigslist).

To launch a double sided marketplace, you need to do a lot of hard early work to convince enough service providers or inventory to get on board and then the consumers follow and it snowballs.

Most of the local services markets that Franchise groups serve are being attacked by Marketplace apps that make it very easy to match users and service providers and are far more powerful at generating new business than most franchise groups have ever managed to do.

Once these marketplace apps are established (and they are rapidly becoming established) the chances of anyone getting a new franchise group in the services industry off the ground are virtually non existent.

What to do?

If you are a Franchise group owner, work out how to dis-intermediate yourself before someone else does.

If you are a potential franchisee just don’t sign anything, use your local marketplace apps to generate your own business and build your brand via your ratings and recommendations.

If you are an existing franchisee, unless you are absolutely killing it, work out how to get the hell out of your agreement or how to supplement it using both e-commerce and Marketplace Apps until its not important anymore and you can decline to renew the agreement next time it comes around.

If you are a manufacturer and work with a distribution channel, realise that if you don’t sell online you are going to be beaten by someone who does. Encourage your channel to morph into service providers.

If you are part of the distribution channel, start morphing now before someone makes you.

Conclusion

The Franchise Model of Product & Services Sales was always a bit broken, often very broken for the franchisee and it is going to be quickly eroded by the success of e-Commerce and Service Marketplace Apps.

The role of entrepreneurs launching startups should be to disrupt inefficient self serving business models, to break their businesses and to make the experience more convenient and cheaper for users and generate more business and better utilisation for the service providers.

To quote activist Leroy Eldridge Cleaver

If you aren’t part of the solution, then you are part of the problem.

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About The Author
Mike88
Mike88
Mike NichollsAustralian Inventor + Entrepreneur working with a small team of engineers building prototypes from Inventions including two medical devices.Publishes Startup88.com and has assessed/reviewed +500 inventions and +200 startups in the last 3 years.Mentors Sydney Startups via Incubate and other incubators and helps members of the Australian Startup Community via the Startup88.com website with free publicity and advertising.Experience in numerous industries including Digital Publishing, Cloud Computing, Apps, Hardware, Aviation, Real Estate & Finance and Health/Medical Devices.