Franchising provides an economical and low risk method to expand an established small business. But before undertaking such a project there are a number of aspects that need to be examined to determine whether franchising would be the correct form of expansion. In this research project we have analyzed a specific company, Franchising Professional Optical Co., to determine whether it has the right business qualities and characteristics to be franchised.
The project begins by
addressing the characteristics needed to franchise a small business in general.
These characteristics include prototype store,
replicating the store, products and/or services offered, competition, and
finally skills needed by a prospective franchisor.
Once we have discussed what is needed in each one of these characteristics, we
then go on to analyze Professional Optical Co.’s business format. Finally by
comparing the general characteristics needed to franchise a small business with
Professional Optical Co.’s business format we determine whether Professional
Optical Co. can be franchised.
In researching this project
we examined a number of franchise trade publications, individual articles
written by franchising professionals on the Internet, and even a franchising
textbook. These materials provided us with a broad scope of material with which
to work. Using facts, figures, and opinions from much of this material we
determined the essential characteristics needed to franchise a business.
After comparing the general characteristics needed to franchise a business with Professional Optical Co.’s business format we determined that the business is ripe for franchising. A few of the aspects that helped us in rendering this conclusion included Professional Optical Co. having an established successful business format that was replicable, quality management, and an expansive product selection. It is our hope that this research project will help other small business owners who would like to expand in making the decision of whether to franchise.
Table of Contents
Executive
Summary
1
Table
of Contents 2
Introduction
3
Product and Service Offered
4
Competition 5 Skills Needed By Prospective Franchisee
5
Assets and Inventory 7
Advertising and Promotion 8
Location 9
Employees 9
Prototype Store 10
Replicating the Store 11
Product and Service
13
Competition 14
Skills Needed By Prospective
Franchisee 15
Conclusion
16
Glossary
17
About the Authors 19
“If we are to go only half way or reduce our sights in the face of difficulty… It would be better to not go at all.” This quote stated by John F. Kennedy sums up the attitude one must have in order to expand a small business. Though difficult in the beginning, expanding one’s business can reap many rewards in years to come. With a good work ethic, determination, and a drive to succeed, an entrepreneur can fulfill his or her dreams of starting a franchise.
Professional Optical Co. is a small eyeglass company located in Omaha, Nebraska. The company has been in business for 25 years and has gained stability in the Omaha Metro market primarily through repeat business. By first examining what is needed in a business to franchise in general, then analyzing Professional Optical Co.’s business, and finally comparing the characteristics possessed by Professional Optical Co. to these general franchising needs we will decipher whether it is suitable for business expansion through franchising.
Prototype Store
There are a number of characteristics that need to be addressed before beginning to franchise. The first of these is establishing a prototype store. One needs to examine several aspects about such a prototype before beginning to franchise. These aspects include whether one has trouble training the employees to operate the store effectively, whether the store itself operates efficiently, whether the store has a substantial amount of repeat business, whether there are enough assets to keep customers content and finally whether the profit margins are as high as they could be (“Anderson” 2). Training can be easy or difficult. If a trainee can respond to the occupation easily, the training process will move along more efficiently, thus having a positive impact on the productivity of the company. If the business operates efficiently, it will be easier to franchise. Repeat customers allow for more stability in sales, a quality sought in franchising. This quality can then be used to project future cash flows of the business. Finally, if there are not a sufficient amount of assets in the business, the need the customers desire will not be met, therefore business will be lost. Once the prospective franchisor has looked at these characteristics, he or she can then begin to think about replicating this prototype store.
The process of replicating a company owned store should be completed before actually beginning to franchise to others to ensure that the business can run smoothly under different conditions. If after opening a few more company owned stores owner confidence remains high, then the franchise replicating process can begin (Gurnick 3). Again before doing this, one should examine whether the precisely same service or product can be delivered at alternate locations, whether the prototype store will work in any location, and whether one can document all of one’s knowledge about the particular business so that prospective franchisees can benefit from their knowledge (Sherman 2). After identifying the prototype store and analyzing whether it is replicable, the next step is to look at the products that one’s company is offering.
