Zeroing in on New Concepts for Growth

Franchise concepts continue to proliferate�"an important sign that the industry is healthy and poised for more growth.

“It is important to realize that franchising as an industry is growing and it is moving into industries where it did not exist before,” says Darrell Johnson, president and CEO of FRANdata, the Arlington, Va.-based franchise information and research firm.

In the second quarter of this year, for example, 95 new franchising concepts were identified by FRANdata. This brings the number of new franchise concepts to 144 so far in 2006. With two additional quarters to account for this year, the total number should reach well over 300 for the year.

New concepts can be either new companies using the franchise business model, or existing franchise systems that create new brands and programs to appeal to more narrowly defined customer segments. The recent numbers for the second quarter represent normal but strong growth for new concepts, says Johnson.

“In the last few years, the number of new concepts has been higher than a few years ago because of a broadening of the application of the franchise business model in industries it has not been in before, or at least was not as prominent in as before,” he says. In addition, the nature of franchising helps make it possible for individuals to get into a market quickly.

The franchise business model also is maturing in many sectors. As a result, other brands and concepts are being added within those sectors. Franchise companies are now operating in a multi-brand arena, where second, third, and fourth brands are offshoots of the primary brand. There also are completely new brands adjacent to existing brands.

Where to expand

What valuable tips can area developers glean from this data? Johnson says there are two major points to consider about the growth of franchising concepts. First, more concepts mean increased competition across the board in both new and existing brands. This fact creates challenges and means that area developers must track their competition diligently to stay on top of the marketplace. Second, more concepts also means there are more franchise options available if multi-unit franchise owners want to grow beyond just a single brand.

It is interesting to note that new brands for the second quarter came from 24 different industries, with the most found in real estate (brokers and related services), business consulting, and specialty/gourmet retail food sectors. The specialty gourmet sector now includes many brands that are providing catered dinners.

Johnson points out that the three sectors listed above are all service-related concepts. Area developers should keep in mind that with the more creative development of franchise concepts comes more unit growth on the service side.

In addition, the recent new-concept numbers are a further indication that franchise companies are attempting to avoid the intense retail site selection battle by offering services that are not as sensitive to location, such as business-to-business, mobile, and in-home services.

This presents an opportunity for area developers to expand into other franchising fields, such as providing services to the residential community and the growing home-based business sector. Johnson maintains that there is a lot of opportunity for area developers to expand in this subset under the franchising business model. For example, you may want to investigate the need or existence of home-based computer support services as well as package and mail services.

“A lot of development over the past 20 years has been focused on malls and shopping areas,” Johnson says. “Once they are built, they have a long life.” Even so, retail does continue to grow, both in the number of concepts and number of units.

It is important to keep in mind that some areas, such as regional mid-sized communities, have the capacity to absorb only so many fast food and other retail operations. But savvy area developers know that if they have maxed out in fast food or other highly developed franchise operations in a community, then it may be time to consider other brands, new concepts, or subdividing within their industry.

Use your knowledge

Multi-unit franchise owners should actually be encouraged by the growth in new concepts, because most area developers are well positioned to take advantage of this trend. Area developers possess important skills that serve them well in this environment. For example: knowing how to franchise and successfully operate one franchise brand can be easily adaptable to additional franchise concepts.

“As area developers gain experience with a particular brand and how to build and manage multiple-unit operations, this gives them a chance to take those skills and grow them either more aggressively with a particular brand or apply them across different brands if they decide to do so,” Johnson says.

If area developers know the franchise model well and understand the area in which they are operating, they will be able to determine which new concept may offer the best growth prospects for them. If you already own and operate a number of different kinds of franchises, there is nothing wrong with considering new concepts to add to your franchise holdings.

There is an important message here for area developers concerning the development of new franchising concepts: Namely, area developers can bring franchising expertise and regional and local knowledge more than anything to the table. Says Johnson: “Today there are a lot more franchising options for you in a lot of industries that you may not have considered or have particular experience in, but because of your existing franchising business expertise, it may be quite appealing to take the time and effort to consider these other emerging franchise concepts.”