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For sales growth and store growth, Starbucks and 7-Eleven are two of R the biggest brands in retail, both at home and around the globe. Their franchise strategies differ, but they have one major similarity: They’re expanding.
The strategy of turning over the reins of the retail brand to an outside investor in the form of a franchise opportunity isn’t for every business model. But according to one franchise advisor, it’s a growth strategy that should be considered by more companies-especially those faced with the difficult proposition of closing stores. ”
“Why don’t more people franchise? A lot of folks think of franchising as fast food,” said Michael Seid, managing director of Michael H. Seid & Associates, a franchisor advisory service based in West Hartford, Conn. “And they just don’t understand it. It’s as simple as that.”
Starbucks and 7-Eleven have been following and adjusting their franchise strategies for years.
In North America, the growth of Starbucks’ company-operated locations has been the stuff of legends in real estate circles. But its licensed locations have grown even faster. In the last three fiscal years, the percentage of franchised store locations has risen steadily from 809 in 2001 to 1,475 in 2003. As a percentage of total stores, franchises accounted for 21.4% in 2001. The figure grew to 26.5% in 2003.
Dallas-based convenience store giant 7-Eleven has a much higher franchi se-to-corporate ratio. At the end of last year, independent franchisees operated 3,338 7-Eleven stores in the United States. That’s more than 60% of its U.S. store base.
While the mix has remained steady, a 7-Eleven spokesman said the company has expanded the opportunities for franchising domestically. The company also began sharing more gross profits with franchisees, beginning this year. In the past, franchisees generally have received 48% of the store’s gross profit. The new agreement splits the pot 50-50. In the 7-Eleven franchise model, the company owns or leases the stores and equipment used by the franchisees.
Seid, who co-authored “Franchising for Dummies” with Wendy’s founder Dave Thomas, said there’s a larger trend toward an increase in the mix of company-owned vs. franchise stores in the retail industry. he said he’s aware of a few “household names” that are planning franchise expansions in the near future. he declined to identify them, but said they include homefurnishings, automotive-aftermarket and Internet-related store franchises.
There are as many corporate franchise strategies as there are franchises. Fast growth, low risk and shared expenses provide the basic attractions. But Seid would like to add to that list improved control, contrary to the perception of the franchise model. While a company-owned store manager can, and often does, quit, a franchise location owner “is on the hook” and bound by strict contracts to live up to the image of the brand, he said. The same dynamic helps explain why franchise stores typically outperform company stores, Seid claimed.
In fact, Seid promotes the idea that companies faced with closing stores have little to lose by considering finding franchisees for the stores.
“There is little reason not to look at it,” Seid said. “It’s a strategy that can cut costs while maintaining the channel of distribution and the customer base. Because the customers don’t know the difference between a franchise store and a company-owned store.”
He pointed to Gateway’s recent decision to close its 188 stores as a possible example of a lost opportunity for franchising. Gateway did not return calls seeking comment on whether it considered the option.
The concept of moving from company-owned store to franchise store has precedent. In fact, 7-Eleven has converted its company-operated stores in southern Maryland to franchise stores within the last two years. Each company store was offered as a franchise opportunity first to the store managers, then to the public. “The interest was quite high, and these stores are operating as franchised stores now,” said spokeswoman Margaret Chabris.
Seid believes the franchise strategy could have been used by many retailers in the past, as opposed to merely closing stores and losing customers. There’s no reason why a franchise strategy can’t work for a big box, he suggested.
“Could you have saved all those Kmart locations? I don’t know. But typically, the franchisee will outperform a company store, because the franchisee is on the hook.”