Products and Services Offered
In examining the product or service being offered, one needs to find a differential advantage over the competition. In this examination one should sample competitor’s products to determine why people buy from one’s own company or conversely why potential customers choose competitors offerings. The reasons are varying and could include superior quality and service, convenience, and/or price. Once this has been addressed, then one should determine if the competitive advantages that one has over competitors are sustainable. There will be competitive advantages in the business format that potential franchisees may use, but they may also found their own unique competitive advantages. This issue is critical to franchising because in expanding into new markets with different ownership and management, it is these sustained advantages that may determine whether a franchise will be successful (Wilkerson 46).
The final aspect to examine is what skills will be needed by a prospective franchisee to run the business effectively. The franchisor should determine whether the necessary skills are so specialized that finding and then further training franchisees will be difficult, how many employees will the franchisee need to hire, and whether the job specifications/descriptions drawn up are an accurate portrayal of the actual job. Once these determinations occur the franchisee will take on responsibility for the business and only gain assistance from the franchisor as needed meaning only when a problem arises will the franchisee consult the franchisor. In franchising it is extremely important for the franchisee to know the business exactly so the operation will run smoothly (Deitz 1-3). This knowledge will stem from the franchisor who must train the franchisee on the entire business format.
The Start-up
Professional Optical has been in business for 27 years exactly. In the beginning of the business, Carl Heine, the owner of the Candlelight Lounge, married a farmer’s daughter from a small town in Nebraska. After having a daughter, he came to the realization that owning a bar was not the most beneficial occupation to have when raising a family. With his ingenuity and ability to communicate with people, he decided to go into a business that would be more conducive to family life (Heine).
Knowing that his brother-in-law was an ophthalmologist along with his best friend being an optometrist, he decided to take advantage of his connection to the eye business. Reasoning that the patients of the two doctors could be referred somewhere, he thought opening an eyeglass business could be a success, that is, with the help of his brother-in-law and friend. The three men rented space to run their practices and business in the Twin Professional Buildings located at approximately 73rd and Mercy Road. To this day the three men are still situated in this location with all of them nearing retirement (Heine).
In the beginning, Professional Optical Co. started with a small selection and minimal assets. Over the course of almost thirty years, the company has grown into the stable mature stage of its life cycle. This company can be dissected into several business aspects to decipher whether or not franchising would be a possibility for Carl Heine (Heine).
All retail companies need a product to sell. In Professional Optical Co.’s situation, their main inventory is eyeglasses. Currently, the company has over 2000 pairs of glasses, claiming to have more frames on hand in the store than any other retailer in Omaha. The wide selection caters to a broad range of people. Having glasses for children, women and men of conservative and liberal tastes, and people fearful of UV rays on their eyes increases their revenues. Moreover, they have a wide range of eyeglasses that fit any budget (Heine). For example, an individual could spend $75.00 –$500.00 on one set of eyeglasses.
In addition to frames, there must be machines to put frames together and fix broken ones. These machines consist of the following: a tinter to darken the color of the lenses, a machine that measures the peripheral distance between eyes, hot pans, an edger, a computer, and an assortment of tools. All of these instruments are essential in order to operate an eyeglass business. Because they do not have a lab in the store like many big chains, they cannot provide glasses for their customers within an hour. Mr. Heine said referring to this, “there are some things in life that should take longer than an hour to make (Heine).”
Before opening, Mr. Heine had a certain customer in mind when thinking about to whom he should direct his advertising. He knew that the most stable and easiest people to relate to are the middle-aged working class. With this in mind, two places he felt would be a suitable means of advertising were the radio and the phone book. On the radio, he felt this demographic of people would be easily reached on AM radio stations. The two that he chose were KFAB and KKAR. KFAB is a station that hosts shows like Nebraska Football pre and post game shows, along with Dr. Laura Schlesinger, and basic news shows. KKAR plays music like soft oldies. He thought people listening to these shows would be reliable customers. In the phonebook, he placed an ad that looked elegant and classy, that says to the reader, “we have a quality product at a reasonable price.”
On the promotional side of marketing, Mr. Heine purchases pens, knives, refrigerator magnets, and other simple products with the company name and logo printed on them. He gives them away to customers in hopes that other people will see the company name and logo. He also has a calendar produced every year to give to customers. He believes the more times people see the company name, the better the chance that people will come in more frequently. In addition, Mr. Heine also gives away gift certificates to Catholic schools for their auctions. Creighton Preparatory, Mercy, Duchesne, and Marian all have fundraisers for their schools in which the community members come to bid on items. Even for people who do not bid on the gift certificate, he believes that they will see it and will be able to recognize Professional Optical Co. when searching through the phonebook.
