DEADLY FRANCHISE MYTHS: The Hot New Franchise Myth by Sean Kelly
May 15, 2013
Deadly Myths of Franchising: The Hot New Franchise Myth By Sean Kelly
When people find out I’m in franchising, they invariably ask: So what’s the hot new franchise?
The idea of the hot new franchise – that exciting new company or concept that bestows instant multimillionairehood upon those in the right place at the right time who have the savvy to act (and invest) quickly – is one of the most prevalent and dangerous myths in franchising.
The siren song of the hot new franchise has drowned the hopes and dreams of thousands of normally prudent people by luring them to invest in such unproven, high risk ventures as eBay drop-off store franchises, meal preparation/meal assembly kitchen franchises, men-only fitness clubs, all-cereal restaurants, drive-thru coffee kiosks and more.
The hot new franchise concepts would be high-risk ventures even as independent start-ups, but once the burdens of franchising are heaped on, they are almost invariably toxic and doomed to fail.
To avoid falling into the hot new franchise trap, you must understand The Basic Franchise Value Equation, and why a better (albeit less fun) question is “So what are the tested, proven & successful franchises?”
The Basic Value Equation of Franchising
Here’s the single most important concept you need to understand about franchising: When you buy a franchise, you agree to start a business with some inherent & significant burdens.
Burden #1 is an upfront franchise fee, typically between $30,000 to $50,000, that you must pay the franchisor.
Burden #2 is that you must continually pay a percentage of your gross sales (regardless of whether you’re profitable) through the duration of your franchise agreement. If you fail before the end of your term, you may still be liable for an approximation of what royalties might have been had you remained open for the full term of your agreement.
Burden #3 is your loss of autonomy. Forget all those franchise ads about being your own boss and calling your own shots… when you buy a franchise you agree to do what you’re told, and to adhere to the rules and restrictions imposed by the franchisor. When you buy a franchise you can be told what you can sell, who you can buy from, how you can market, and how you price your products and services.
So why buy a franchise? Prospective franchisees assume that they will gain benefits from the franchisor that far outweigh these significant burdens. Some of these benefits may include instant name and brand recognition, efficient, established operational procedures, tested marketing programs and techniques, powerful national or regional advertising, group buying power, and the backing of a support team with years of experience.
If a given franchise requires the burdens of extra fees, royalties, restrictions and requirements but fails to provide benefits to (more than) offset those burdens, the franchise will likely fail fast and hard.
The Franchise Appeal of Boring, Old & Successful
McDonald’s is a good example of a franchise that works. A McDonald’s franchisee takes on the upfront burden of paying a $45,000 franchise fee and paying a 4% royalty, plus advertising fees and co-op contributions. In addition, McDonald’s franchisees must do what they’re told – such as maintaining the controversial Dollar Menu, and adding required equipment and products – whether they like it or not.
Few would dispute that the benefits McDonald’s provides – from expertise in site selection to universal name recognition to powerhouse national advertising – far outweigh the burdens. McDonald’s provides a proven system, finely tuned from years of trial and error, that takes the guesswork out of business ownership.
Strangely, many hot new franchises, despite having unproven concepts, no track record or national advertising, charge fees and royalties equal to or exceeding those of franchise giants like McDonald’s.
Here are a few examples of Hot New Franchises from recent years:
iSold It In 2007, iSold It was named Entrepreneur magazine’s hottest new franchise. They charged a $22,000 franchise fee, a 10% royalty and 3% advertising contribution for an unproven, experimental storefront concept selling people’s stuff on eBay. With an initial investment of $138,000 – $198,000, iSold it sold more than 400 franchises. Just over 200 opened before it was clear that the experiment was a failure and the chain crashed. The original franchisor is gone, and a smattering of stores remain.
Cereality is a cutesy, all-cereal restaurant still sold by Kahala, franchisors of Cold Stone Creamery, Blimpie, and other much maligned franchises. Donnie Deutsch on CNBC’s The Big Idea said “I love this. This is genius.” USA Today wrote: “The latest fast-food concept is so absurdly simple, self-indulgent… well, how can it fail?” Obviously, it can fail quite easily, as every one of the $200,000+ cafes have failed… some in less than 6 months. Despite the fact that just an airport kiosk and a tri-branded location remain, Kahala (aka Bad Ideas in a Bowl) is still hawking the Cereality franchise opportunity.
Make & Take Gourmet was one of a number of much-hyped “meal assembly kitchen” franchises with clever names like Dream Dinners, Super Suppers, Supper Thyme USA & My Girlfriend’s Kitchen. The hot new idea was to charge busy, professional women a fee to use a commercial-type kitchen where they could prepare gourmet meals to freeze and serve later to their families. Amazingly enough, it turned out that working women actually have their own kitchens and freezers in their homes! The Make & Take Gourmet chain imploded and most of the meal assembly kitchens have disappeared, along with the $300,000+ each they burned up in the process.
Not Every New Franchise is Necessarily Bad
The failure of hot new franchise concepts is not an indictment of every new franchise company or new franchise brand.
Five Guys Burgers and Fries is a successful, relatively new franchise company. But Five Guys was a variation of an existing concept based on a proven fact: We know people will eat burgers and fries, and we know what they will pay for them. Five Guys Burgers and Fries had the benefit of decades of established data, experienced management and an established industry & supply chain.
Compare that to the hot new franchise concepts, which are predicated on unproven assumptions, such as gamble that people will pay others to sell their junk on eBay, will pay regularly pay $6 for a bowl of Fruit Loops, or will pay someone else for the privilege of making their own frozen food.
Other hot new franchise owners are gambling that online access to video game software won’t wipe out every video game store, that people will buy gourmet food (at gourmet prices) from a food truck, or that people will pay to send Fido to summer camp.
There’s nothing wrong with trying an experimental, high-risk, innovative business venture … just don’t pay for the safety of a proven system when the concept itself is an experiment.
If you want to innovate, do it as an independent business.
If it works, you can always franchise it yourself… once it’s an old, boring, and highly successful business.
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