Focussed Strategy holds the Australian distribution rights to The Franchise Trap, a book that explores why franchised businesses fail and what franchisors could and should do to prevent it.

This is the book that franchisors don’t want you to read and should be mandatory reading for anyone (and everyone) thinking about buying a small business. This is real world stuff, plainly written and brutally honest. A definite must read and possibly the best $25 you’ll ever spend.

Here’s an excerpt from the introduction to The Franchise Trap.

HOW DO FRANCHISES BEGIN AND WHY DO THEY DIE?

OK, imagine that you’ve just moved to a new suburb and, in the course of getting to know your way around (exploring), you discover this really great store.

In fact, this store is the best one you have ever seen and you can’t help thinking that the owner must be making stacks of money. After all, every time you walk in the place is packed and they always seem to be unloading more stock and have staff constantly in a state of frenetic activity.

After a while you begin to wonder how you could ever develop a business like that – the owner seems to be wildly successful and you’d like to be that way too (the grass is always greener – people forget the hard work involved in any business and only see the dollar signs).

Somewhere along the line, the owner starts to recognize you as you walk in, smile and say hello and one night, quite close to closing time when it’s just that little bit quieter, you actually have a conversation and immediately strike up a rapport.

This happens maybe two or three times over the next couple of months and one night you ask him whether he’s ever considered franchising the business.

He says that he’s thought about it and that quite a few customers have asked him but he’s heard that it’s a lot of work and a huge hassle if you get bad franchisees, so he hasn’t really looked into it that much. He’s happy running his own business and doesn’t really see the need to create competition for himself.

You mention that you know someone who knows someone who’d be happy to have a chat, just in case he ever wants to explore the concept and he says “thanks but no thanks”.

Then, about a month later he asks you for that phone number and says that his wife has really warmed to the idea of having extra income and thinks that maybe franchising is worth a look.

You happily hand over the number and, in doing so, mention that you’d really like the opportunity to get involved if this progresses at all. He says “sure, no problem”.

In the course of things, the franchise concept becomes a reality and you do buy one of the first franchised outlets. Being a sensible and reasonable person, you think that it would be silly to open up a store in your new neighborhood (it would also be too close to the original store anyway) so you open a store on the other side of the city – let’s say 20km away.

Now, a fact of life in big cities is that people tend to live in a corner, rather than living in the whole place – just think about your own situation. If you live in a city that has at least 1 million inhabitants than I’ll bet that there’s many parts of that city that you have only been to once or twice and quite a few that you’ve never been to at all. All of those areas have people living in them and many of those people will never have seen where the original store is, so your shiny new franchised outlet looks to them like a brand new business and, in the course of their daily comings and goings they discover your store.

Of course, your new store becomes flavour of the month (let’s hope) and pretty soon you’re being asked whether or not you’d be willing to franchise or whether this is a franchise. Being honest and pleased with your results so far, you refer them to the owner of the original store, who is now the franchise owner, the franchisor.

The franchisor is delighted at this cross referral and starts selling more and more stores through a combination of word of mouth and some advertising and personal selling and even starts selling franchises interstate and starts thinking about overseas.

Here’s where it all gets interesting.

Because there is only so much geographical property for new stores to take and because approximately 20% of the population changes their residential location every year, consumers start to feel like they’re seeing one of these stores on every corner (whether they are or not). At this stage, turnover is still likely to be high and any franchisee wanting to sell their outlet is likely to have lots of willing buyers, most of who will pay a premium for a strongly trading store in a good location.

Now the franchise is a normal part of society and consumers use it as part of their normal shopping behaviours and, in the same way that every business has peaks and troughs, a normal annual trading pattern emerges.

At some stage, those customers who first discovered the original store (which is still trading happily along but has now been sold to a franchisee) begin to look for a bit of variety and, eventually, discover this wonderful new store that is completely different to the franchised outlet, it’s a lot quieter and, as people do, they tell their friends and (almost imperceptibly) change their shopping behaviours so that they now spend much more time at the new independent store than they do in franchised outlets.

