What Criteria the Emerging Franchise Business Needs To Meet

July 17, 2018

For beginners or those who do not want to take high risks, franchise business is still one of the most promising options. The franchisees just need to follow an established system. McDonald’s and Starbucks are among the most popular franchises in the United States and perhaps in the world. They have been available even in developing markets. The two franchises can bring the investors as well as the franchisees to success in short period.

How to Find the Next Franchise Business

However, experts said that the golden days for both McDonald’s and Starbucks are overs.  They have been under-performing during the last few years. Therefore, the growth investors should find alternative franchises business that can make them rich. However, how do they spot the next opportunities?

The investors certainly need to consider some key metrics of promising franchises before making a decision. The following are some of them, as suggested on Forbes:

The Business Model

This refers to how the franchise enhances customer value and experience and how it deals with competition. The emerging franchise should be able to distinguish its business model from the rest of the industry. The best place to test the business model is, of course, the market itself. When the business model passes the test on the market, it has much opportunity to scale up.

After the market test, it is the time for the investors to expand the market reach, not only the domestic markets but also the overseas markets. Furthermore, the franchise will enjoy economies of scale, due to the savings obtained from the larger production size. Starbucks and McDonald’s had enjoyed success from the strategy. They immediately open new stores in its home as well as abroad after passing the market test.

Market Saturation

This refers to the degree of market penetration. Experts said that too many stores can be counterproductive for the franchise business. Too many stores can make the market saturated fast. The higher the degree of market penetration, less room is available for the business to grow. Dunkin Donuts and Chipotle have been using this strategy to survive.

Dunkin Donuts and Chipotle both have businesses, which have passed the market tests. Dunkin Donuts now has around 10.858 stores, while Chipotle has 2.250 stores. Compare them to the number of stored owned by McDonald’s (35.000 stores) and Starbucks (28.212 stores). As a result, Dunkin Donuts and Chipotle have more room to grow compared to that of McDonald’s and Starbucks.

It seems that declining performance of McDonald’s and Starbucks could be the results of their failure to anticipate the market saturation. When the market saturates fast, the franchise business has less room to innovate and to grow faster.

The Bottom Line

Therefore, how can the investor spot the next franchises to invest their money? The answer is finding emerging franchises that have market-tested business models and still have more room for growth. Unless it meets both criteria, the franchise will find it difficult to survive and beat the competition. Moreover, the investors are not interested with franchise business that does not have a promising future.

Source: FX Daily Report