3 common difficulties for franchises, and how Location Intelligence can help you solve them (1/4)
The franchise model is designed to be scalable. Its expansion is based in a win-win relationship between the franchisor and the franchisee: with each new opening the franchisor benefits from a higher base of royalties and increased brand awareness. The franchisee is also able to launch her own business with an idea that is market proven and with an established operational model. However, at certain point in the expansion process, the franchise can fall under its own weight, facing saturation, cannibalisation and scalability problems. Talking with many of our clients we have seen that certain difficulties appear again and again in our discussions:
- Designing the expansion strategy
- Convincing and attracting new franchisees
- Managing and controlling the network of franchises
Because what we do and what we are passionate about is Location Intelligence, these points might be biased towards location related issues. We acknowledge that, and we what we’ll talk about in this series is not about how to solve all problems for franchises, but the problems we typically see in our day to day.
We will divide the series in 4 pieces. In the first one (this one!) we’ll discuss briefly the 3 difficulties and then explain different solutions to solve them. In the rest of the articles we will focus on how we would apply Location Intelligence to solve those difficulties and scale a franchise network by a factor of x10 or x50.
Short introduction to 3 common difficulties that franchises face
Designing the expansion strategy
You have just launched your franchise in a city that you know well. You know the places that are suitable for your franchise and you have identified around 10 areas where your franchises could succeed. It’s easy and fast to visit your candidate areas, count how many people walk in front of your potential franchise, note what shopping bags your future customers are carrying to figure out what and where do they buy, count the number of competitors nearby, etc. This information will help determining whether the decision you are taking is the correct one or not.
Once you and your franchisees have opened franchises in the areas that you know well, you need to start investigating other areas to continue with the expansion, in the same city or in other cities. In this case it’s typical to have partial or incomplete knowledge of where to open new franchises. The risk of taking a wrong decision is higher and more time and money is needed to find new areas and locations. Because of this difficulty many decisions are taken based on intuition and experience alone, potentially taking sub-optimal decisions.
Convincing and attracting new franchisees
Opening a new franchise can be a huge investment for the franchisees and before they do so they want to make sure they are taking the right decision. There are many ways to convince them and win them from other franchisors (e.g., branding), but we’ll talk about what we know: Location. Either if you are the one proposing a list of potential locations or if the franchisee is in charge of finding her own location, making sure that the future location will be successful and having hard-data to back-up the decision is key for both parties’ interests.
What if all franchise located decision could be backed-up with all relevant socio-demographic, economic, traffic, competitor, etc. data? What if you could give your franchisee a sales forecast based on the location and the target population? This will increase the certainty that the future franchise will be successful.
In this aspect two problems arise:
- With data: how do you gather that information? How do you present it clearly to your franchisee?
- With scalability: how do you replicate that process when the number of franchisees you need to convince grow significantly?
Managing and controlling the network of franchises
With few franchises in one city it’s manageable for the franchisor to control the network. It’s easier to avoid cannibalisation among franchises, as there is the entire city or country to choose locations from. It’s also easier to get all the data from sales, employees, marketing campaigns, etc. to control what’s happening in the network.
Once the franchise network starts growing to a significant number in many cities across the country, it gets harder to consolidate results, analyse franchises one by one, visit the locations, etc. It also gets harder to anticipate cannibalisation effects, to assign exclusivity areas or to learn what locations work best and why. How can you control the growing complexity and dispersion of your network without limitless investment in time and money?
Overview of possible solutions
We will explore different solutions to solve the location related difficulties explained above. This list does not try to be completely comprehensive, but to give an overview of the most common chosen solution available in the market. These solutions are sometimes used independently and sometimes are used together, depending on the specific situation of the franchisor. Of course, each solution has its own advantages and disadvantages.
As a franchisor you can hire the services of a specialised consultancy company. The advantages of these types of consultancies are that normally they have a lot of experience in different sectors, geographies and typology of projects. Thanks to this you can benefit from a know-how you might not have in your company and you won’t need to hire and train anybody (with the necessary learning curve), but you can start seeing results from the beginning.
