One of the great draw cards of franchising is that brands tend to be innovative and quick to respond to changing demands of consumers. This is why they’ve proved resilient during these drawn out years of recession and global financial instability.
But as quickly as franchises emerge and evolve, the rug can just as quickly be pulled out from under them.
There’s a reason why established, popular franchises have waiting lists and price tags that make your eyes water:
Their concept and systems are proven and they have a firm footing in the market.
What’s more, even if they started out as one of a dozen similar concepts, they’ve proved they’re worth their salt while others have fallen away. If you need an example, just think back five years or so to the number of pie shops around. Today there are only a few major brands left.
So while newer franchises can be more affordable and appear to have traction, they do come with their share of risk – how will you know which one has staying power?
It’s not always possible to see into the future, after all, who knew that after VCR would be DVD, then Blu-ray and then on-demand?
So, here are the red flags to look out for when researching a new and fast-growing concept to avoid a franchise fad trap.
The franchise has limited offerings
Many great businesses have thrived because they do one thing well – fish and chips are an example. But a one-trick pony is most vulnerable to consumers’ whims. You should be wary of buying any franchise that’s focused on a single product or service.
A case in point
Back in 2002 to 2006, American Dr Siegal licensed his hunger controlling cookies that went hand in hand with his commercially successful weight loss ‘cookie diet’ system.
After opening dozens of centres in the US and Canada, it joined the ranks of other ‘has been’ diet fads, as Siegal fell out with his franchisee, and in 2008 he filed for bankruptcy protection.
The owners are rookies or ‘too much too soon’
Franchise companies are often born with a novel business idea that gets packaged and sold before the operators prove their broader business acumen.
That’s why you should always look at management strength and history before investing in a franchise. If they have vision – and capital – they will know how to tweak the business model to change with the times and keep up if there’s a sudden boom.
If their experience is limited, however, they may flounder and flop.
A case in point
In 2005, US franchise Complete Nutrition opened its first set of doors offering diet and nutrition supplements as well as health consultation. But it suffered a fate called hyper-growth after franchising in 2008: It awarded 245 franchises in 15 months with only 20 franchise support staff.
The result was a brand that grew faster than the infrastructure could support it with proper franchisee training, marketing and product demand.
Stretched so thin they faced implosion, in 2011 Complete Nutrition decided to freeze franchise sales until they recruited seasoned executives with franchise, retail and technology experience, taking their support staff to 60.
The franchise’s product or service isn’t a necessity
Be wary of ideas that rely on discretionary income, especially in a tough economy. If a franchise is focused on a discretionary product or service, investigate why your customers will keep spending even when times are tough. There are of course exceptions.
These include fitness franchises, which have held up relatively well, as well as franchises related to educating kids and pampering pets.
A case in point
From a local perspective, think how specialty pick and mix sweet stores have become few and far between. Once available in almost every shopping centre, they’re now challenged by supermarkets offering much lower prices.