73rd and Mercy Road might be considered near the heart of the city. Being approximately three miles from Dodge, the main thoroughfare of Omaha, one would think Professional Optical Co. is located in a great spot. This is not the case. If it were on 72nd street itself, people might drive in just because of seeing a sign, but it is located on lowly 73rd street. 73rd street is small, dismal, and a terrible street to attract random customers. Along with the fact the city will not allow a large sign to be put in place to help customers identify the company, customers must know in advance how to get there.
On the positive side, Professional Optical Co. is located between two doctors. Without this customer source, the store would have been out of business a long time ago. Referrals and word of mouth is how Heine obtains most of his customers.
The relationship of the employees to the owner and how they work together might be the largest factor that makes the company succeed. His two employees are his wife and a close friend. These two ladies do not have the skills that Mr. Heine possesses. Carl Heine has sharp technical skills, and has an incredible way of getting people to perform without acting in a pushy or bossy manner. In contrast, the other two employees are not skilled in glass repairing, but they make the customers feel comfortable about the frames they purchase.
These contrasting personalities help the company function with a diversity of skills and attributes. Many people purchase their glasses from Professional Optical Co. because they enjoy the experience of the friendly service. In addition, the employees keep Carl Heine and each other in check.
Professional Optical Co. took one month each training their two employees, future franchisees will probably take a similar amount of time training their own employees. This length of time for just training can be difficult in starting up a franchising operation because once the franchisor has been trained, he or she will want to open the store immediately to begin making money. It is important to note that at the beginning of most franchises, the franchisee has invested his or her entire life savings and thus is badly in need of money (“Retailing” 1). Employees working at Professional Optical Co. need to be technically sound with regards to glass sizing as well as responsible enough to run the business alone should others need to take a leave of absence. Thus a potential Professional Optical Co. franchisee will have to find highly qualified individuals to work for them. This can be difficult in times, such as now, when the unemployment rate is low. An advantage for the franchisee though is he or she will only need to find two employees, which is much less than a typical franchise operation. Furthermore, the turnover rate for this store is low (Heine’s employees have both worked for the company for more than ten years) so once the franchisor has successfully found qualified employees he or she can plan on employing them for years. There is a potential problem with this rational; dedicated, loyal, and personable employees are few and far between. Mr. Heine has been fortunate enough to have his wife and a close family friend work for him. Once franchising begins this will most likely not be the case.
Another aspect to look at when addressing the prototype store is whether the business operates efficiently. Professional Optical Co. conducts business very efficiently by employing quality-motivated employees, top-of-the-line equipment, and effective advertising measures. The store is able to pay the suppliers, rent, employees, and doctors* and still manage to create a profit – “enough to put three kids through Jesuit high school and college institutions,” Heine said.
The assets Professional Optical Co. possesses are able to keep customers content, which is another key in franchising. Their selection of glasses (over 2000 frames) is Omaha’s largest, as claimed by Mr. Heine, and the fitting machinery used in the store is the most advanced equipment available, only a year old. Machinery needs to be updated about every 15 years and would be a fee the franchisee would need to address. By keeping this business format when franchising, the new franchised store locations will also be able to sustain a competitive advantage.
In replicating the store by franchising the franchisee would become the owner of the store. He would purchase from supplies from the same supplier and follow the exact business format set by the franchisor, Mr. Heine. Sales would all go to the new franchisee and percentage of those sales would go to the franchisor, this is known as a franchise royalty fee and is appears in all franchising contractual agreements (Judd).
Many small businesses may have a prototype store for franchising, but whether these businesses could feasibly replicate to another location is another issue entirely. When asked about this issue, Mr. Heine commented that as long as the prospective franchised stores could find suitable franchisees willing to conduct the business in exactly the same format as now, then the store could be successfully franchised. Finding suitable franchisees can be difficult, though, especially among businesses that have not previously established a presence in the franchise environment. Put simply, there will not be a large demand among prospective franchisees to replicate this operation due to it being an unproven franchising system (Judd 51).
