Retail surgery: Can I reduce risk by introducing a franchise model?

It is important to understand exactly why a retailer is considering a franchise model, points out Dan Murphy, a director in AlixPartners’ retail practice. In the case of overseas expansion it can make sense to use an experienced local franchising partner because of the costs and complexities of owning and running stores in another country.

Likewise, if the objective is to roll out a simple concept in your own country – such as a fast food concept – then a cookie-cutter franchise model offers the perfect low-risk, low-cost model.

However, Murphy explains: “If the objective is simply to reduce rents and stock costs and offload underperforming stores to franchise partners, then some deeper questions need to be asked. Which locations will be most attractive to potential franchise partners? The answer is probably the high contribution stores, which are surely going to be the ones you want to keep. And if you are trying to offload the less profitable stores, why would a franchisee want to invest in these?”

There are examples of large retailers that have tried to pass underperforming stores into a franchise network, shifting the burden of rents and stock costs to the franchisees. In many of these cases, the result was that the franchisees collapsed under the weight of costs and so the store contribution was lost anyway.

Murphy concludes: “The fundamental question I would ask is: if you believe a franchise partner can make money running a store, then why can’t the retailer?”