The Franchise Model: How Successful Planning Created Empires
In the world of business investment, the franchise model allows a company to grow and expand nationally, or even worldwide. While the most successful franchises quickly became household names, there are still a lot of business opportunities in smaller, lesser-known brand names. Every empire starts somewhere small. Apple Computers started in a Southern California garage with only 2 people and some big ideas. Today, they are the world’s largest company, being the first to reach the $1 trillion mark in total market valuation. A globally recognized franchise business, Domino’s Pizza Inc. began with one location in Michigan in 1960. By 1978 they grew to 200 locations when their business really started to take off. Today there are over 14,000 locations worldwide and Dominos Pizza does close to $3 billion in sales annually.
If you are looking to franchise your own business, or purchase into a franchise opportunity there are a lot of great examples to follow. There are also a lot of examples on what not to do.
McDonald’s is arguably the most successful business franchise of all time. Today there are roughly 34,000 McDonald’s locations worldwide and they employ 1.8 million people in 119 different countries. This all began with a traveling sales man, Ray Kroc who sold milkshake mixing machines that could make five milkshakes at once. In 1954 he heard about a restaurant in California who had purchased 8 of his milkshake machines and were using them all, simultaneously. He just had to check out this restaurant in person, to see how they were selling so many milkshakes. When he arrived at the busy hamburger stand he saw a fine-tuned assembly line production process. This was practically unheard of in the food industry at the time. Ray Kroc had the vision and ambition to franchise this process out across the country and the concept of ‘fast food’ was born.
As America was becoming more mobilized, with highways and interstates crossing the country, Americans were free to travel with ease. McDonald’s began opening up locations on major highways and interstate exits and they quickly became known for their speedy service. In 1961 Kroc bought the franchise outright from the MacDonald brothers for $2.7 million and a continuing royalty of 1.9% on the gross sales. Kroc quickly expanded his empire with the McDonald’s name intact across the United States. Kroc’s contributions to the business of franchising are unparalleled. The success of the fast food restaurant, catering to travelers quickly led to other franchises like hotels and convenience stores popping up along highways and interstate exits next to the McDonald’s locations. Franchising is really all about commercial uniformity. A customer can know exactly what to expect when they walk into a franchised business whether it is located in Los Angles, California or Des Moines, Iowa.
While franchises are a popular way to get out of the whole start-up phase of creating a new business from the ground up, they face the same market fluctuations and trends as any business would. Market saturation has been a huge problem for many franchises as market innovations and fads have also been. Mattress Firm recently announced it was entering bankruptcy as online mattress retailers have taken a larger slice of the market. There literally is a Mattress Firm across the street from another Mattress Firm in my hometown!
One of the most prominent failures that come to mind in franchising is the story of Blockbuster Video. The inevitable innovation of disc-rental kiosks and eventual streaming video services on the internet, essentially made the Blockbuster business model obsolete. A very small amount of stores are still in operation today, operating at rock bottom margins, renting movies for .49 cents a day or .99 cents a week. While their story seemingly ended in failure, there was some light at the end of the road. Dish Network purchased the blockbuster franchise in 2011 and the Blockbuster name lives on with an online movie streaming service for Dish Network customers.
California was the first state to regulate franchise opportunities, in 1971.
Many other states created their own franchising laws, and in 1979 the US Federal Government began regulating franchise operations through the Federal Trade Commission. Many in the franchise industry welcomed the regulations and they have arguably made the franchise model a stronger, more-viable business option. There is a lot of opportunity in franchising, as thousands of unique business opportunities are available in the United States today.
If you are looking into buying a franchise, or selling your business out to a franchising opportunity, you should always have a professional business broker by your side. Shawn Davis, and his team at LINK Business are always available to help you with your needs or to answer any questions you may have.