Judging from the performance of PotbellyCorporation IPO on Friday, franchise remains a popular investment concept in Wall Street—the company operates and franchises Sandwich Works shops in the US.
But as is the case with other investment, not every franchise is successful. And even among successful franchise chains, some fare better than others. McDonald’s and Yum Brands for instance, have fared much better (in terms of equity performance) than Wendy’s.
What makes the difference? Five factors:
1.The Right Business Model: The way the chain enhances customer value vis-à-vis the competition. Franchise pioneer McDonald’s, for instance, delivers customers a quick, convenient and inexpensive meal, vis-à-vis traditional restaurants. KFC offers the same meal attributes but with a different menu—focusing on chicken rather than hamburgers—though both chains broadened their menu portfolio overtime, adjusting it to the local tastes.
Dunkin Donuts offers coffee and donuts (and in recent years ice-cream) to go at convenient locations.
2. Scale: Cost savings associated with a larger production scale of a standardized menu–the bigger the production scale, the lower the cost per menu. With 33,510 units around the world, for instance, McDonald’s has a scale advantage over Wendy’s, which has 9,792 stores. The scale advantage is reflected in the operating margins of the two companies. McDonald’s enjoys a hefty 30.12 percent operating margin, versus 7.38 percent of Wendy’s.
3. Scope: The cost savings associated with the offering for sale of different products by a single corporation rather than by different corporations. McDonald’s and Panera Bread, for instance, offer a variety of products for sale (McDonald’s has added Mccaffe in many locations), vis-a-vis Wendy’s and Dunkin Brands. That can explain the higher return on assets.
4. Location: The benefits associated with occupying primary location sites for franchise stores. In fact, location can support and re-enforce all these advantages. As an older franchise McDonald’s, for instance, had the opportunity to pick best locations. This further explains both the hefty operating margins and the high return on assets.
5. Market Saturation: The degree of market penetration. The lower the degree of penetration, the higher the room for the company to grow by opening new stores. Potbelly and Panera Bread, for instance, have more room to grow, vis-à-vis McDonald’s and Yum Brands.
The bottom line: Successful franchise chains begin with the right business model, and proceed with the amassing of the right scale and scope in the right locations, until they reach optimum market saturation.
Don’t forget our elders can suffer in silence too: suicide prevention
Many people think that mental health and suicide are not topics that impact our elders but they could not be more wrong. The data tells us there continues to be an emerging trend when it comes to peop...
Wherever you look these days, not matter the developed country, whole population groups and peoples struggle with the daily grind of life. From children in state care to mental health, from affordable housing to the primary health system and from education to employmen...
For the last few years I have been fortunate to have been involved in the aged care sector and have seen both the lows and highs. Today we live in a world where most of us are living longer thank to more awareness around healthy living, the advancement of better medica...
You can’t go past a news paper, radio show or television news story these days without being flooded by all things Bitcoin or Crypto Currency. Some say it’s the new world of money while others suggest its all just a passing fad. Whatever your position or preference of...