Strategies to Compete in a Challenging Environment

(Franchise Buy) - By . Updated Feb 20, 2011

There are a number of giant franchise networks, (e.g., McDonald's, Subway, Blockbuster and Century 21), that have reached invincible proportions - or so we may believe, given their level of size and brand awareness. This perception of invincibility is, however, often misplaced. Indeed, the business environment facing most companies, including the “invincibles” of the franchising world, is actually exceedingly tough and challenging, and some fundamental changes to franchise business concepts have been made by many of the larger franchise networks to continue to sustain or improve their competitive advantage.



During the past year there are many examples of well-known franchise companies (or holding companies) featuring some type of issue surrounding profitability (e.g., UPS and GNC in the US, French Connection in the UK), sales (e.g., Papa Johns and Snap-on Tools in the US, Marks & Spencers in the UK), store closures (Krispy Kreme and Howard Johnson’s restaurants in the US, Jean Coutu in Canada and McDonald’s in Jamaica), or related crises (e.g., staff cuts).

In addition to internal factors there are a number of external factors franchisors have little to no control over that contribute to the current challenging operating environment. Competition is intensifying in many sectors. Technology is constantly creating new opportunities and threats. There are changes to the regulatory environment. Finally, customer tastes are also changing – providing a moving target.

What are some of the high profile companies doing to stay in front in this challenging environment? Smart companies operating in competitive environments are working very hard to improve efficiency, test high-yielding new initiatives, and differentiate themselves from competitors. An analysis of the news reveals the following examples of franchise system improvements and initiatives designed to facilitate competitiveness and improve efficiencies.


Cost reduction and efficiency strategies

Many well-known franchise companies are undertaking a huge range of initiatives to reduce costs in all aspects of operations.

• Raw materials and stock
  A variety of different initiatives have been undertaken to reduce the cost of raw materials and stock. Companies, like 7 Eleven, have negotiated new supply agreements that not only reduce costs, but also improve on-time deliveries, and in-store stock levels. Recently both 7-Eleven, and GNC, sought to increase power over suppliers, and reduce costs, by attempting to increase co-ordination and volume of approved supplier purchases by franchisees.
  
  Some companies have worked co-operatively or created alliances to address supply costs. For example, New Zealand’s Mitre 10 recently sought to reduce its cost of goods by co-operating on product sourcing and business information with the South African hardware chain Mica -who have more than 200 stores. This aimed to reduce costs through co-operating with a company that offers no competitive threat in the domestic market. In an example involving franchisees, a group of Dunkin’ Donuts franchise owners co-operated to build a 22,000 square foot kitchen together, designed to centrally supply more than 50 Dunkin’ Donut stores.
  
  Interestingly, not all attempts to reduce the cost of raw materials find favour with the public. In Australia, KFC and another well-known fast food operator recently came under public scrutiny for their attempts to source cheaper potatoes offshore.
  
  
• Franchise set-up costs
  Some companies have sought to directly address franchisee performance by focusing on set-up costs. Two well-known US restaurant concepts made dramatic improvements to store design. Church’s Chicken, the 1500 location restaurant chain, recently launched a new store concept involving a prefabricated store that takes 30 less days to build than their traditional outlets. Meanwhile, Burger King created (and is now testing) a new more compact and contemporary format – that not only looks more up to date, but also costs 30 percent less to build, and requires half the retail footprint. These changes should have a dramatic impact on profitability and return on investment for new Greenfield franchisees.
  
  
• Efficiency and productivity
  Smart companies are also looking for efficiency and productivity improvements. Not surprisingly, McDonald’s is spearheading examples in this area. McDonald’s aims to always work very closely with suppliers to identify potential production and sourcing efficiencies. In addition, McDonald’s are expanding testing and use of labour saving equipment, and streamlining processes, including having many of their US restaurants change from standard beverage machines to automated ones that drop and fill the right-size drink cups as sales are keyed into registers. Other McDonald’s examples include use of new machines to automatically filter and change cooking oil and self-order kiosks.
  
  Blockbuster Inc, the video rental company, sought to reduce its supply costs by establishing a centralised procurement division. The procurement function was designed to allow the company to consolidate purchasing of equipment, office supplies and other products, and centralise distribution and shipping of US bound items.
  
  In one instance, the source of improvement went to the heart of the concept. Starbucks in the UK tried to increase productivity and turnover by testing the removal of comfortable seating from their outlets.
  
  
• Staffing costs
  Some companies are attempting to reduce overall costs by addressing staff related costs. In some instances (e.g., GNC), job cuts have been initiated. In other more long-term focused initiatives, companies have sought to address staff costs by introducing initiatives designed to reduce employee turnover.

When it comes to seeking cost, efficiency, productivity or profitability improvements, proactive franchise companies look to all aspects of the business. The big chain examples demonstrate that when it comes to seeking performance improvements, the most minor features, tasks and processes offer the potential for efficiencies and cost savings.


Differentiation strategies

Cost reduction-oriented initiatives aren’t the only bright ideas employed by companies seeking a competitive edge over their rivals. Smart companies are also seeking to differentiate themselves from competitors in order to create a point of difference, build closer [and more meaningful] relationships with existing and potential customers, take market share, and build barriers to entry. Numerous examples are evident in the highly competitive fast food sector.

