The Role of Equity in Franchisee buying groups

8020If there is one business truism, it’s Pareto’s Principle

  • 80% of something comes from 20% of another thing.

Therefore, you get observations like:

  • sales gurus talking about “80% of your sales coming from 20% of the number of your customers”,
  • labour relations [80% of grievances — 20% staff]
  • hospital errors [80% — 20% Drs.] and
  • so on.

Testing Theories: This passes for management wisdom and is largely only good if you actually do some work to see how a specific situation is the same [integrates or supports a theory] or is different [differentiates itself from the conventional wisdom].

Observation: I have noticed, though, that every franchise system that I have studied has recurring patterns. One can be split apart [segmented] by annual sales volume.

There are a few very high volume operators, most are middle and a few very low sales volume franchisees.

Not surprisingly, one subset I’ve noticed is:

  • the higher the volume — the more professionally run it is (ie. able to decide based on sound business analysis).

High Volume: The operators understand business better and are willing to fund and act on innovative ideas quicker and hold the course over a longer time horizon. They’re often early innovators in all areas of business: marketing, human resources, technology and cost containment.

They are also keenly aware of their dominant status among their trademark franchisees. They are deferred to by their peers and their franchisor. Their success and authority is often used by the franchisor to seal the deal on new franchisees.

For all these reasons, they have a sweeter deal financially and a greater latitude with thier franchisor when compared to their trademark peers(ie. the unwashed masses: uniformed, lower volume operators).

Current Buying Groups: Most groups that I am aware of can be split into 2 categories:

  1. by industry association (ie. the Chamber of Commerce’s general insurance program) or
  2. by trademark system. (ie. bunch of Tim Hortons operators use the same health and safety training contractor).

Sure they help but it’s mostly amateur hour. There is a third way that I think is much more interesting.

3. Transtrademark Buying Group, TBG: The few, high volume operators in several systems commit to buying common goods and services. In a sense, an independent franchise-only buying group administrator cherry-picks based on volume and ability to decide (rather than on what brand you belong to).

The fundamental problem with the two traditional buying group types is that they institutionalize differential free riding: The whingy low volume freak is a drag on the decision making and administrative processes for the higher volume, more competent operators.

When you bundle buying groups with advocacy (as the AAFD does), you bitch up both.

A membership or democratic model (one member, one vote)

  • is fundamentally irreconcilable with

buying good and services (the higher volume = higher benefits, big fish eats little fish).

The higher volume guys (after the initial cost drop) rapidly lose interest because they are penalized for their strength [not rewarded] AND have to be associate with a bunch of weaklings who have very little to teach them.

These “two master” associations rapidly accumulate an ossified, out-of-touch  leadership, a predatory associated member class who capture the organization or/and association groupies [a species that gets their jollies from hanging out with other butt-sniffers].

It is only franchisees’ inexperience as a member of ANY group [before in their life] that they are such sheep when it comes to the strengths and weaknesses of a group of businesspeople.

  • They figure it takes a couple of hours, and poof, you have a competently, well-functioning not-for profit. Sorry sport: Never was like that. Never will be like that. NFPs are different.

Irreconcilable Differences: Either you serve social justice or capitalism. Trying to do both is just silly and leads to incompetence and irrelevance. Sure the associate membership:active membership cross-subsidization allows the association to live but it lives as a castrated entity.

Equity: I think a smarter way is to reward existing competent business owners and investors with higher returns [the more the whole group buys, the more ROI via annual dividends].

A TGB should be structured as a direct investment in an independent company by several core franchisees. More can become partners but they pay a higher rate for committing earlier.

Prices would be negotiated with, say, office supply companies for a specific annual volume of business at a certain % off retail. Each equity member commits to annual volume. Results are monitored over the year and buying group members that do not live up to their volume commitments, are penalized. (This selective “opting-out” is what kills 90% of  buying cooperatives).

  1. The administration of the group is covered by retaining a portion of the negotiated savings (ie. the vendor remits x% of sales of each contract to group, members of group receive, say, 8% instead of 10% as they order independently from the vendor during the life of the contract.)
  2. Progressive discipline (promise v. actual buying behavior) is maintained by transparency, reports of free riding to Board, retaining portion of savings and then remitting at end of year (along with dividends).
  3. Termination by Board clearly known. Adding equity partners possible.

I would much rather work with

  • a few, high volume, competent operators from Brand X plus
  • a few, high volume operators from Brand Y plus
  • a few, high volume operators from Brand Z.

than a dog’s breakfast of operators from any one system.

If the industry had any ability to act or an instinct for self-preservation, they’d get busy developing this capacity. There’s only about 100 years of work to do before any need to address any win:lose items for franchisees and franchisors.

  • NOTE: If this sounds harsh, it is meant to.

Most business  innovation dies because of a mushy, “shot gun” approach to positioning. I am much more interested in a rifle approach to innovation and then, once it’s successful, broadening it out or hiving off a related entity.

  1. Custom first.
  2. Mass-produced services as warranted.

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