After all, everyone goes to the franchised outlet now and who wants to be the same as everybody else?

So, in the franchised outlets (and this occurs over a prolonged period of time) trade beings to drop off. The peak periods aren’t quite as busy and the quiet periods are just that little bit slower and, even though things are still good, the growth rate just isn’t there anymore. Again, people being people, the franchisees approach the franchisor to discuss the situation and the franchisor, understandably, responds that they all have great businesses and all they have to do is stick to the formula and they’ll keep making money.

The franchisees take this at face value and go back to running their stores. After all, isn’t this the guy who built the original store? Isn’t this the guy who effectively gave them the opportunity to have a successful business? He must know what he’s doing, right?

A while later and things are still declining, more and more customers are discovering alternative offerings and the new store has now franchised and is growing in popularity in a whole range of areas.

So the franchisees go back to the franchisor and say “what do we do” and “we need to change”.

Now the franchisor is a simple sort of guy who, you might remember, was very happy running his own business and didn’t really want to franchise. He’s not really a business person, almost certainly has no management training although he’s almost definitely a very good tradesperson / business operator. This franchise is the biggest and best thing he’s ever done and he’s become very used to the income and the lifestyle that he’s generated. He knows that there are a few franchisees out there who don’t follow the system, give poor service and break the rules and he’s convinced that things would be better if they just stuck to the system he’s built.

At this stage, the franchisor is scared of losing what he has. This is the biggest business he has ever owned and he knows he’s not likely to get another one. In fact, he’s scared because he knows that he doesn’t have the skills to improve the situation and he ends up doing exactly what will make things worse – nothing.

So customers keep on leaving – not because the business is bad but because it’s stale – and the franchisees keep complaining and now no-one wants to buy stores when franchisees want to sell and the franchisees (and the franchisor) begin to feel trapped in the business….

The question is, how does this happen and what could be done to fix it before the situation gets to this stage? Also, will this happen to every franchise?

In a nutshell, yes, it will happen to every franchise – IF the underlying problem isn’t addressed in time.

To understand how this happens, I’ve borrowed an example from Naomi Klein’s book, No Logo. I’ve paraphrased significantly here, so my apologies to Ms Klein.

In the USA, Nike used to find the coolest kids in depressed economic areas (commonly black neighborhoods in major cities) and give them the latest and greatest sports shoes. In their role as opinion leaders (whether actively or passively) these “cool kids” influenced the other young people in their group to buy Nike products. Academically, this reflected the aspirational nature of the Nike brand. In reality, this caused adolescents to be looking for ways to fund the purchase of an item outside their true capacity to pay and was directly responsible for the “sandshoe mugging” phenomenon of the 1980s; but that’s not the point of this example. When all the kids (or at least most of them) had acquired the current model Nike shoe, the company then started the process all over again by providing the opinion leaders with the next biggest and best thing.

The point here is that people want what opinion leaders have until everybody has it then they go looking for a point of difference again. Nike was circumventing the search element to make sure that the lead time for product adoption was reduced.

In franchising, we want the exact opposite result – of course we want people to discover the store quickly, but we definitely don’t want them to continue exhibiting search behaviours after that. Now that’s like trying to stop the world from spinning!

If you’re still in any doubt, just think how much people like buying things and how quickly they lose enthusiasm for a product after they get it. They don’t like the having; they like the acquiring – they like the feeling of “newness”.

As a franchisor, this points in one direction => businesses have to evolve or they die; and that’s the franchise trap.

This book is about identifying why you would get into a franchise (and there are very good reasons for some people to do just that), how to spot the warning signs, what to do about it and where to get real advice on real opportunities that will come your way…

For more information on The Franchise Trap, call us on 1300 884 675 .

Visit our Hobart office at Level 2, 11 Morrison Street, Hobart (on the waterfront).

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