"The Master value is trust. There are no relationships that can survive for very long without it."

- Jim Amos

It’s Time to Reconsider the Way Franchises Operate

July 27th, 2012

Future requires radical transparency, back-and-forth with customers

There has been a great deal of angst since October of 2008 about the state of business in general and specifically in the world of business format franchising.  Clearly, with the collapse of Lehman Brothers and the near collapse of the world financial structure that resulted in the great recession, sustained high unemployment and the travail of the auto, home and banking industries, we continue to face an uncertain future.

The point is that “business as usual” is no longer a phrase that has any predictable meaning, and in this environment of change, long range strategic planning is nearly impossible and even annual operating plans must be made with flexibility in mind.

Thought leaders from every industry are contemplating the future and all of the innovative considerations that might imply.  Leaving the political dialogue and the impact of tax, energy, and regulatory policy aside, I would like to consider what all of this might mean for business format franchising.

First of all, I would posit that like almost every other segment of business, business format franchising is changing. Financing and its related components are different.  Money is moving and or concentrating and competition is more prevalent in all participating industries.  In fact, all elements of traditional franchising have changed, are continuing to change, and in all likelihood will never return to previous tracks and models.

Consider the ability to scale, the related financing, lead development, web strategies, technology, data gathering and application, development in general, and the fear that is pervasive given the present sustained level of uncertainty, and you begin to see why so much capital is being held in reserve.

Franchise Leaders Need to Examine Industry Practices

As usual, times like these attract greater attention to all elements of the traditional franchising model and once again we hear new calls for “fair franchising” that is catching the ears of legislators.  In California, as an example, a bill that would have been crippling to franchising lost by one committee vote and now some organizations have promised to take the campaign across the nation.

The International Franchise Association in its mission to promote, enhance and protect the industry has always and once again must take the lead to protect and sustain what I have often called “the elegant economic engine” that is franchising  and that has created so much opportunity for so many. The reality is that IFA is the only organization that can convene the conversation that needs to take place.

However, in light of what we have already discussed, this conversation must take on the sense of urgency and gravity that the times mandate.  That means that, while franchisors and franchisees have been innovating their offerings and doing everything they possibly can to survive and compete, perhaps all of us should take this opportunity to analyze what might be necessary to keep the franchising model vital, viable and dynamic well into the future.

FDD Reform Should Focus on Transparency and Availability

I would proffer that analysis would require the re-visiting of every element of the model without protection of “sacred cows” of any kind.  As an example, perhaps we should all consider the vital relationship between franchisees and franchisors and its governing document the FDD.

In 1970, the California legislature enacted one of the first franchise disclosure laws in the country that became the outline for the FTC Rule that is now called the Franchise Disclosure Document (“FDD”). California states that “the purpose of the pre-sale disclosure is to provide truthfully and fully, material information about the franchisor and its franchise offering to the prospective franchise, prior to a purchase.”

The elephant on the table is whether the FDD will still serve its stated purpose with the next generation of franchisees who are better informed than ever and who work in a world set free by social media that did not exist in 1970 or even as little as 10 years ago with the advent of the World Wide Web?

One could ask questions such as:

1)   Should we change the way the FDD is disseminated and accessed?

Instead of a system that enables an electronic e-mail disclosure, could we go further and simply have an internet site that lists all of the information and allows any person to view the information by checking-in like you check-in on foursquare?  Is there a need to not be transparent on what is listed within the FDD?  Should California and New York be the only public repositories for FDDs?  Should franchisors disclose their FDD on public sites to provide full transparency? Personally, I vote for full disclosure and transparency because it is inevitable anyhow and it is the right thing to do.

2)   Is the information in the FDD relevant when buying decisions are being made through research done through the Web using active blogs that post reviews and testimonials?

One example of relevancy is item 20.  By the time the franchisee is ready to make a buying decision the information in the item 20 can be and in fact usually is stale.  With more real-time information found in the blogosphere and through interacting with franchisees through the social media conversations and dialogue, do these complex tables tell the real story?  Is this annual ritual of sifting through each column productive and does it provide the next generation who is going to make business investments differently the information that is relevant and the validation they need to make that decision?

Franchises Must Empower Franchisees and Customers

This is but one example of what we should be doing now to maintain the relevancy of the franchising model.  Let’s look at everything.  Let’s not get bogged down in “that’s not the way things are done around here.” Let’s wake up and realize that perhaps what was relevant and got us to the dance may not be the programs and processes that will take us into the future.