Location is always a major factor in starting a business, and franchising is no exception. A suitable location for a Professional Optical Co. franchise would be directly next door to an eye doctor. Mr. Heine says that as long as this is the case, other location aspects will not be cause for concern. He gave his store as an example, saying there are many spots in Omaha that would make the business more visible, but just being next to the eye doctor allows him to do a substantial amount of business. This is an easy requirement to demand, but actually finding doctors to locate next to could pose great difficulty. Often times doctors’ offices are located in an office building where there is no rent space available. Should there be rent space available, the rent can be high, which could be difficult for a new franchisee to account for in the beginnings of his or her business. Conversely, many eye doctors of any kind in Omaha and elsewhere do not have eyeglass stores located within their vicinity. This presents a great opportunity for prospective franchisees.
The final aspect to attend to in replicating Professional Optical Co. is the ability of the company owner Mr. Heine to communicate his knowledge of the business in its entirety to potential franchisees. In our interview with Mr. Heine, he could speak thoroughly and incessantly about the operation of the business. By the end of the interview, we felt we could begin a franchise from all the information he had given us. His ability to do this is extremely beneficial and important to prospective franchisees. In franchising Professional Optical Co., this information would need to be put into an operations manual to which franchisees could refer. Franchisees will know exactly what to do under any circumstances. Handling a situation, both bad and good, properly, can often lead to the success or demise of a business.
Professional Optical Co. employs the belief that quality products and services are what win customers loyalty and keeps them returning, not price. Accordingly, Professional Optical Co. claims the largest selection of Eye Glass frames in Omaha. Customers can enter the store knowing the frames they are looking for will either be in stock or do not exist. This aspect is a strategic advantage over competition but is not necessarily sustainable. What is sustainable are the services that Professional Optical Co. offers. Both the owners and the employees are extremely friendly and personable. They get to know their customers and thus take great pride in keeping them pleased. These aspects of small businesses, it is said, are often lost once the business begins to franchise. By entering a partnership with franchisees who possess similar personalities and attitudes towards customers Professional Optical Co. can maintain this competitive advantage throughout the franchising system.
Convenience and price should also be addressed in discussing the products and services of a small business. In the case of Professional Optical Co., their prices are competitive but above average. Mr. Heine explained their pricing strategy saying, “Though our prices may be higher than our competitors’, our services and products account for the discrepancy. You get what you pay for and our customers are glad to pay a little more for the product as long as they get a lot more service and a better product in return.” Furthermore, Professional Optical Co. is strategically located between an optometrist and an ophthalmologist making it a convenient place to shop after having one’s eyes examined. This pricing strategy and convenience advantage would need to be employed in new franchises as well since both are of great importance in keeping the store thriving.
As people advance into the twenty first century, a number of technological advancements face established businesses. The eyeglass industry is no exception. Indirect competition from contacts entered the market years ago, and most eyeglass companies have adjusted. Now though, a new indirect competitor is beginning to eat away at the eyeglass market -- laser surgery. For an amount of about $1,000.00 per eye, the visually impaired can have their sight corrected permanently -- leaving eyeglass companies with sagging demand. Though this advancement has affected Professional Optical Co., the price and risk of the laser operation often leave those needing to see clearly with a more economical alternative – glasses. Furthermore, long-term complications from the surgery could provide the eyeglass company a new market niche with which to enter. Mr. Heine said though younger customers are entering the store less frequently than in the past, but realistically their sales have not been affected greatly by the new surgery technique. This competition will, of course, affect future franchised stores as well. The key will be catering to customers who do not have the money for or do not to want take the risk of laser surgery.
Direct competition to Professional Optical Co. is mainly posed from Lens Crafters, which have a number of locations around the Omaha Metro area. Being an independent business located between an optometrist and an ophthalmologist, Professional Optical Co. has always maintained a high demand but franchising could change this. Lens Crafters is an established nation-wide company. Should Professional Optical Co. set up a franchise operation, Lens Crafters and other large multi-state companies like them would be their main competitors. Potential customers in new locations would have to be pulled away from Lens Crafters. Professional Optical Co. does offer superior service and a better selection, so completing this feat is possible for franchised locations. In addition, once beginning a franchising system Professional Optical Co. would be purchasing a greater amount of glasses. With this being the case, economies of scale would prevail lowering the cost of glasses to us. These savings subsequently could be passed on to the customer.
