Franchisees trounce company-owned stores in major study, but McDonalds still wants both

Michael Bailey Deputy editor

Franchisees trounce company-owned stores in major study, but McDonalds still wants both

Published 28 March 2014 12:46, Updated 28 March 2014 14:51

McDonalds maintains a mix of franchisee and company-owned clusters within metro areas, avoiding direct competition between two stores under different models wherever possible. Photo: Glenn Hunt

Franchisees create 5 per cent to 15 per cent more revenue than company-owned stores within the same concept, and do it with 10 per cent less wage costs, a research project of 19 major retail franchise networks has found.

Networks in the study were also using four times as many field consultants to support company units as the same number of franchise units.

However the study, by the Franchise Relationships Institute (FRI), did find that when comparing “clusters” of franchisees and company-owned stores within the same network, there was little consistent difference other than wages being lower in the franchised units.

This finding supported the use of a “cluster” approach to company-owned stores, according to FRI founder Greg Nathan.

It’s an approach already in use at one of Australia’s largest networks, McDonald’s.

“Our company-owned stores tend to work best when they’re clustered and we have a lot of support resources nearby,” says McDonalds’s field service manager, Bert Cotte.

McDonalds maintains a mix of franchisee and company-owned clusters within metro areas, avoiding direct competition between two stores under different models wherever possible. However, regional areas will almost always be addressed by partnering a franchisee.

“In regional areas our community engagement is key, local sponsorship of sporting teams and giving back where we can, and you really need a local figurehead to do that,” Cotte says.

“You can do it with employees but we find franchisees are usually better versed.”

STILL A CASE FOR COMPANY-OWNED

The outperformance by franchisees discovered in the FRI study broadly applied to McDonalds, Cotte says.

“Human behaviour dictates that on a level playing field, franchisees should outperform company run stores, due to the investment that franchisees have on the line. No matter how good a wage earner is, having a $2 million loan on the line is just a different level of driver,” Cotte says.

However, he says McDonalds continues to open new company-owned stores and buy back previously franchisee-owned ones, maintaining roughly 20 per cent of total stores in company hands, because there is a sound business case for doing so.

“The company-owned stores are a great breeding ground for talent. Around 60 per cent to 70 per cent of the 300 people in our head office have come out of company-owned stores, though that’s not to say there aren’t some from franchisees too,” he says.

A benefit of company-owned stores that’s difficult to quantify is the comfort that they give to prospective franchisees, Cotte adds.

“We can make an awful marketing decision and it hurts us too. The franchisees know we’re all in it together.”

Company-owned stores create an “opportunity to lead by example and set benchmarks”, and also act as a testing lab for product innovation.

“Whether it’s new menu items or a new process for serving drive-through that we’re trialling at the moment, we can experience the teething problems before we hand something new over to franchisees,” Cotte says.