However, all these benefits have a cost. You will need to make a big investment in the project, in terms of money and time. Additionally, you need to make sure not to be making the typical mistake of failing in the “knowledge transfer”. The transfer of knowledge from the consultant to your company can change the outcome of the project from a success to a failure. The projects becomes a bit useless if you don’t learn anything from the processes, technical knowledge and solutions proposed by the consultants. A project should not be a one-off, but an opportunity to solve a specific problem while your team learns in the process.
These kind of studies are very convenient, as the reports have already everything prepared and you can obtain it instantly or very quickly. It’s a very replicable process and, depending on the level of information required and the question you are trying to answer, a report can be enough to solve it. However, what happens if we want to play with the information, modify some parts or iterate? There are some reasons why sometimes a report could not be recommended (of course, depending in the situation and the type of report):
- Information might not be directly treatable: it’s in PDF, the information is not disaggregated enough to your required level of granularity to cross different sources, etc.
- Reports might not be flexible: the reports have to be adjusted to a format and level of granularity that might not be 100% suitable to your particular situation but you don’t have the option to design and tweak it in the way you would like.
- Reports are very replicable but not scalable: in some cases reports are used to validate a hypothesis, and one might be enough. But if you can investigate different areas or iterate, you’ll need several reports and the cost can increase exponentially so other solutions will become more affordable
In-house Location Intelligence software
In this section we are referring to both the building of an internal product by your own engineers or by an external vendor. The biggest advantage of building your own software in-house is that you have 100% flexibility to adapt the product to your specific needs. Additionally, you can design the software taking into account your current systems and processes, so the integration with other tools and areas in your company will be much easier.
As with the other solutions, this one has also some disadvantages, of which we would like to highlight two:
First of all, you will be stuck to that product for a long time, as you will need to justify your investment in time and money. It’s not a cheap solution, as you need to invest a lot of recurring man-hours to build and maintain it. What is more, even if you realise that your product is not satisfying completely all your needs and that you know that there are better solutions out there, you will not be able to migrate to a different one.
Second, there is a high chance that your product is not up to the standards of similar products that your competitors are using. Your core business and the thing you are the best at is your franchise, not building Location Intelligence software. There are companies that use 100% of their resources and talent to build a software that is attacking the same problem you are, and they can amortise the cost among a lot of clients. Moreover, these companies are constantly innovating and iterating, so it becomes harder and harder to keep up with them. The chances of you letting scape a better and cheaper solution are very high.
Location Intelligence or geomarketing application
There are many types of Location Intelligence or geomarketing applications. Some are more oriented to visualising internal geo-located data to extract insights, others are more focused on analysing relevant external data sources, some are more specialised in marketing, others in expansion, etc. In this section we will not discuss the details of each one of them, but we will focus in an application that combines data, visualisation and analytics. Let’s dive into the advantages and disadvantages:
Among the advantages of a Location Intelligence application is that it’s a completely scalable product, as all the analysis you perform can be repeated without any additional cost or complexity. You will be able to replicate and iterate the studies of an area, the search for new locations, etc. with no limit. This contrasts with a single geomarketing study, where you need to pay for each iteration. Even a low number of studies justifies the investment into a geomarketing or Location Intelligence application. Technically, these applications are easy to kick-off and don’t require any maintenance nor technical resources. Depending on the application, we can save a lot of time and money in the process of gathering all the external data sources and the programming of the analysis, as that’s usually pre-loads in the tool.
Depending on the application, the learning curve to extract the full value can be steep, as some require previous knowledge of GIS or statistics. Additionally, the integration with other systems of your company can be complex and cumbersome, and the personalisation of the tool is more limited.
This post is part of a series that talks about 3 typical location-related problems franchise face. As what we are passionate about is Location Intelligence, we tackle location related issues. In the rest of the articles we will focus on how we would apply Location Intelligence to solve those difficulties, with specific real world examples.
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