One of the franchising industryÍs many mantras is that company-owned stores will always be outperformed by a good franchisee owned business. ItÍs a belief that pizza giant DominoÍs set out to disprove when it focused on building a strong network of company-owned stores. But why?
When Patrick McMichael, franchise development manager for DominoÍs, started in the pizza business 19 years ago there were just 31 stores in the network, all franchised. And it remained that way until around the turn of the century. The appointment of Don Meij to the top role brought about a change in philosophy, explains McMichael.
“It was increasingly obvious that to reach the next level we needed to lead by example and build a stronger company platform. “We had to prove that as a franchisor we could make money, and this was the springboard,” he says.
In most franchise businesses there are between two and 10 company stores at any one time, he adds. DominoÍs now has 100 company-owned stores in addition to its 160 franchisees, many of whom own multiple units, and the party line is that this is a tremendous strength. Some of these company stores rank high with volume of turnover. Key to the development was working out the infrastructure and correct management. And providing the right remuneration can result in company managers performing an outstanding job, McMichael says. “But it takes a lot of work to get to that point.”
DominoÍs runs two structures and the company store structure quadrupled that required by the franchisee network thanks to locations remote from head office, people resources and maintaining strong checkpoints along the way. This is a struggle for most franchisors, says McMichaels, and has brought some down.
Operating two divisions, as DominoÍs does with franchisee and company-owned divisions, could elicit a them-and-us environment. McMichaels admits in the beginning there was a divided culture but claims this is no longer the case thanks to the efforts of the corporate store managers and the management team; it is one company at an operational level and at conferences, he insists. To that end both company-owned stores and franchised outlets contribute a marketing levy for the advertising benefit of all.
So what does McMichael perceive as the key benefits of a franchise network with a substantial segment of company owned stores? “I advocate to potential franchisees that weÍre franchisors and store owners so every line item is negotiated very hard as it impacts us 100 times. We understand the day-to-day business; our skins are in the game,” he says.
DominoÍs doesnÍt undertake many store conversions. For instance, he says, it would be easy to put a store in Alice Springs where there is no Dominos presence but hard to service and run it properly. Instead the key area of growth has been the movement of managers from corporate stores to the franchise arena, a trend the company actively pursued and which meant 80 per cent of the franchisees came from within the company. Now, however, there is a shift to external growth.
The Melbourne market has potential for further stores and there are some stores in Sydney, and more in regional areas. ItÍs a different kind of franchisee, more professional now, coming out of different sectors and not wanting to be downsized anymore. “WeÍre different too; weÍre more measured in our selection.”
Franchisees only
James Hayward, CEO at Forty Winks, explains why the business has no company outlets. “We started in the early Í80s, six owners from CaptÍn Snooze founded a buying co-op to utilise funds. By 1993 there were about 30 owners, all had undergone pretty solid growth.”
It was then the structure was changed to a franchise organisation. “The beauty of the model is no us-and- them. IÍve worked for Freedom and there was a big us-and-them mentality. And I donÍt have the HR complications. We have a solid plan for growth.”
Hayward happily trials new products in the franchise network because he believes franchisees generally have initiative and are entrepreneurs, so harnessing their energy, drive and passion makes sense. “We have a superior advantage. We donÍt have heavy infrastructure and the majority of fees go back into marketing.”
Significant growth
A freight and distribution business which has in the past operated company owned stores, before becoming fully franchised, Pack and Send has just one corporate store but plans to develop this stream of business to account for 10 per cent of the overall network. Founder and managing director Michael Paul says: “The dynamics of the network have changed and we have more multi-store owners. We thought we needed to show some leadership in terms of being a multi-store owner ourselves and show benchmarking of operations.”
Another key driver, Paul reports, is that company-owned stores are a valuable source of management talent. “WeÍre growing quite substantially internationally and we need to bring in new management experienced in the day-to-day operations and a company-owned store is a great breeding ground for that.” Paul cites Leo Tortorici; the group development manager who started with the business in a company-owned store and gained great frontline experience; this is important to a support role, he says, because franchisees then receive informed quality advice and support.
The franchised stores and the corporate outlets are two separate divisions, with the company-owned sector headed up by a manager to oversee its development. “WeÍre almost running two separate businesses,” Paul explains. The corporate store division is funded through the profits of the franchisor, and Paul sees this as an investment back into the brand.
“The core objective is to strengthen the brand. This is a good way to deploy profits. I think it gives credibility to the franchisee that the franchisor can run a business successfully and be prepared to use corporate stores to develop new markets.”
On the horizon are test markets in airports, for instance. “I donÍt see any issues with an us-and-them culture. I think there are more benefits to the franchisees. We are showing leadership, franchisees are looking for leadership all the time, and in my view thatÍs what a good franchisor needs to do.”
Strengthening the brand through company stores is a view shared by Toby Lawrance, WendyÍs chief operating officer. The increase in store numbers has a two-fold affect — lifting awareness about the brand in both consumer and potential franchisee markets. Company stores also provide an ideal location to trial new marketing, operations, equipment, systems and processes, he believes.
A positive strategy
The food franchise group recognises the importance of company store ownership and has a dedicated resource responsible for overseeing the company store management strategy. “One aspect of company store management that requires careful consideration is resourcing,” says Lawrance. “In order to ensure that company stores provide full benefit to the franchise network, itÍs vital that store managers are secured based on an approach to business thatÍs similar to that of a franchisee.
In short, company store managers need to be just as passionate about the business as a franchisee would. Company stores create an important environment which plays an integral part in fostering the development of future store owners and company staff and WendyÍs strives for excellence in this area.”
Simon Beattie at Snooze, a franchise business under the consolidated group Steinhoff Asia Pacific, which includes the Freedom network, shares his view of understanding the company store and franchisee-owned business set-up. “The starting point is a belief we are a franchise organisation. There is a special place for company-owned stores but our choice is to expand via franchising.”
So how does the company-owned store sit in the Snooze set-up? There are 17 company-owned outlets and 58 franchised stores. Firstly, says Beattie, as a showcase of the model to be franchised, and if there is more than one model within a system, then each should be represented by a corporate outlet. Secondly, he suggests a company store is a test and trial location which allows the franchisor to present the franchisees with a fully trialled product or process.
“The franchisor should take the elementary risk,” he believes. Evidence of this is shown with the new fit-out going into corporate outlets so the various elements can be tested before a franchise roll-out. A third point is using a company-owned store for location acquisition. “I would not want to lose a beacon site,” he says. But the expansion into the area would be with the clear intent to franchise the site.
Lastly, Beattie believes, company stores can protect a site in the case of business failure, if, he adds, it is the right venue to continue with.
Like Paul, Beattie too believes that franchisees gain a level of confidence in a franchisor that supports the model with company stores. But the two elements are not without tension he admits. “Every franchisee is in essence competition to a company store. The customer can choose to shop at one or another,” he says. “But weÍre not trying to take more of that business. There is always an us-and-them feeling but I canÍt see there is a clash between our store network. I donÍt have anyone presenting any complaints about company owned stores.”
While DominoÍs is going all out to prove motivated managers are as good as franchisees, at Snooze the view is that the drive simply cannot be replicated without external influence.