Why franchisors fail (Lessons from the Titanic) 

The collapse of Kleins and several other insolvencies of both small and large franchisors so far this year has thrown the issue of franchisor failure into a rarely illuminated spotlight. Franchisor failure is an unsavoury topic which participants in the sector rarely discuss publicly.  

Like a sinking ship, a franchisor failure often creates a suction that drags surviving franchisees down with it, leaving only a small amount of wreckage on the surface to identify that the system ever existed (such as a vacant store, a painted-over sign, or a Yellow Pages ad). But this flotsam associated with the tragedy of a system collapse is rarely visible years or even months after the event.  

The Titanic, an “unsinkable” passenger liner which became the greatest maritime disaster of all time, sank with its lights on and engines running. Franchisors can also sink in a similar fashion. Up until a just a few days ago, the website for Kleins was still touting the franchise’s virtues as a business opportunity. In comparing franchisor failure with the sinking of the Titanic, there are some surprising similarities. Here are just three:

The Myth of Invulnerability 

The Titanic was designed, built and promoted to be unsinkable, yet sank on its first encounter with an iceberg. Franchisors create for themselves an equal myth of unsinkability. A common appeal in almost all franchise recruitment advertising is that a system is “proven”, but rarely is there any substance to this claim. What exactly has been proven? How has it been proved? Who proved it? When?  

The notion that a system is proven simply because it exists ignores the possibility that it may have been on life support from the outset, or is sailing directly into the path of an iceberg. 

This Myth of Invulnerability is shared by both franchisors and franchisees. Franchisors, like any other entrepreneur, do not set out to go broke. Nor do franchisees, who buy into a system on the expectation that the brand, systems, marketing and support provided by the franchisor will substantially reduce their chance of failure compared to an independent operator.  

However studies in both the United Kingdom and the United States indicate that up to three out of four new franchisors will fail in their first 10 years*. These tracking studies, conducted independently of one another, both come up with roughly the same figure for franchisor failure. My own preliminary research in Australia shows this figure to be closer to one in three franchisors here will fail in their first 10 years**, but more research is required to determine if the rate of franchisor failure overseas is reflected in the local market. 

The Myth of Manoeuvrability 

Like the Myth of Invulnerability, the Myth of Manoeuvrability originates with the franchisor. Prior to franchising, a business is often quite small and agile, and able to make changes rapidly to reflect a dynamic marketplace. In this regard, it is a bit like a jet ski – highly manoeuvrable, light, fast and responsive, but with only the driver and maybe a single passenger on board.  

Even when franchising commences, a franchisor’s business may still feel like a highly manoeuvrable craft because of the rapid changes introduced to the system as it grows, but most of this perceived manoeuvrability will come from an increase in the size of the engine (due to the number of passengers on board), rather than any real improvement in steering or navigation abilities. 

The more passengers (franchisees) the bigger the ship must become, until inevitability it loses the agility and manoeuvrability that made it successful in the first place. So now when travelling at speed, rather than comfortably steering around the iceberg, it may be impossible to prevent the ship from sailing into it, as with the Titanic all those years ago. 

The Myth of Wealth 

The Titanic was a luxury cruise liner which represented the best of everything on offer in the year it sailed. Many passengers were rich, or aspired to be rich by rubbing shoulders with rich people and doing the things rich people do. Those who weren’t rich were travelling to a better life across the sea, and had staked everything on a journey that would take them there. 

Similarly franchisees aspire to a better life in the hope of wealth and prosperity through their investment in a franchise, and are often persuaded by the perceived success stories of others already “on board”. Many are not fully aware of the work and commitment involved in running a successful small business until they are already in, and the glamour of self-employment soon wears off when the reality of turning a profit kicks in.  

Like passengers on a ship, there are few opportunities for franchisees to disembark once the journey has begun. They have little choice but to put blind faith in their captain and crew that the ship is heading in the right direction. For many the journey is truly worthwhile. 

Both franchisors and franchisees should be aware from the outset that the journey is not without risk. No hip is unsinkable, and the bigger it becomes the more difficult it is to steer. Furthermore, icebergs and other risks can appear from anywhere at any time, and both franchisees and franchisors should maintain a constant watch and be prepared to act at the first sign of danger. 

Had the Titanic and Kleins followed this advice, two tragedies could have been averted.   

References: 

* Stanworth, J, Purdy, D, English, W & Willems, J 2001, ‘Unravelling the Evidence on Franchise System Survivability’, Enterprise and Innovation Management Studies, Vol. 2, No. 1, pp.49-64.

* Shane, Scott A 2005, From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company, Prentice Hall, Upper Saddle River, NJ.

* Blair, D. Roger & Lafontaine, Francine 2005, The Economics of Franchising, Cambridge University Press, New York. 

** Content analysis: Franchising and Own Your Own Business Magazine, vol. 9, no. 5, Advertiser Index p. 136, HH&M Media, Sydney.      

Copyright Jason Gehrke, 2008