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Three examples of franchising done right

Focus on operator profitability has helped chains such as Domino’s, Popeyes and Chick-fil-A thrive, says RB’s The Bottom Line.
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The Bottom Line

This week’s A Deeper Dive podcast took a close look at some of the disputes between franchisors and franchisees that have emerged in recent months.

Such disputes tend to come up as chains face sales challenges or acquisitions or both. Weak traffic in recent years has made these issues inevitable.

But they also provide an important lesson for franchise brands: If you want your brand to thrive, make sure your operators can make money. When that happens, they tend to find franchisees are more willing to remodel locations and build new ones, and they’re more accepting of things such as discounts and delivery.

And as a result, they grow. Here are three examples of franchising done right.

Domino’s Pizza

All of the publicity surrounding Domino’s incredible, decade-long run of growth has focused on its technology efforts, and for good reason. But an overlooked element of the brand’s success has been the way it franchises.

Its operators have reaped serious rewards as the company’s same-store sales have surged. Those higher profits made them more willing to remodel locations in the company’s “Pizza Theater” design, which has helped boost pickup orders and improved sales further. Now these operators are using their profits to build new stores, which is further helping the chain to grow.

It's notable that the company has made some tough moves in the past, notably its requirement many years ago that operators add Domino’s own point-of-sale system. That requirement was controversial, but it has proven to be a smart, forward-thinking move that led to all the new technology that has improved sales and operator profit.

The company also has a captive supply chain center and requires operators to buy their products there. Such captive chains tend to be a point of contention in the franchising space. But Domino’s splits the profits from the center with those operators, effectively lowering their food costs.

These efforts helped Domino’s come back from being a chain that was deep in debt and trading in the single digits to one flirting with $300 a share.

Popeyes

Another comeback brand was Popeyes Louisiana Kitchen, which named former KFC executive Cheryl Bachelder CEO in 2006.

All she did was take what had been a struggling regional chain and grow it so much that the company received one of the strongest valuations in industry history when it was sold to Restaurant Brands International last year.

One of the major reasons for its performance was the company’s collaborative relationship with franchisees.

For years, the company avoided requiring operators to install new POS systems. That didn’t stop the company from collecting operator data, even if the franchisees sent them the information in print form.

Perhaps not surprisingly, when Bachelder stepped down last year, the announcement included a comment from the head of Popeyes’ franchisee association, praising the collaborative culture the company built under her leadership.

Chick-fil-A

This might be the most controversial addition here because, while Chick-fil-A is technically a franchise that has to follow government franchise regulations, in reality it’s a different model entirely.

But Chick-fil-A in many respects is what franchising should be, with owner-operators who are close to customers, interacting with them every day, and with a real incentive to ensure that the store is run the right way.

Operators go through a rigorous approval process and intense training. The operator pays a small $10,000 fee. The company pays for the cost of opening the restaurant and leases it to the operator. The franchisor and franchisee split the profits.

In a typical franchise model, the royalty is based off a percentage of revenue and can result in franchisor-franchisee misalignment because franchisees care about higher profits and the franchisor wants more revenues.

But in Chick-fil-A’s case, that incentive is aligned because both franchisor and operator want the same thing. And the fact that the operator is in the store, interacting with employees and customers, improves service and helps the chain’s sales flourish. Its traditional locations now average more than $4 million in revenue a year. In the very near future, Chick-fil-A will be the third largest restaurant chain in the U.S.

While the franchisee can’t sell the store when they retire, they still walk away with a hefty payday every year. And they get Sundays off.

There are many other good models of franchising out there, and this isn’t meant to overlook any of them. But when a brand ensures that its franchisees are profitable, the entire company benefits as a result.

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