As ActionCOACH business coaching celebrates its 20th anniversary in franchising, I would like to revisit the humble beginnings of franchising as a business model and show how franchising has adapted to the needs of both consumers and entrepreneurs alike, making it one of the most successful and prevalent business models today.
Franchising as a business model almost failed as quickly as it began. While the Catholic Church dabbled in a form of franchising with tax collectors in the 1700s, the first real—and successful–attempt at franchising in America came in 1886, when pharmacist John S. Pemberton created a concoction of molasses, spices, sugar, soda water, and cocaine and licensed certain people to sell the product we know today (minus the cocaine) as Coca-Cola.
Believe it or not, other companies that still remain successful businesses to this day failed at their first attempts at franchising: Singer sewing machines, Kentucky Fried Chicken, General Motors, and Rexall Drugs, to name a few. It really wasn’t until America shifted from an agricultural to an industrial economy, that manufacturers licensed individuals to sell automobiles, trucks, gasoline, beverages, and other newly invented products. The franchisees, however, did little more than sell the products. The contemporary franchising model, where the relationship between franchisor and franchisee is necessarily reciprocal and symbiotic did not exist in the early days of the franchise model. Therefore, franchising was not a growth industry in the United States until much later—the 1960s and 1970s.
People with an entrepreneurial spirit began to see the attractiveness of franchising. However, there were serious pitfalls for investors, which almost ended the practice before it became truly popular. For example, there was nothing to discourage licensed franchisees from promoting and selling competing products and services—that is until franchising became more heavily regulated. Further, it was only when the public (consumers) began to demand uniformity across products and services that the franchise model established and maintained consistent and lasting success.
So until recent years, the big franchises like McDonald’s, Burger King, Howard Johnson, Motel 6, Mr. Rooter, and Supercuts, survived—and thrived—under the contemporary franchise model. Until recently, franchisees tended to own and occupy one unit—with very ambitious entrepreneurs branching out with two or three units. The franchisee almost always worked in the store, at least part of the time. And overall, franchising was a successful business model, but with its limitations.
New Trends in Franchising
Today, in 2017, many changes in the worldwide economy, in business regulation, and in the demands of both the investors and the consumer market have inspired new trends in franchising, making it even more promising as a viable business model for long-term success and sustainability.
Following are some of the trends you—as a potential investor—should consider when deciding whether franchising is right for you and also, which franchise is right for you:
Generational trends-The Baby Boomers have given birth to a larger generation—with different skills and values to boot. While Millennials—those born in the 1980s–early 2000s—have a reputation for being lazy and possessing an air of entitlement, wanting praise for very little accomplishment. The International Franchising Association has seen enough potential in this young group of investors to start NextGen, a program designed specifically to educate Millennials about franchising. Thanks to the Great Recession, the crumbling job market and changes in employment culture, Millennials are wary of corporate America and more interested in alternatives like franchising. According to Paul Segreto, CEO of The Franchise Foundry, “There are so many in the younger generation who are unemployed or underemployed and have so much talent. But because of high real-estate and startup costs, it’s hard to start an independent business. Millennials are looking for alternatives. That’s where franchising fits in.”
Multi-unit franchising-Before the Great Recession, it was normal—desirable even—for the franchisor and the franchisee to deal with franchise ownership one unit at a time. When franchisors noticed that small operators of one or two units were struggling, they began to rethink their strategy of selling just one or two units per franchisee. Larger franchisees, with their greater volume and tendency to be invested in more than one brand, franchisors noticed, seemed more resilient during economic downturns. Further, franchisors working with single, experienced franchisees was easier than getting dozens or hundreds of people of varying experience levels up and running.
Multi-unit franchisees also tend to have strong relationships with realtors and vendors, paving the way for unit development. Speed of expansion is also a key factor in franchisors’ desire to work with multi-unit franchisees. Their experience and contacts make it quicker and easier to open more units in a shorter timeframe.
Home-based-With more than fifty-percent of small businesses in the U.S. being home-based, according to the U.S. Census Bureau, this trend in franchising is quickly becoming a favorite choice in business ownership for entrepreneurs of all ages and levels of experience. It often sounds easier than it is…operating a business from home. However, as long as entrepreneurs maintain realistic expectations and have the discipline and skill set necessary to successfully own and operate a home-based business, it could be the most fulfilling career choice you could make. Not only is the original investment minimal, compared to those requiring build-out and other costs associated with a free-standing business, but setting your own hours, deciding how much you want to work; hence how much you want to grow your business, and how much of the business you can run yourself versus hiring outside employees are all decisions made easier with home-based franchises. Many novice entrepreneurs choose a home-based franchise as a way to dip their toes in the water before branching out into multi-unit or even a single-unit franchise that requires significant build-out costs.
International-While one defining feature of franchising tends to be the consistency in systems and procedures, as franchising becomes more and more the model of choice for all entrepreneurs, franchising’s expansion into the international marketplace is becoming more rampant than ever. One thing that makes the internationally based franchisee different than the strictly domestic franchisee is the level of expertise he or she must have regarding the culture, language, and business customs of the prospective franchise market. The excellent news for international franchisees—often referred to as master licensees or master franchisors—is they do encounter more risk than a single-unit domestic franchisee, but the reward is many times greater in the long run.
Vending Machines and Food Trucks-Though food trucks (a.k.a. Roach Coaches) and vending machines are not new concepts, the quality and consumer desire for such convenience has become an overwhelming trend inspiring more innovative types of food trucks and vending machines. One vending machine that has recently been adopted in the world of franchising is Denis Koci’s “Burrito Box,” an orange vending machine that dispenses hot burritos with all the fixings, and hot tortilla chips besides. Like most fast-food restaurants, the Burrito Box makes all food off-site, and franchisees refill the contents daily. Says Koci, “With our machine, you get the same quality you get out of fast-casual restaurants.” The food truck is enjoying the same popularity as fancier vending machines, like the burrito box. With food trucks becoming a way for underemployed chefs to earn a living, they have quickly become a favorite among the hipster crowd. Again, both symbolize today’s entrepreneur’s desire for low-investment, high ROI.
Technology-based-According to successful ActionCOACH business coach, Monte Wyatt, “Every business should think of themselves as a technology company.” No doubt, any business that hasn’t adopted the use of modern technologies to improve and maximize their business potential is going to be behind those that do. Not only should all businesses maximize the technologies offered to businesses in our digital age, but many are geared toward selling—via franchise—the technologies themselves. Packing and shipping franchises, software development, and mobile hardware/networking services are just a few.