What is coming is the full empowerment of individuals by making them more independent of controlling organizations and better able to engage with them.  The primary driver is a new field called VRM or vendor relationship management that works on the demand side of the marketplace as opposed to CRM or customer relationship management on the supply side.  Franchisees, like customers, are no longer going to be viewed as targets to acquire, control, manage and lock in.  And while business is enamored with “big data” that is gathered by tracking files in browsers and smart phone apps without the knowledge of the customer, the collection of this data is as insane as it is for the customer to continue to allow it to happen, and they will not do so indefinitely.

That is the purpose of VRM, and by changing their contact information only once, everyone will be able to access many vendors at one time, cover multiple web sites simultaneously, and set their own policies, preferences and terms.  As Doc Searls stated in the Wall Street Journal, “You will no longer have to accept agreements that aren’t worth reading because as we all know, they cover the other party’s butt but expose your own.”

I wonder how many franchisees and or franchisors would relate to that comment?

B.J. Emerson and I have a new book coming out in September focused on Social Media and how to turn this phenomenon into understandable and actionable strategies — “The Tasti D Lite Way, Social Media Marketing Lessons for Building Loyalty and a Brand Customers Crave”. (McGraw Hill) www.thetastidliteway.com

As Doc Searls again comments, “In the marketplace, fashions come and go, and giants fall, but freedom remains the guiding light.  The largest and most durable opportunities are those that use the freedom we have or give us the freedom we want and need … everyone will understand that free customers are more valuable than captive ones.”

We do not have to be late to this party.  We can lead it.  Why not begin the process of examining our business model now.  Let’s focus on the lynchpin of our businesses, the franchisee/franchisor relationship and host a summit the results of which builds a more dynamic, relevant and profitable future for all of the stakeholders in the world of franchising.  I wonder if that is an earnings claim?

Tasti D-Lite and Planet Smoothie chairman and CEO Jim Amos has more than 30 years of experience guiding successful franchise companies such as Mail Boxes Etc. He helped initiate the the International Franchise Association’s VetFran program and was inducted into the IFA Hall of Fame in February.

12 Comments

  1. Posted July 30, 2012 at 7:15 pm | Permalink

    Jim, This is a truly thoughtful article and you raise many broad, fresh and relevant questions. And you do so, at least in my view, in a very evenhanded manner.

    I think your questions about FDD reform are particularly apt. I agree wholeheartedly that the FDD process should be more transparent. Posting the FDD on a franchisor’s website would be a huge step toward transparency. The only resistance I would anticipate may come from franchisors who sytematize their franchise sales process as much as they do their business format. This, of course, comes with the concomitant fear that immediate access wrests control of the process from the franchisor’s sales team, a not insignificant consideration.

    On your second point about the continued utility of FDDs, I think that while you make an excellent point, the Internet and blogosphere are still very much in the wild west stage of development and it’s still difficult to separate the relevant and thoughtful from the deceptive and undisciplined.

    One point to add to your discussion is the role that the FDD plays in stanching the riff-raff of the would-be franchisor world.

    Thanks again for a great article.

    Mike Sheehan

    • Jim Amos
      Posted July 31, 2012 at 7:21 pm | Permalink

      Mike,

      Thanks for your kind remarks and encouragement. I appreciate your additional suggestion as well. There is much to discuss and much to do to stay relevant and more importantly effective.

      Best,

      Jim

  2. Marvin Storm
    Posted July 30, 2012 at 7:54 pm | Permalink

    Great article, insightful and a peek into franchising’s inevitable future.

    • Jim Amos
      Posted July 31, 2012 at 7:25 pm | Permalink

      Marvin,

      Thank you for your kind remarks.

      Best,

      Jim

  3. Posted July 31, 2012 at 4:14 pm | Permalink

    Thanks, Jim.

    (Rhonda S. always speaks highly of you)

    I like your take on the changing face of the franchise business…and what might need to be changed.

    But, I disagree on one thing. You wrote that, “The reality is that IFA is the only organization that can convene the conversation that needs to take place.”

    Jim. Jim. Jim.

    The IFA does a pretty good job, but they are not the ONLY player in the game. There’s the AAFD-but I don’t know enough about that association.

    There are also lots of independent voices around. Some of them have the ability to spread their messages-their ideas too.

    You see, the internet has leveled the playing field.

    Big brands…big associations still have power.

    But, others do too.

    Again, nice job.

    The Franchise King®

    • Jim Amos
      Posted July 31, 2012 at 7:24 pm | Permalink

      Joel,

      Of course you are correct and the IFA is not the only platform. I do think, however, that it is the logical repository to attract all of the players you are referencing to the table. That is what has to be done which is why the summit idea, I believe is attractive. If another source wants to take the lead then so be it………..it is the dialogue that must take place and soon it seems to me.

