Developing Your Franchise Offering, Part Three

In MSA’s five-part series on the Threshold Analysis, we discuss how to evaluate whether your business is ready to franchise. This series looks at the approach MSA takes when designing and developing a franchise system for our clients.

Market Selection Overview

Franchising for the most part is a critical mass-driven business. Too often a franchisor’s geographic expansion is determined by factors other than planning, and instead is substantially driven by where the prospective franchisee’s calls originate. If you are working with a franchise broker, frequently they will present you with opportunities outside of your geographic target – and often those should be rejected if you can’t support franchisees in those markets. An unplanned growth strategy can have detrimental consequences, as the cost of supporting franchisees and the capability to enforce brand standards become increasingly difficult for new franchisors as the distance between franchised locations and your headquarters increases.

Markets targeted for expansion should primarily focus on enhancing the franchisee’s and franchisor’s bottom line. The factors you need to consider in establishing your geographic growth strategy include:

• Markets in which you have established brand and concept recognition
• Critical mass requirements
• Supply chain capabilities
• Field support capabilities including labor cost, staff availability, and time required to provide the necessary support services
• Established competition
• Available and affordable real estate
• Relationship laws
• Affordable franchise sales marketing
• Available strategic multi-unit franchisees
• Language requirements, etc.

Critical mass enables the franchise system to achieve market dominance over other chains and local independents, enhances financial viability for the franchisees in the market, and allows you to develop a sustainable revenue stream necessary to provide franchisees with the required brand support. An indirect benefit to planned expansion will be your ability to establish better real-estate broker relationships and attract better locations under more advantageous terms as the brand becomes stronger in the targeted markets. It is generally far better for an emerging franchisor to develop strong regional brand presence than to have locations scattered over a large geographic area that may be difficult to financially support.

Site Selection and Development

To ensure a more sustainable franchise system, the performance of your franchisees and their selection of the proper real estate for your type of business will be important. Real estate availability is always a challenge; the goal is to establish a support program that provides your franchisees with the information required to understand your real estate requirements and, with your support, develop their locations. In developing your approach to site selection and development, you should focus on:

• Researching markets to determine areas of better real estate availability;
• Targeted development of suitable markets;
• Flexibly reviewing your site requirements to expand the number of locations available to the franchisees;
• Focus on recruiting the appropriate franchisees required to develop and execute your localized site development strategy;
• Establishing relationships with real estate broker networks and attending real estate deal shows and meetings, including those held by the International Council of Shopping Centers (ICSC) and local real estate associations;
• Establishing relationships with companies that may be in difficulty and potentially have real estate that meets your development needs;
• Providing your franchisees, early in the relationship, with training on site selection. This training will have major payback, as it will enable your franchisees to focus their efforts on looking for the right locations, will give them a process to do so effectively, and will also strengthen your franchise relationship as it will provide them with an early benefit of being your franchisee;
• Encouraging your franchise prospects to begin looking for sites, and reviewing those sites with them during Discovery Day or prior to signing the franchise agreement;
• Using digital photography, site review packages, and other methods to speed up the process of reviewing the real estate that franchisees identify;
• Establishing your site selection, approval and development strategy; and
• Define territorial grants, if any, to facilitate critical mass market coverage necessary to support your system’s requirements and capabilities.

Establishing Site Criteria

There are no stock definitions of a great site, because every business’s criteria are different. If your system’s customers will be coming to your place of business, then visibility and ease of accessibility should be foremost on your mind. However, if you are in a service business that goes to a customer’s home or place of business, then highways, a place to park your vehicles, and warehouse space may be most important. You need to consider what your location will do for you. You also will need to determine how much location your franchisees can afford. Following are some of the basics, but there are other criteria you need to consider:

• Population density: How many people or businesses are in your trading area? Are they the right background, age, family size, and family income for your type of business? There are demographic suppliers that can provide you with localized reports telling you who lives and works around any proposed location.

• Traffic generators: It is always beneficial, if you’re expecting customers to come to your location, that other businesses help you draw customers. Traffic generators such as malls, office complexes, schools or hospitals may bring you the right traffic. Anchors like grocery stores and drug stores may bring the localized traffic your franchisees will be relying on. If your business is a women’s hair salon and your center has several women’s clothing stores – that may be a perfect situation. But if your next-door neighbor is a furniture store or auto repair facility – both locations that people visit infrequently – they lack the compatibility you require.

• Traffic count and accessibility: How much traffic, both by car and by foot, do your locations require? Simply measuring traffic counts isn’t enough, if the speed of the traffic or the accessibility makes it difficult for customers to get to your location. Similarly, if foot traffic is high during the day, but your business needs an evening clientele, then measuring noontime foot traffic isn’t going to benefit you. You need to determine not only that traffic exists, but also that it is accessible and available when you require it.

• Competition: Some businesses – like quick service restaurants – often do better in areas in which other quick service restaurants are established. However, if you are a dry cleaner and there is a dry cleaner on every corner, saturation by established retailers may be your undoing.

• Security: The safety of your customers and staff is important. Understand how well the center is run and what types of individuals currently shop in that center.

