Franchising: New Horizons

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03.29.1996

Kim L. Bayless

For many years franchising has proved to be a strong growth vehicle for the expansion of business opportunities on both the national and international level. This expansion has traditionally come through the construction and operation of free standing or self-contained units, uniform in design and operation. We have grown up recognizing the familiar designs and trademarks of franchised businesses that touch or affect many aspects of our daily lives. However, as the franchising industry has matured and desirable locations have been developed, new properties capable of supporting new franchises have become harder to find. In addition, since the traditional approach to franchising normally requires a significant commitment of capital and other resources, the pool of individuals capable of taking advantage of the franchise concepts has continued to shrink.

This "aging" of the franchise industry has forced franchisors to look for new means of expanding their operations. These non-traditional approaches, some of which are listed below, are many and varied and continue to develop.

Streamline or express units offering a limited number of items or services can be constructed as free-standing units on smaller tracts of land or in combination with other units. This permits the use of smaller tracts of land, frequently smaller investments, and further specialization of the product or service.
Franchise units can be incorporated into other existing businesses. This approach can be used to put any kind of franchise concept into another business, which can be consistent with or totally different than the existing operation. For example, a fast food franchise can be placed in a convenient store or other retail location.
Dual branding permits two or more franchise concepts to be combined. A number of franchisors are offering their concepts in combination. This approach provides more variety, with several different franchise products being offered from the same location.
Kiosks, carts, cases or similar pieces of equipment can be used to provide a compressed version of the franchise concept. This is becoming a popular approach when done in combination or when "stacked" with other franchised concepts to permit the consumer to have a full range of food or other products in one location. For example, prepared sandwiches, chips and desserts can be offered from small cases filled periodically by separate vendors.

Other concepts are developing that are structured to avoid the disclosure and other franchise related laws. These basically consist of some but not all of the customary attributes of a franchise. An example of this approach would be a simple license of a trademark, without enforcing adherence to a business operating plan. The objective of this approach is to permit the franchisor to avoid the disclosure and other franchise laws and thus the costs associated with compliance.

Utilizing these non-traditional approaches offers many potential benefits for both the franchisor and franchisee. These include reduced space and capital requirements, as well as sharing of overhead and operational expenses. These approaches can provide new sources of revenue from the sale of the new products, as well as from customers seeking the combination of the new products or services with those previously available at the location. Since the non-traditional approach oftentimes is "scaled down" and less costly, the franchised concepts are becoming available to individuals who do not have the resources to undertake a traditional franchised operation. On the other hand, franchisors can use them to expand into new and varied areas such as airports, toll roads and retail businesses, not otherwise available to them.

Although the non-traditional approaches to franchising provide many benefits, they do not come without new problems. One of the obvious concerns stems from the fact that many of these new approaches are untested. One of the advantages of a franchise is receiving support from the franchisor and avoiding the pitfalls that normally attend the start-up and/or operation of a business. Unfortunately, franchisors have much less experience in the non-traditional approaches. Development of demographic requirements, operational procedures and other aspects of franchise operations should continue to develop as these non-traditional approaches are used. Refinement of these will continue to help reduce the risk of mistakes in business operation. In any event, a franchisee seeking to use a non-traditional approach should inquire into the experience of the franchisor in whatever approach is selected.

The development of the non-traditional approaches has required franchisors to be more creative and to give franchisees more leeway in the operation of their businesses. The traditional "take it or leave it" attitude of franchisors has given way to increased flexibility and the opportunity for franchisees to exert more influence over the franchise relationship. This phenomenon has been most notable when multiple franchises or areas of development are being provided to franchisees. Franchisors have become more willing to negotiate issues such as royalty discounts, reduce fees and grant more control over activities of the franchisees and revenues generated from the franchise activities, such as control over local or regional advertising. Since franchisors are addressing many of these issues for the first time themselves, they appear to be willing to listen and to try, or at least consider, approaches suggested by franchisees.

Further development of the non-traditional approaches to franchising will continue to provide new opportunities. The combination of these approaches with existing business activities should present a multitude of opportunities for those willing to try them.

Physical Address: 301 Fayetteville Street, Suite 1900, Raleigh, NC 27601

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03.29.1996