BUYING FOR TOMORROW

Imagine you are considering two café franchise opportunities.

Both have attractive restaurants, good coffee, established brands and broadly comparable investment levels. Their franchisees appear reasonably positive, and the financial projections stack up. On the surface, there may not be much separating them.

Or perhaps you are comparing two commercial cleaning franchises. Again, both appear credible. They have established customers, recognised brands, systems, training and territories available.

How do you choose between them? There are obviously many factors to consider, but one that I believe deserves much greater attention is innovation.

Importantly, this does not mean simply asking which franchise has the newest app, the coolest technology or the greatest number of new products. The more relevant question is whether the franchise system has demonstrated the capability to keep improving and adapting over time.

That is important because you are not simply buying the franchise system that exists today. Depending on the franchise term and your plans, you could be investing in a business you expect to own for five, ten or even fifteen years – and a lot can change in that time.

What does innovation really mean?

Innovation is sometimes associated with transformational developments, like a revolutionary new technology platform, a major new product or a completely new way of doing business. Those innovations certainly matter, but most business innovation is much less dramatic.

Consider a bakery-café franchise that refreshes parts of its menu every quarter. To customers, the result might simply be several new cabinet items, a seasonal pie or a new sandwich.

Behind those apparently modest changes, however, may sit a substantial innovation process: analysing customer preferences, identifying trends, developing recipes, sourcing ingredients, negotiating with suppliers, calculating food costs and margins, conducting kitchen trials, involving franchisees, updating point-of-sale systems, producing marketing material and training franchisees and their teams.

Then the system does it all again next quarter. That may not sound revolutionary, but an organisation capable of repeatedly making well-researched improvements has developed something potentially much more valuable – innovation as an organisational capability.

How do businesses innovate?

Innovation can occur almost anywhere that a business creates, delivers or captures value. For a prospective franchisee, it can be useful to think about at least six areas.

First is the customer proposition: products and services, pricing, packages, ranges and the overall customer experience.

Second is how customers access the business: online ordering, delivery, drive-throughs, mobile services, e-commerce, extended operating hours or new channels altogether.

Third is operations and productivity: improved workflows, rostering, equipment, automation, stock management, wastage reduction and quality control.

Fourth is supply and purchasing: better sourcing, supplier arrangements, logistics, purchasing concentration and opportunities to leverage the collective buying power of the network.

Fifth is technology, information and capability: POS and CRM systems, customer data, AI, benchmarking, training and learning systems.

Finally, innovation can change the underlying format or business model itself, including things like the size and type of premises, use of capital, territories, new revenue streams or fundamentally different ways of operating.

Mitre 10’s development of the MEGA format provides a good New Zealand example. The first Mitre 10 MEGA opened in Hastings in February 2004, after the local business had studied international home-improvement trends and identified the need for a much larger “big box” format. Moving from traditional stores to a large one-stop home-improvement format affected the range, premises, parking, inventory, staffing, customer proposition and economics of the business.

Innovation, therefore, should not be confused with invention. It is about finding better ways of operating and creating value.

Small improvements can be very big

For many franchise businesses, the most valuable innovations may be relatively small. A one percent improvement in labour productivity, stock loss, average transaction value, sales conversion or gross margin can be highly material when repeated year after year.

The power becomes even greater in a franchise system. If one franchisee discovers a better process that improves productivity by two percent, that is useful to one business. If the franchisor can validate the improvement, document it, train it and successfully transfer it to 50 franchisees, it becomes a significant system innovation.

This is why good operating documentation and training systems also matter. Before a system can continuously improve, it needs to understand and articulate what good practice looks like today.

Strong manuals and training should not fossilise a franchise system. They should provide a foundation from which it can evolve. Without that foundation, innovation starts from fragmentation, with different franchisees potentially doing the same activities in different ways.

Franchisees can be innovators too

One of the great potential strengths of franchising is that ideas do not have to originate at head office. A franchise system may have dozens or hundreds of motivated business owners interacting every day with customers, employees, suppliers and their local markets. Collectively, that represents a considerable source of intelligence.

McDonald’s provides some famous examples of franchisee-led innovation...

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