Change Means Opportunity: Are you set to take advantage?
We’ve seen this play out many times. The economy takes a dramatic downturn and during the recovery new companies arise with products and services tailored to a more rapidly evolving market. Existing companies try to keep up, and/or their franchisors are reluctant to do the hard work to make the necessary changes.
There are many reasons franchisors can give to not change too much. Among them is the need to convince franchisees that such changes are necessary. And in legacy systems, older, established franchisees may have little incentive to invest in “new.” Franchisors can argue that ending up with a split system of newer and older models doesn’t help the brand or its franchisees. And on and on. So what’s my point here, you may be wondering.
Simply this. Multi-unit operators have significant advantages in the early stages of a recovery following an economic crisis. They have the know-how and access to capital and resources to move quickly. FRANdata has seen this story play out in multiple post-recessions. Perhaps the Great Recession was the best example. It was driven by a financial crisis. Therefore, access to capital was key early in the recovery. Consumers were ready to go, but financial institutions weren’t. Who did banks focus on first in the franchise space? Operators with proven performance records. For the first 3 years, from 2009–2011, multi-unit operators were the darlings of the lending community and took advantage of it to grow. This period also coincided with the coming of economic age (translation: spending money) for Millennials, hence the explosive growth of personal service brands from food to fitness to hair care to massage. Multi-units were able to catch that wave.
A significant part of that wave was driven by new brands. FRANdata tracks all franchise activity, and early on we observed the substantial number of new brands showing up in certain sectors. We also observed a trend in certain sectors coming to market with new models of delivery, such as salon suites in the hair care sector. Understanding what those trends were early in the recovery gave multi-unit operators significant growth advantages that they benefited from over the next 10 years.
FAST FORWARD TO 2021
That leads me to what we see today. While the cause of this crisis was health-related, it affected consumers very directly—and for an extended period compared with past downturns—which has forced changes in consumer behavior. To be fair, most of the changes in behavior were evolving before the pandemic and many of these consumer behavior modifications we’re seeing now would have gradually become more commonplace. The crisis just compressed the evolution into a revolution.
Finding opportunities that will lead to disproportionately faster growth and profit must focus on 3 things: 1) How is the consumer permanently changing? 2) Which existing brands are best positioned to connect with those permanent changes? 3) Are there new brands arising that represent the next fitness industry style wave?
I’ve written recent articles on the trends we’re seeing in consumer behavior so I won’t elaborate on that here. Suffice to say that we will look back on this period and recognize that many consumer changes were not new; they were in various stages of adoption before the pandemic, but they were accelerated so rapidly that clear winners and losers emerged based on how quickly brands could recognize and adjust.
As you look at the established brands you currently are working with or considering signing on with, I think the most important thing is to understand how much they need to be internally focused to address the problems they had before the crisis and/or were caused by the crisis. Undercapitalized franchisors, too rapid unit growth leading up to the crisis, low prospect screening standards, substandard technology support (this will be a big factor in the recovery for many across multiple functional areas), inefficient and/or dated product or service offerings, and so forth are due diligence criteria that should be part of your evaluation.
In our recent advisory work with brands, we are seeing a distinct 18- to 24-month advantage as the recovery gets under way for brands that came through the crisis largely unscathed and, in some cases, stronger. That advantage will have consequences for years to come because of the anticipated speed of initial recovery once it gets under way.
Finally, we’re starting to see new brands coming to market in anticipation of how the consumer has changed or will be changed. It’s still early, but it’s worth watching new brand trends as these market signals are among the strongest indicators of the next phase of franchise expansion. They are challenging old assumptions and testing new ideas from product to delivery to support.
Darrell Johnson is CEO of FRANdata, an independent research company supplying information and analysis for the franchising sector since 1989. He can be reached at 703-740-4700 or firstname.lastname@example.org.
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