10 Rules For Managing Franchisee Innovation

By: Jacob Grosshandler
Published: March 10th, 2014

Develop a System-Wide Vetting Process

Who is responsible for innovation? For many franchise concepts, innovation is the sole domain of the franchisor as it safeguards the brand's equity: "Do only things that I say, and do them exactly as the operations manual specifies."

Franchisor-led product innovation is most prominently seen in food-related brands in the form of the centralized test kitchen. However, franchisor-led product innovation often leaves an invaluable resource untapped: the franchisee. Think McDonald's Filet-O-Fish, invented in 1962 by franchisee Lou Groen to make up for slow Friday burger sales.

Also, despite the positives provided by franchisor-led product innovation, a brand runs the risk of becoming entrenched in its own singular manner of thinking--a competitive threat in the face of ever-changing consumer tastes.

So how does a franchise system unlock the profitable insights from franchisees without unleashing a Pandora's box of compliance issues and risk erosion of its brand equity? Our interaction with many franchisors on the subject suggests that the answer resides in placing boundaries around the type of product innovation allowed by franchisees. The following 10 steps provide a roadmap to unlocking the value of franchisee-led product innovation.

•  Rule 1: Stick to the brand's core. No franchisee should be allowed to tamper with the core product set that defines the brand. The Big Mac is sacred to McDonald's and will remain untouched, and KFC's secret recipe still needs to be in every bucket of fried chicken.
•  Rule 2: Leverage existing inventory and the system's supply chain. Franchisors should encourage franchisees to first consider ways to create products with existing inventory and equipment. This minimizes additional unit investment and training, ensures that the existing supply chain can be leveraged, and limits how far the new products can wander from the brand's core.
•  Rule 3: Filter ideas. Not all ideas are good ones. Franchisors should establish preliminary metrics to measure the viability of ideas in a uniform and structured format. This will keep down the cost of evaluating product innovation, while empowering and encouraging franchisees to envision new, profitable revenue streams. It will also take the emotion out of determining whether a new idea has merit. Franchisees should be allowed to proceed with piloting new product offerings locally only after franchisor approval.
•  Rule 4: Innovation is not for everyone. To avoid sidetracking new franchisees from learning the fundamentals, franchisors should limit the option to undertake product innovation to only franchisees in good compliance standing and with several years of operating experience. In most cases, this means a greater likelihood that multi-unit franchisees will be the operators encouraged to test new ideas.
•  Rule 5: Reinforce compliance. Franchisors should establish and communicate clear guidelines for any variance in consistency and compliance. Testing new product offerings could mean a new ingredient in the pantry or crowding in the store, but compliance in all other metrics and procedures must be followed to ensure brand consistency.
•  Rule 6: Share the costs. Operational constraints and inefficiencies in testing and introducing a new product could negatively affect a franchisee's operations and costs. This isolates the costs and risks of a new product launch, which could have value to the whole system. The question "Who should pay?" must be be clearly addressed up front as part of the procedures a franchisor uses for innovation.
•  Rule 7: Test and retest. Franchisors should leverage their own test kitchen and company units to formalize and streamline scale and operational issues for a large product roll-out. This shows that the franchisor is invested and has the best intentions for the entire system.
•  Rule 8: Leverage social media. Social media is an invaluable tool that can be used to promote new products cheaply, as well as to collect real-time feedback on customer reaction. Subscriptions to social media aggregating tools have increasingly become more affordable; some cost less than $500 a year, putting them in reach of franchisees and franchisors.
•  Rule 9: Don't be afraid to pivot. Innovation can be messy and unstructured and is not always successful. We all remember New Coke, right? If a new product clearly not working, cut bait. To avoid costly mistakes, before launching a product with any scale, franchisors should track new products against pre-established KPIs and collaborate with franchisees to set targeted sales volumes, profit margins, and other operational metrics.
•  Rule 10: Promote franchisee success stories. Focus should be placed on what made them successes by communicating the importance of compliance and consistency and their impact on sales and profitability. Franchisors also should reward successful franchisees with recognition and/or money.

By decentralizing product development while using a structured set of procedures and measures, revenue diversification can be achieved cost-effectively. In addition to expanding same-stores sales, franchisee-led innovation will likely foster a new sense of partnership between franchisees and franchisor.

Jacob Grosshandler is a research analyst at FRANdata, an independent research company supplying information and analysis for the franchising sector since 1989. He can be reached at 703-740-4713 or jgrosshandler@frandata.com.

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