Alicia Miller
Franchise sales conferences and channels appear to have more energy than ever. But net unit growth remains essentially flat. Why?
First, we have a top line problem: franchising still isn’t getting its fair share of entrepreneurial interest. Forty thousand more new business applications are now filed per month, 140,000 per month total, compared to 100,000 per month prior to the pandemic, as tracked by the U.S. Census Bureau. But this isn’t flowing through to net unit growth within U.S. franchising, still 15,000 units per year (openings, net of closures).
Implications? Our message isn’t resonating, we’re not on people’s radar or other options are more appealing. Franchising has ongoing communications and marketing work to do to share information about the opportunities available.
Second, a few large brand closures are skewing the numbers while others are skewing information in the opposite direction—selling many licenses but with murky opening data. For example, Subway and Burger King are closing U.S. units as they right-size and try to reboot. Meanwhile, some emerging brands are selling several hundred units within only a year or two.
Implications? We really need more data about licenses sold, tracked through to units open. Franchise disclosure document data can be weak, confusing or handled inconsistently. Development agreements get muddled into mix. A brand may brag “500 units sold,” but the FDD lists 100 units open and only 59 in the pipeline. How can that be?
Another may tout they’re expanding “points of presence” (services delivered in temporary locations), while brick and mortar sites gradually close. In that case, it’s unclear whether the model is intentionally shifting to a new delivery model focused on temporary spaces instead of the brick-and-mortar model it followed for decades, or if those pop-ups are opportunistic offsets masking fundamental problems. A large restaurant platform recently celebrated strong new license sales and hundreds of new unit openings, mostly in international markets. But net of closures, total growth across all brands was only 60 units.
Taken in aggregate, 15,000 annual net unit growth for several years running looks steady and predictable, almost placid. But there are signals of frantic paddling beneath the surface. Better tracking in FDDs of units sold and development agreements, not just openings, closures, and transfers would be beneficial.
Third, according to FranData, approximately half of all net unit growth is via existing franchisees expanding within their brands. This is great news. It signals satisfied franchisees are returning to build bigger businesses. But it also signals we’re not bringing in enough new people.
I listened to a franchise podcast recently featuring the head of a large broker network. He mentioned a statistic I’ve never heard or seen before (and you know I pay attention to industry data), so I was intrigued by his comments. I’m paraphrasing, but he basically said the influence of brokers and franchise sales organizations is overstated because those groups drive only 18 percent of new license sales. (He didn’t mention the source.) His point was that outsourced sales are “only a small portion, one-fifth of all new franchise license sales.” Said another way: Nothing to see here! Outsourced sales channels don’t deserve special attention or regulation. We’re small.
Missing of course was the concept of TAM: Total Addressable Market. He was citing all new license sales. But if you believe FranData, half of all new sales go to existing franchisees returning to their franchisor to buy more licenses. So, while brokers and FSOs may sell one out of every five new licenses in total (if you believe the statistic mentioned), that means potentially one out of every 2.5 new licenses (40 percent) sold to first time franchisees are going through broker and FSO channels. That’s neither small, nor insignificant.
Implications? We’re kidding ourselves if we think outsourced franchise sales efforts don’t impact perceptions about franchising. The volume of transactions is too meaningful to be ignored. If 40 percent of new franchisee license sales are really closing via outsourced sales channels, and at the same time we’re not growing the total pie of new people interested in franchising, could the sales channel itself be part of the issue?
Are people entering the discovery funnel but are somehow turned off by the process or tactics and not getting through to the other side? Are thousands of units getting sold that will never open? It is worth pondering what’s happening within this massive sales channel. There is an information disconnect between total units sold and openings as mentioned above. Selling 6,600 units over the last six years (as one FSO site mentions) but opening only a fraction is impactful and drives perceptions. How many sold are opening? How many remain open?
Yes, finding sites is more challenging these days and real estate costs are higher. But the number of mobile brands (no site needed) has also exploded, so it’s difficult to blame inflation or a real estate crunch in the absence of data that specifically carves out the number of net openings held up by these environmental factors.
Finally, private equity-backed platforms as well as established growth brands have well-oiled franchise sales efforts and plenty of organic interest. Some large platforms are selling hundreds of new licenses each year including to existing franchisees.
Implications? Emerging brands must be prepared for longer ramp times to achieve royalty self-sufficiency in the face of heightened and well-funded competition. Launching better capitalized and building more corporate locations (to drive cash flow) before kicking off franchising efforts is recommended. Some brands attempt to sell their way to relevance through those outsourced channels. But if commissions siphon off money needed to build support infrastructure, franchisee dissatisfaction is the risk.
If dissatisfaction develops and leaks into the public domain via franchisee surveys, press reports, complaints to regulators, and even negativity at the neighborhood barbecue, it creates bad perceptions about franchising as an entrepreneurial opportunity. This returns us to the top of funnel impact and one of the marketing challenge for franchising.
Alicia Miller is the founder and managing director of Emergent Growth Advisors. Her Development Savvy column covers smart ways to market and grow a franchise. She is also the author of “Big Money in Franchising: Scaling Your Enterprise in the Era of Private Equity.” Reach her at amiller@emergentgrowthadvisors.com.