First of all, a prospective franchisee needs an understanding of business. Having an attitude of service and going the extra distance is essential in this business, as it is for any business. Specifically in the retail eyeglass business, it is mandatory for a franchisee to understand the differences in types of vision, characteristics of lenses (ie, bifocals, trifocal, no-line focals, different coatings, and assortment of polishings), and the structure and terminology of frames. One must know how to fit glasses to an individual’s face and be able to relate to an assortment of personalities. The training involved in teaching these aspects to prospective franchisees should be done in a classroom format with no more than 12 other prospective franchisees in the training. This teaching format allows for prospective franchisees to learn thorough personalized teaching while still garnering knowledge through peer interaction (Judd). With hard work and determination, a prospective franchisee can succeed.
Establishing a small business is a feat not easily accomplished. Failure rate estimates for small businesses range from 60% all the way up to 90% (“Answers” 1). Once a business is successfully established, the next logical step is to try to grow the business. Franchising offers a great opportunity for small business owners who have a successful operation but do not have the capital or simply do not want to take the risk of expanding through company owned stores (Wilkerson 21). Should Professional Optical Co. decide to expand, would franchising be the best option? This question demands that one look at Professional Optical Co.’s operations through a number of aspects including the prototype store, replicating the store, products and services, competition, and the skills needed by a prospective franchisee. After addressing each of these issues thoroughly, I have determined that Professional Optical Co. could be a prosperous franchise.
Company Owned Store- a store owned by the original founder or founders of the business, i.e. not owned by franchisee.
Differential Advantage- an advantage that competitors or a group of competitors cannot replicate or copy
Franchise- authorization granted to someone to sell or distribute a company's goods or services in a certain area, or a business or group of businesses established or operated under such authorization
Franchise Royalty Fees- Fees paid by the franchisee to the franchisor for providing the opportunity to use the franchised business’ format
Franchisee- one that is granted a franchise, i.e. to market a company's goods or services in a certain local area.
Franchisor- one that grants a franchise
Ophthalmologist- a physician who specializes in ophthalmology
Ophthalmology- the branch of medicine that deals with the anatomy, functions, pathology, and treatment of the eye
Prototype Store- the exact model of an existing business that is used to replicate and shape future franchised businesses
Works Cited
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10 May 2001.
Deitz, Jim. “Franchise Tips and Facts That Will Help You Find Your Best Franchise
Opportunity.” The Franchise Doctor. 15 march 2002.
Gurnick, Lou. “Management.” Franchising Business International. 20 March 2002.
http://www.franchisebusiness.com/management/
Heine, Carl. Interview with John Heine and Josh Ripp. Easter
Sunday Brunch Discussion
On
Professional Optical Co. Omaha: 31 March 2002.
Judd, Richard. and Robert Justis. Franchising. Cincinnati: Desktop Publishing: 2002.
“Retailing Marketing Notes 2002 (Retail Classification). Retailing. 20 March 2002.
http://www.crab.rutgers.edu/~ckaufman/rmnclassification.html
Sherman, Andrew J. “Strategic Guidelines for the Prospective Franchisor.” Centercourt.
20 March, 2002. http://www.centercourt.com/usa/sherman3.html
Wilkerson, Jerry. “Consumer Preferences Power Chain into the
21st Century.” Nation’s
Restaurant News. New York. June 14, 1999.
Wilkerson, Jerry. “It Takes Capital to Run a Successful Franchise Company.”
Franchising World. Sept./Oct. 1999.
Josh Ripp is a junior at Creighton University located in Omaha, Nebraska. He is majoring in finance, entrepreneurship, and history. His limited business experience has included managing a pool/recreation complex in Colorado Springs, supervising the intramural sports program at Creighton, and operating a small landscape company. Josh’s aspirations include one-day attending law school and beginning his own small business, though he does not know in what field yet.
John Heine is destined for success. With his outstanding analytical skills and his vision in business, there is no telling where he will go. Currently, John is two weeks away from graduating from Creighton University’s fine business program. From here he will go onto the prestigious and accredited school of law at Creighton. His past history in the business world include an internship at Dain Rauscher Investment Services, working at Professional Optical Co., and taking care of Jesuit vehicles.