One Person's Ceiling Is Another One's Floor: The Current State of Franchise Sales
To paraphrase the words of the late, great business author and management consultant Peter Drucker: The purpose of franchising is the making and keeping of franchisees. But it’s times like these that many franchisors are being put to the test in fulfilling this mandate.
The Covid-19 pandemic has created a challenging environment for franchise sales. According to our most recent Franchise Pulse Survey from August, we found that while 84% of franchisors are actively offering franchise sales opportunities, only 37% of those expect to achieve between 80% and 100% of their original 2020 franchise sales goals; and 40% expect to achieve less than 50% of their plan.
In a new study that builds on our earlier Franchise Sales Index, we analyzed more than 600 franchise brands on the impact of the pandemic during the first half of 2020 and found that, overall, franchise sales leads declined by 18% in the second quarter of 2020 (April – June). This data makes it clear that one person’s ceiling is another one’s floor — and that industry and brand size are determining factors as to whether the pandemic is benefiting franchisors or crushing them.
However, there’s a silver lining. Even in the midst of the pandemic, tens of thousands of those new leads who have expressed interest in franchising are seeking stability in the new abnormal. In the first quarter of this year, we processed 197,000 franchise leads on behalf of our customers and an additional 162,000 leads in the second quarter. And from looking at the industries franchisors serve, it isn’t just to the favor of those we might call recession- and pandemic-resistant. Such a case can be made when we see that the retail products and services franchise segment saw an increase in leads of 49% quarter-over-quarter, while automotive experienced an increase of 4%.
States with high unemployment are generating more leads
When looking at the distribution of franchise leads geographically, we are finding evidence that double-digit unemployment claims have led to an increase in leads in states such as Mississippi, Ohio, and Michigan. Concentrating your marketing spend in smaller markets can potentially amplify your brand awareness, rather than spreading yourself thin by casting a wide net.
Deals by source: Brokers are No. 1
When it comes to which sources are generating the most deals, franchise referral consultants (also referred to as brokers) were No. 1 for the first time in the history of our Franchise Sales Index — producing 21% of all deals in the second quarter, compared with 11% in Q1. Brokers were closely followed by referrals, which represented 17% of total deals — very close to where they ranked in the first quarter. It’s my belief that this is due to a combination of factors, including reductions in marketing spends, buyer confidence, and relationships.
In analyzing the balance of leads by source, we found the most precipitous drops in sales were those attributed to websites, which decreased by 70%. I’ve always been suspect of “websites” as a lead source as these are typically sought out after having encountered your brand in doing their research.
Portals and trade shows led to slightly more deals in the second quarter than the first, indicative of these being leads that carried into the second quarter that were in process in the first quarter.
More development stats to consider
Here are some additional statistics we uncovered in the Franchise Sales Index related to deals by source:
- Total lead-to-closure rates declined from 1.2% in Q1 to 0.9% in Q2.
- The leading source of deals as a percentage of leads was franchise referral consultants (brokers), improving from 4.7% in Q1 to 5.3% in Q2.
- Referrals dropped from 7.9% to 4.9%, ranking No. 2.
- Organic lead to deals increased from 1.6% to 1.8%.
- Marketing-attributed deals improved from 0.7% to 0.8%.
- Websites dropped from 1.5% to 0.6%.
- Portals (0.3%) and social media (0.2%) remained unchanged.
Based on our findings, franchise referral consultants take approximately 20 leads to culminate in a sale, whereas it would take 500 leads to make one sale if you were relying on social media.
Keep investing in franchise development marketing
Another data point worth considering is that larger brands (more 200 locations) represent 28% of the total leads in our database but represent a whopping 67% of all sales. Contributing factors are likely the result of greater brand awareness and larger marketing spend.
The whole point of these Franchise Sales Index reports is to aid you in turning data into actionable insights, so you can have a roadmap to achieving your greatest ROI. Now is the time to be bold in your marketing. Reducing your franchise development marketing spend will potentially have debilitating results and leave you without a pipeline when you’re ready to ramp up. There are many examples of brands in hard-hit industries, such as personal service and QSR, achieving record levels of franchise sales. Of course, you need to know your metrics, or you will be wasting your cash.
Next time: A detailed look at lead sources
This article is a first in an exclusive Franchise Update series in which I will share data and insights into all things related to the “top of the franchise sales funnel” and how they have affected the behaviors of franchise buyers. In my next article, I’ll begin to go deeper into each lead source to show how results look when filtering by industry and system size.
To read the full 2020 Franchise Sales Index, click here.
Keith Gerson is President of Franchise Operations at FranConnect, a recognized leader in franchise management software. For the past decade, he has worked closely with executive boards and leadership teams that are part of the company’s portfolio of more than 800 brands and 150,000 locations, with a focus on helping franchisors achieve their desired goals in sales, operations, and marketing. For more information, best practices, and guides, visit the company’s Resources Page.
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