• Employees: Are there sufficient numbers of qualified people in the area to work in the location? If the pool of potential employees is limited, your pay scales may go through the roof. If you need entry-level, minimum wage employees and every kid in the neighborhood is driving a BMW or Audi, it may be difficult to find enough local staff to support the location.

• Visibility, signage and zoning: Having clearly defined criteria is essential. If you are a destination type concept, it is important to make certain that customers will have easy and sustained site visibility.

These are just some of the site criteria you will need to establish. Finding the appropriate site in some communities can be difficult simply because many of the great sites have already been taken and there is heavy competition for those that are available. But, you can limit your risk of franchisees selecting poor sites by understanding what types of sites work for your franchise and making certain that the sites selected meet your needs.

Types of Available Sites

The ideal location for your business depends on the type of business your franchisees will be operating. If they will be providing services or if the business model doesn't require high traffic, then an office, warehouse or even their home may be the perfect site. However, if they will be running a restaurant or retail business, it's likely that locations with visibility and high traffic are what you'll want to target. As your franchisees begin to look at specific sites, there are several types you will want them to be familiar with:

• Malls: We've all been there. Large, usually enclosed shopping centers containing a mix of different types of businesses, malls service a large area or market and are accessible from major thoroughfares. Malls are natural traffic draws, and the good ones can attract a large number of potential customers to your business. But all that traffic usually comes with a high price. In addition to rent, you'll likely be required to pay for common fees such as area maintenance, association dues and mall advertising, among other charges.

• Lifestyle Centers: Usually found near affluent residential communities, these open-air centers feature upscale national specialty chain stores, dining and entertainment, and fountains and other ambient design elements that make browsing the internal, uncovered walkways enjoyable – whenever the weather permits. It isn’t typical for a traditional anchor store to be dominant in a lifestyle center the way they are at the malls; multiplex cinemas, small department stores, large bookstores, and large-format specialty retailers are usually the biggest individual draws. These centers combine some lower-priced, impulse purchase vendors trading off of the high traffic counts, along with higher-priced, destination type merchants. At these centers there may be parking right at each of the retail stores and usually larger parking lots as well. They will generally have a regional draw depending on traffic patterns and convenience.

• Shopping Areas: These serve the community, such as a downtown area that benefits from local office workers or residents. In some cities, these shopping areas also draw tourists or folks who live in the suburbs and are attracted to the areas because of entertainment. But shopping areas can be expensive retail areas, and often lack sufficient parking for customers. Keep in mind – if most of the traffic comes from office workers, the business hours may be compressed into lunchtime and immediately after work. Unless there are other draws or residents in the area, weekends may not be as busy as at other locations.

• Neighborhood or Community Centers: These are usually anchored by supermarkets, drug stores, or other large retailers and benefit from the variety of other merchants in the center. They draw from the local community and are the type most retailers and restaurateurs look for. While the larger regional centers can have signage and other restrictions, most neighborhood centers offer few of the barriers often found in mall locations.

• Power Centers: Power Centers are open-air and usually located near a Regional or Super Regional Center. They include at least three “Big Box” or “Category Killers” such as Wal-Mart, Target, and Home Depot. A trend in some markets is to convert some of the underproducing Regional Centers to Power Centers, because people like the convenience of the Regional Centers but prefer the ability to park in front of the store of their choice.

• Strip Centers: These are smaller versions of neighborhood centers, usually with three or more stores but without the anchor of a large grocery or drug store.

• Off-Street or Mass Gathering locations: Airports, universities, ballparks, and co-branded locations are all types of sites that have a specialized high traffic audience and are usually not easily accessible to customers just driving or walking down the street.

• Other Centers: There are constantly evolving variations of developments where retailing, entertainment, employment, tourism, bargain hunting, and other activities come together. Theme/festival centers are heavy on entertainment and restaurant businesses for leisure and tourist activities. Outlet centers have great bargains and sometimes draw busloads of people from very far away. Mixed-use centers combine many activities in the same area – retail, restaurants, employment transportation, sports, recreation, office, hotel, cultural and other activities in various integrated combinations. Specialty centers can focus on restaurants, car care, off-price, and other specific types of businesses on a planned development parcel. These, as with the more typical centers above, can be centers that you either want to be part of or near to, so that you can take advantage of the customer flows they create.

Site Approval Process

It is not generally the role of the franchisor to select sites for its franchisees. The more standard approach is to develop criteria for site selection, and to provide that information as part of a training module that also provides the franchisee with a methodology to find sites. Franchise methodologies vary but, in part, franchisors develop workbooks or site approval kits which franchisees complete on locations that they believe meet the franchisor’s requirements.

Once the site approval material is received from the franchisee, the franchisor will review the information received and make a preliminary determination as to whether any of the proposed sites, on paper, meet their criteria. Prior to approving the location, there is usually a physical evaluation by the franchisor of the site, and the franchisor merely approves or disapproves the location at that time. While the process is supported by the franchisor, the site is merely approved by the franchisor. It is usually the franchisee that is responsible for selecting their business site.

In Part Four of this series, we will cover financial modeling, legal overlay, and appendices to consider.