Before You Buy a Franchise, Please Read This
June 2, 2020
Maybe you've been laid off. Maybe you’re one of the seeming few able to retire from the corporate world gracefully, but you don’t want to completely hang it up. Whatever the reason, if you’re considering buying a franchise, pay close attention.
I beg you: DO NOT buy into any franchise system which allows the franchisor to exert control over the pricing of your product or service. This includes not just the ability to set prices, but the requirement that your franchise honor national promotional campaigns initiated by the franchisor.
Subway International has made itself an example of why I have such a strong opinion on this issue.
In 2018, the CEO of Subway announced that franchisees would be allowed to opt out of the famous $5 footlong promotion (the mere mention of which causes that jingle to go off in your head, right?). At the time, we wrote a “good riddance” post, arguing that while this promotion may have had value in the very early days, its continued use damaged the company’s brand and its franchisees.
The damage to the brand occurs when numerous promotions are repeatedly price-based. In Subway’s case, premium competitors like Jimmy John’s and Firehouse Subs came along, promoting specialty sandwiches with premium ingredients, taking away a big chunk of very profitable customers.
We also noted in that post that Subway’s biggest loss of customers hadn’t even been to other sandwich chains, but to Chick-fil-A, a chain which goes out of its way to emphasize quality and rarely, if ever, advertises on price.
Fast forward to today’s pandemic, when the entire restaurant industry is in a precarious state. Restaurant Business magazine reports that Subway International is attempting to bring back the $5 footlong promotion.
Why is Subway International, the franchisor, so insistent on this promotion?
It’s because their revenue comes from royalties off the sales their franchisees generate.
Franchisees, on the other hand, are directly squeezed when a price promotion is foisted upon them by their franchisor, and they have little to no ability to adjust their costs to compensate for the loss in revenue.
It’s very simple: the franchisor benefits from top-line sales. Franchisees do care about the top-line, of course, but they can only take home what they receive in profit from the bottom line.
Now do you see why Subway franchisees are up in arms?
In a recent letter to its members, the North American Association of Subway Franchisees (NAASF) wrote that “the $5 Footlong was abandoned years ago after countless attempts to make it profitable for the restaurant . . . Not since the first iteration of this campaign did the increase in sales from traffic offset the cost of the trade-down.”
It’s almost as if their franchisor doesn’t care whether they are successful or not, and if you understand the economics of franchise systems, you understand why.
I can’t shout it loudly enough: if you are considering purchasing a franchise from any franchisor, you need to read and understand the fine print of the Franchise Disclosure Document (FDD). I repeat what I wrote at the beginning of this post: DO NOT, under any circumstances, buy into any franchise system in which the franchisor can assert control over the pricing of your product or service.
This is just one reason why I strongly recommend, if you are considering purchasing a franchise, that you hire a reputable franchise coach or broker to advise you. A good franchise broker will help you avoid situations like this.
Further, if you are thinking about buying an existing franchise from a franchsee, hire someone to help you. A couple of ideas include a reputable business broker who handles buyside transactions or an attorney who is familiar with FDDs and can help with that fine print.
In either case, if you have to ask around, do so, but hire a good advisor.
Please don’t get caught in a situation where someone else controls your pricing.
Photo Credit: JumpStory
©Ray Business Advisors, LLC and John Ray
About me: I’m enthusiastic about how changes in pricing strategy can significantly change profitability for a business and enhance life choices for business owners. I live this passion through Ray Business Advisors, my outside CFO and business advisory practice, in which my pricing is exclusively value-based, not hourly. I work with business owners on how they can change their pricing not just to increase their profits, but better serve the wants of their customers. Click here to learn more or call me at 404-287-2627.