• Quality Improvements
  McDonald’s recent initiatives included promoting greater quality in a further attempt to differentiate itself from others. Interestingly, in 2004 their emphasis on quality monitoring reputedly led more US franchisees to leave the system in twelve months than had previously exited in five years. The quest for quality was obviously a serious one.
  
  
• Brand value changes
  Franchise companies have also attempted to differentiate their brand values.
  
  McDonald’s sought to distinguish itself by introducing a range of healthy products. In the US, McDonald’s health focus involved new meals for adults that included salad, bottled water, a pedometer and advice to walk more. Very recently, McDonald’s has further emphasized health-related values by sponsoring a physical education program that appears in one-third of US public elementary schools and in another push, McDonald’s sought to differentiate itself from other fast food operators by selling bikes and skateboards to burn off their burgers and shakes.
  
  McDonald’s worked hard changing and testing a new image before rolling it out throughout the group. In their publicly available 2004 revitalization plan, it explains how testing and learning from experiences in New Zealand and France proved a fresh, sophisticated environment could generate increases in sales and profits.
  
  In another example, Ben & Jerry’s, the 600+ location ice cream chain, sought to promote certain brand rather than product values. Ben & Jerry looked to differentiate themselves from competitors by returning to social issues. Rather than expounding the virtues of their ice cream they are focusing a new campaign on social consciousness or ‘issues’ not ‘ice cream.’ Examples include ‘Licking Global Warming,’ and taking a stand on drilling in the Artic National Wildlife Refuge.
  
  
• Product/service/delivery changes
  Several companies have also sought to improve operations by altering their price, product line and/or introducing new initiatives. Burger King US attempted to differentiate on price with a $1 value menu that was intended to stimulate traffic and better compete with their competitors. McDonald’s has been pushing franchisees to open 24 hours.
  
  In terms of product additions, globally McDonald’s initiatives have ranged from toasted sangas or toasted sandwiches in Australia, adding healthy products and salads, adding and testing espresso coffee (also tried by Dunkin’ Donuts), and offering table service in Thailand.
  
  A number of technology inspired changes have also been implemented – presumably in the hope people will either visit more often and/or stay longer (and therefore purchase more). McDonald’s has been testing selling DVD’s for a $1 a night – which no doubt brings people back regularly. In Canada, Mail Boxes Etc is offering wireless access to customers – in the hope it will boost demand for printing, mail forwarding and courier services. McDonald’s in the US is now also offering Wayport-enabled access for gamers at more than 6000 restaurants. Second Cup – a coffee chain with 350+ Cafes across Canada are also offering wireless access to customers. Interestingly, there are a whole string of cafes (including Starbucks), and other types of businesses, that have started offering wireless access – presumably all in the hope customers will spend more time and money in their premises.
  
  In other technology inspired changes, Kodak is upgrading 80 percent of its 8,000 + Chinese stores with digital technology over the next three years. In Australia, Domino’s hopes that ordering pizzas by mobile phone and Internet will make Australians eat more pizza and boost revenue by 12 per cent. And finally, Subway has adopted an e-loyalty card. Electronic cards capable of storing customer data are poised to replace the paper loyalty cards that fast-food outlets have used for decades to reward frequent eaters and have been the target for fraud.
  
  
• Store format changes
  A number of franchise chains have been reinventing their store format and concept in efforts to improve attractiveness and all-round competitiveness.
  
  O’Briens Sandwich Bar (the Irish export with more than 300 locations in 13 countries) say a £750,000 overhaul of their store design and menu has sales 12% above forecast.
  
  Forzani Group Ltd, Canada's largest sporting goods retailer – with 300+ stores is revamping its stores, merchandise and marketing in an effort to turn around their fortunes. Other examples of companies remodeling stores include Baskin-Robbins and the Body Shop in Canada.
  
  Finally, it is interesting to note that the new Kiwi design for KFC that was launched in Manukau is proving so successful that overseas executives say it is likely to be adopted by KFC in other parts of the world.

Summary

The adage the ‘only constant is change’ adage continues to prevail in the sphere of franchising. Adaptation today, more than ever, is absolutely vital.

As some of the above examples demonstrate, many new initiatives involve only one tiny part of the business. It is therefore vital to understand individual franchised operations, in fine detail, in order to seek out all possible avenues for improvement. The examples also demonstrate how important it is to understand your environment (e.g., competitive, technological, legal etc), and the threats and opportunities it can provide.

The requirement for franchise systems to adapt is only likely to increase. We need to get used to the idea that what worked yesterday won’t tomorrow: We need to work on tomorrow today. As McDonald’s has proven, through the efforts they go to, a legendary history and name simply isn’t enough.

Herein lies the key challenge in franchising. Franchise systems, for all their virtues, are not well suited to making rapid and fundamental changes. For this reason we need to:

1. Be extremely careful when designing new franchise systems to ensure the concepts are competitive and enduring
2. Anticipate changes and build in flexibility to adapt
3. Very carefully plan, research and test new initiatives before proposing them to existing franchisees

Fundamental changes in direction which are not well communicated to and understood by franchisees are destined to fail. Consequently, comprehensive analysis and planning is increasingly vital in order to compete effectively over the long-term.