      Regards,

      Jim

  4. George Palmer
    Posted August 1, 2012 at 12:23 pm | Permalink

    Anyone who has been around the track several times will totally understand the need to keep your feet on the ground, but your eyes looking forward. Franchising has always been a restrictive system and it certainly is NOT a method to utilize by everyone. The discussions about getting information out to the readers and making and keeping the transparency issue seems quite valid. There is no ‘secret sauce’ so why create an environment that seems to imply that there is.
    The problem is that some candidates will play by the rules and some will say that they will, but really don’t intend to and that is where the need to be able to clamp down on those franchisees that have a ‘better’ way of doing things needs to be considered. If the discussions about the future of franchising is focused entirely on the legalities, restrictions,etc,that may be missing the bigger picture which is that people seem to want all sorts of freedoms, but therein lies the problem. I know this sounds like the saying that ‘this will hurt me more than it does you,’ or ‘this is really for your own good’, but there needs to be rules and there needs to be enforcement provisions to protect the Franchisors business model. If not, total chaos can result. So those who cannot or will not work within a structured environment may be better suited to consider a business model other than franchising. I hate to hear myself say that, but I’ve seen a real trend the last few years of people who want to buy into a system for all the wrong reasons, such as they only want the name or the Vendor relationships and the deals they’ll get by going into an established system or opportunities will be presented at the outset that they wouldn’t have available if starting on their own. Whatever the reason I think fairness and reasonableness must prevail. The question is to how best do that by not giving away the farm, yet maintaining a process and order within the system. Otherwise, people will be out there doing things the way they ‘think’ they should be done and the business model may suffer as a result. Wish I had the answer. I applaud the initial thoughts, but I think the guard must still stand by the door or who knows where it will go.

    • Jim Amos
      Posted August 1, 2012 at 4:17 pm | Permalink

      George,

      Thank you for your thoughtful comments and cautionary advice. I cannot disagree with a single point you make I simply suggest the discussion must take place regardless. The race for transparency is on and will not be denied. That does not predispose the need for controlling documents that are fair and protect both parties when necessary.

      Jim

  5. Keith Albright
    Posted August 1, 2012 at 1:05 pm | Permalink

    Hello Jim:

    Enjoyed the article and your insights into the future of Franchising. If nothing else, the next 10 years should be another interesting ride for Franchisors and Franchisees.

    Thanks

    KRA

    • Jim Amos
      Posted August 1, 2012 at 4:21 pm | Permalink

      Keith,

      Franchising and related entrepreneurial efforts have provided the impetus for growth in our country and around the world, bringing more people out of poverty and providing more wealth than any other economic system in history. We need to keep our emphasis on free markets and free people and free enterprise and not let the current economic downturn provide fodder for those that would seek to pursue some secular social fundamental change to our country. You are right the next 10 years will be stimulating if we decide to continue to engage and learn.

      Best,

      Jim

      • Keith Albright
        Posted August 1, 2012 at 9:59 pm | Permalink

        Hello Jim:

        You’re absolutely right. We have to engage, learn and prevail. The alternative is fairly frighteningly described in Atlas Shrugged – which is becomming a must read these days.

        KRA

  6. Posted August 29, 2012 at 7:24 pm | Permalink

    Jim,

    Great blog. Thoughtful and well developed.

    I fully agree with your comments regarding the need for greater transparency and availability regarding FDD’s. In your blog you state – “Should California and New York be the only public repositories for FDDs? Should franchisors disclose their FDD on public sites to provide full transparency? Personally, I vote for full disclosure and transparency because it is inevitable anyhow and it is the right thing to do.”

    How prescient. Late last year I created The FDD Exchange as part of The Educated Franchisee – http://www.fddexchange.com . This is a website that allows users to share FDD’s. Any user can both upload and download FDDs as they wish. Today we have over 100 FDD’s and the list is growing every day.

    What I find interesting is that more and more often franchisors are beginning to upload their own FDD’s into the FDD Exchange. These franchisors agree with you in regard to transparency and they are proud of the information in their FDD. The control issue as mentioned by Mr Sheehan is a big stumbling block but some franchisor’s are confident enough to rise above this fear. These franchisors are confident in their offering and want prospective franchisees to see the FDD. They are choosing increased transparency.

    Keep up the great leadership that you have shown for so many years and please give Peter Holt my best.

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