Conversion Growth Strategies in Franchising

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The Strategies Evolve
There are a number of important considerations that franchisors take into account when navigating the marketplace with their growth strategy and there is no proverbial “one size fits all”. Effective brand management by the franchisor is based on developing a solid understanding of the unique structural and cultural institutions within the franchise framework.

While the franchisor has complete responsibility for the use of the brand(s), it provides each franchisee with a license to use that identity in a limited manner. Thus, the franchisee’s success becomes ostensibly tied to their trademark license for the franchisor’s brand. In the early stages of a franchise brand’s development, the reliance by the franchisor on the effective ability of each individual franchisee’s representation is critical.

Over time this dissipates as the brand “itself” begins to dictate and shape the course of customer perception, thus the responsibility for brand management in the relationship shifts towards the franchisor. This process is the essence of building brand equity to the benefit of all parties. As franchisors and the brand evolve they tend to shift their growth strategies, which can be a key source of disruption in the franchise network, especially when they move into a “Conversion Strategy”.

Competitive Conversion
The predominant conversion approach is “competitive conversion”, which is characterized by having an independent competitive business “convert” their existing business to become a franchisee of the system. Many times the incumbent owner stays on with the business as the new franchisee. One of the franchise organizations that choose this approach is The Dwyer Group, which operate several services brands: Aire Serv, Glass Doctor, The Grounds Guys, Mr. Rooter, Mr. Appliance, Mr. Electric and Rainbow International.

According to Vice President, Mike Hawkins, “Bringing in quality independent business owners enables franchise companies to have another avenue to grow their brands.” The company made this strategy shift due to the increased competitors in franchising and the shrinking pool of qualifying candidates. This approach requires the prospect to qualify for and become a franchisee, shift their existing business to the franchise and transitioning their branding.

The hospitality industry also uses competitive conversion as a critical component of their growth strategy, according to Mark Forseth, Assistant General Counsel for Marriott International. “Due to the significant investment required to bring a property online, whenever, we can effectively convert a competitive use to one of our brands through our franchise program it’s a win-win”. They gain access to our global reservation system and we gain access to a strong local operator”. The Marriott rationale effectively taps into a known truth in franchising; strong local operators require less monitoring thus reducing franchisor cost.

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Competitive Acquisition
The other dominant approach is “competitive acquisition” which is characterized by a franchisor purchasing the assets of an independent competitor, then systematically converting the business to the franchise brand/model. This approach can result in a company-owned and operated unit or the unit can be re-franchised, and in most cases the incumbent relinquishes its relationship to the business. This approach is designed to create a much higher level of control by the franchisor with respect to all pertinent decisions that take place post-acquisition, including but not limited to:

  • Staffing: effectively all the employees of the target company are terminated upon closing, thus the franchisor can systematically determine if any particular employees should be hired into the new entity, changes in human resources policies, and compensation strategies deployed
  • Brand Management: given there will inevitably be significant changes undertaken in transitioning from the local brand, this can be orchestrated judiciously by the franchisor without deference to the prior owners interests
  • Operational Efficiencies: While it may be reasonable to assume the operational adjustments focus is from the incumbent processes to the franchise model, it can also include competitive enhancements from the local operations. Capturing operational efficiencies through shared services is a critical outcome sought

One firm using competitive acquisition in recent years to significantly accelerate their growth is Safeguard Business Systems, owned by Deluxe Corporation, which acquired the company for its strategic small business network. After the acquisition, the organization strategically chose a deliberate competitive acquisition strategy to “invest in high quality targets that could dramatically increase our brand presence and economies of scale”, according to Mark Roggenkamp, Executive Director, Channel Marketing.

 

The Combination Approach
While traditionally franchise companies have chosen one path to follow for extended periods of time, increasingly a combination approach is being utilized. This is generally manifested with a dominance by one approach and a somewhat organic acceptance of the other. One of the emerging areas of interest is the disruption pursuing a conversion strategy can have on franchise systems, and the research indicates that more mature systems face stronger levels of disruption when significant changes are enacted by the franchisor.

An example was the acquisition of Mail Boxes, Etc by UPS in the U.S. According to David Lee, Regional Vice President, “Although there were issues with the transition to the UPS brand, it was clearly the best choice for the company and for our franchisees profitability.” While the franchise system faced significant disruption, the value at the franchisee level has ultimately increased through the commitment to the single brand of The UPS Store.

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Rising Above the Ordinary
As franchising continues to dominate the business landscape, conversion growth strategies will expand, which will be a source of disruption within systems. Those franchisors that make deliberate decisions, keep their franchisees informed of significant changes in organizational strategy, and monitor impact on their networks will be the ones that rise above the ordinary.

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