Franch revolution

franchising business model

The appeal of the franchising sector has contributed to its resilience in the face of economic headwinds.

The British Franchise Association reported that after a small downturn in 2008, overall turnover of the franchise sector has been in growth ever since, as have the number of franchised brands, businesses and employees.

There are many different types of franchises, but three sectors in particular highlight the diversity and sustainability of this business model:

Within the hotel industry, franchising has been utilised internationally for decades. Currently, c.70% of all hotels within the US are branded or "flagged", significantly relying on their central brand to secure "heads on beds".

In the hotel franchising model, owners secure a site from which they apply to franchise from a central brand. Often, the central brand will have multiple brands under one umbrella corporation. These will usually be segmented by price point, which is beneficial to both the franchisee and franchisor. This allows the site to differentiate itself against competitor brands, and prevents the cannibalisation of sales across the franchised brand.

Intercontinental Hotel's Group (IHG), the owner and franchisor of Holiday Inn and Hold Intercontinental Brands, among others, is switching to an asset light business model. IHG have shed over 200 sites since 2003, while IHG continues to operate a small number of sites. 96% of operating profit is generated by their franchise business model. IHG notes that franchise models are generally utilised in more mature markets, for example the Americas and Europe, while they employ an alternate management model within emerging markets.

Fast food 
This sector is also showing a shift towards fully franchised brands. Restaurant Brands International (RBI), owner of the Burger King, Tim Hortons and Popeyes brands, operates over 25,000 restaurants across the world. After 2014, RBI operated as a 100% franchised business, with units owned and run through franchise agreements.

Generally, within the food franchising industry, franchisees will be granted geographical rights to operate under the brand name. Usually purchasing several site locations from the franchisor, with the franchisor helping to best select the correct size and location for new units.

This geographical model is particularly helpful when entering new markets; it allows the franchise partner to utilise their local knowledge to tailor the product mix and servings to local taste. For example, Dunkin' Donuts' franchises in Colombia serve arequipe (a type of South American dulce de leche) donuts, which was introduced by the Colombian franchise owners.

However, this model is not without risk. As the model utilises franchisees operating independently of one another across geographies, but under the same brand banner, the autonomous actions of one franchisee (or of the franchisor) can have knock on effects across the entire network. In early 2018, Ontario based Tim Hortons franchisees responded to increased minimum wages by scaling back employee benefits, attracting negative press and pressure from consumers. This damaged the brand's reputation; so much so that whilst in 2017 Tim Hortons was ranked the 4th most liked brand in Canada, just a year later it had dropped to 50th.

Anytime Fitness (AF) utilises a different fee model to other sectors. Rather than accruing a percentage share of sales, AF takes a flat fee from each of its franchisees. This is directly because of the income stability of gyms; the subscription model means that there is generally little variation of income across sales periods. Gyms also have the benefit of being unaffected by supply-side changes (e.g. the cost of food), and will often be franchised in ones and twos, making their enfranchisement an attractive offer from both sides of the deal.

Franchising is set to remain a highly attractive method of growing brand exposure, entering new markets and shifting risk from central operations to a wide network of individual operators and one which will continue to see growth across diverse industries.

Sam Rintoul