Why The Franchise Industry Needs Standard Metrics To Assess Franchise Performance25 June, 2015 / Articles
“Everyone is an expert,” could be said of many things in business but probably nowhere more than in the world of franchising. The spectrum of judging a “good” or “bad” franchise can sometimes run from “I hated their food”, “They got a great YELP review” and “Aren’t they awful to their employees?” all the way to the most academic of economic and business analytics. At fault are both the sheer dynamism of the franchise model itself and the ongoing fascination of the public with franchise outliers that for good or bad will always represent the world of franchising as a whole.
At a time when individual opinions carry more weight because of social media and the power of the Internet and when information itself is has become a common commodity with lines between fact and fiction often blurred, franchises vulnerable to the changing waves of opinion need a stable center from which to derive a consistent message of growth, sustainability and yes, even failure.
Which is why we at FRANdata see the franchise industry coming to an important crossroads, a path that is becoming clearer to almost all constituents in the franchise ecosystem. The need for a standard set of performance metrics serving dual purposes: first, a way for potential franchisees and lenders to consistently and reliably judge the future and current success of a franchise brand, and secondly, a way for franchise brands to efficiently and precisely measure their own performance as a benchmark across their specific industry and among their peers.
So… What Does a Good Franchise Brand Look Like?
Isn’t that a fascinating question and one that we should be able to describe fairly easily? It’s just that as an industry, we can’t; not because we don’t know what a good franchised brand looks like but because we don’t have a set of industry standards with which to describe that “good” brand. Look at what the internet has done to the flow of information to prospective franchisees. There is a vast amount of subjectively based information about franchise brands that is simply wrong or misused. The absence of a set of standards allows this situation to persist. This absence is also partly at the root of legislative and regulatory actions that are trying to change the franchise business model as we know it.
What we have done with the Forbes ranking is take the prospective franchise investor’s perspective and applied a set of consistent performance metrics towards as big of a universe of franchise brands as we could and narrowed it down from there.
Having compared and analyzed thousands of franchise brands for the past 25 years, we see three important components as consistently being the most important to assess when measuring performance: quality of end-consumer product or service and the “outward” facing aspects of the brand, quality of the system and all the mechanisms in place that support its growth and sustainability, and finally, the quality of the franchisor in terms of the commitment and ability of its leadership over time to deliver measurable results. For Forbes we focused on the latter two components, since those two are essential for a potential franchise buyer to grasp and may also be the hardest to measure without access to a vast amount of information or knowledge of the intricacies of the franchise model.
When measuring the quality of a system for the Forbes ranking, we evaluated brand demand and system health as the key indicators. Then we considered other factors, such as franchisee support with financing and operations. Ultimately, the methodology we created was based with an eye on how to best represent sustained, quality growth. In addition, we consider the health of franchised locations as an extension of system health, and measured that through the franchised unit continuity rate for the same five-year period.
Measuring the “F” Word
We cannot talk about the “Good” franchises without bringing up the flip-side, but more importantly than simply labeling a brand a “failure” – is defining failure in the context of the franchise model.
We utilize a lot of indicators some more intuitive than others– starting with a full and high quality support program, including disciplined prospect screening, training that measures results, site selection and opening assistance that is based on proven criteria, and field operations and compliance that are effective. All these functions can be benchmarked against peers.
In an absolute sense, all these indicators are aimed at a pretty simple concept– unit success or failure. Over the long term, the only reason a unit will stay in business is because it is profitable. While we tend to acknowledge that there is a financial impact on franchisors of a failed unit, we rightfully focus mostly on the impact on the franchisee – a calculation that deals with measuring past performance which we call “continuity rate”.
In the end we realized there was one major criterion that affected all of the others: whether the franchisor shared the information necessary to assess its performance. While Forbes wanted to highlight 30 brands, there are 100s of others that are also excellent opportunities. We looked at all of them but there were some that we simply had to exclude because they do not provide the information necessary to evaluate them. This does not necessarily mean that they are bad franchises, but without anything to prove it, there is no way that they could be elevated to the top of the ranking.
Brands that make a reasonable and useful unit financial performance representation (found in Item 19 of the Franchise Disclosure Document or FDD), that have system dashboards that compare unit performance in real time, that actively support their franchisees as they get financing, and that seek system feedback through independent third parties are employing transparency measures. Franchise brands that “get it” not only actively collect and use this information to improve their performance they also share it with their marketplace.
Having good performance is always the end game– showing it is the act of being transparent as well as the best way to counter opinion, misunderstanding, and misuse of information. Inevitably, the industry will either adopt or be mandated a set of performance standards. We at FRANdata are trying to help the industry by setting benchmarks for best practices and good performance.