The traits for high growth within franchise systems is a topic that there has not been much consensus on over the past 40+ years. Study after study has tried to narrow down the traits of high growth systems only to find there are often not many correlating points.
We recently looked at over 400 franchisors from different sectors in the United States. In this analysis, we gathered data points from Franchise Disclosure Documents, the internet, and other sources. We identified common data points among the top 70 franchise systems that achieved growth rates of over 20% in 2023. These insights offer practical advice and strategic considerations for franchisors and aspiring franchisees.
Expanding a franchise system successfully requires understanding the key factors that drive growth. Our analysis aimed to uncover these elements. This is not meant to be a roadmap to success. Instead it is meant to show the common characteristics among high performers.
The findings reveal significant trends and offer practical advice for franchisors looking to replicate this success. This article will delve into various aspects, from financial disclosures to marketing strategies, providing actionable steps to improve franchise development and sales.
What is normal growth?
In 2023, the franchise industry was projected to generate a total output of $860.1 billion, reflecting a 4.2% increase from the previous year. This growth is a testament to the robust nature of the franchising model, which continues to expand even amidst economic challenges.
Never the less, you can see that 4-5% growth is the industry norm. To achieve 20% growth, takes adherence to specific strategies. Total revenue in 2024 was projected to increase to $893.9 billion, showing similar growth. In order to outpace the industry, a company must have a well through out approach and strategy.
The Importance of Financial Transparency
Financial Disclosures and Item 19
Item 19 in the Franchise Disclosure Document (FDD) provides prospective franchisees with financial performance representations. This helps prospects in understanding the potential earnings and financial projections of the franchise.
Our study has shown that financial transparency is a crucial factor for franchise sales. In fact, 70% of high-growth franchise systems provided clear and detailed financial data in their Item 19 disclosures, compared to the average of 57% of all franchise systems. This level of transparency not only helps potential franchisees understand the financial implications and benefits of joining a franchise, but it also instills confidence in the franchisor’s operations. It is clear that franchisors who prioritize clear financial disclosure are better positioned to attract prospects.
Prospective franchisees are more likely to invest in a franchise when they clearly understand the potential financial returns. High-growth franchises leverage this by providing detailed financial information, facilitating easier and more informed investment decisions.
Supplier Relationships and Focus
Our study found that 66% of franchisors supplied products or services (in addition to normal coaching/support) to their franchisees. However, among high-growth franchisors, this number was lower at just over 50%. This indicates that high-growth systems might prioritize external marketing efforts over internal supply chain management. By focusing on attracting new franchisees rather than solely supplying existing ones, these franchisors can drive more significant growth.
While being a supplier can strengthen the relationship between franchisor and franchisee, balancing this with efforts to expand the franchise network is essential. High-growth franchisors allocate more resources to marketing and franchise development, emphasizing the importance of a robust external focus for achieving substantial growth.
Web Presence and Marketing
A strong web presence is a critical factor for franchise growth. High-growth franchisors averaged 140,000 unique visitors to their websites monthly, compared to 54,000 for those with less than 20% growth. This substantial difference underscores the importance of an effective online marketing strategy in driving franchise sales and development.
To achieve a high number of unique visitors, franchisors should invest in SEO and content marketing. A well-optimized website that ranks high on search engines can attract more potential franchisees, increasing prospecting and growth.
Unopened Franchises and Resource Allocation
Interestingly, 25% of franchises in high-growth systems were unopened as of December 31, 2023, compared to only 10% in lower-growth systems. This might seem counterintuitive, but it highlights the importance of strategic resource allocation. High-growth franchisors might focus on signing new franchisees and planning future openings rather than immediately opening new locations.
While ethical systems don’t want to sell franchises that will not be opened, they also need to balance growing their concept with owner support. High growth system may engage with third party providers or pass more of the opening details to franchisors so they can allocate time to growth.
Effective planning and resource allocation are essential for franchise development. By carefully managing when and where to open new locations, high-growth franchisors can maximize their impact and ensure sustained growth over time.
Social Media Influence
Contrary to what one might expect, high-growth franchisors had an average of 30,000 combined followers on Instagram and Facebook, compared to 74,000 for lower-growth systems. This suggests that while social media presence is important, it is not the sole driver of growth. High-growth systems likely use more targeted and effective marketing strategies beyond just social media.
Franchisors should not solely rely on social media metrics as indicators of success. A comprehensive marketing strategy that includes various channels—such as email marketing, SEO, and content marketing—can be more effective in driving growth.
Geographic Concentration
High-growth franchisors had 61% of their units concentrated in their top three states, compared to 47% for lower-growth systems. This concentration allows for more effective marketing and brand penetration in key areas, leading to faster growth.
Focusing marketing efforts on specific geographic areas can result in more efficient use of resources and higher growth rates. Franchisors should consider targeting their marketing campaigns to areas with the highest potential for franchise sales and development.
High Growth Best Practicse
Balancing Support and Expansion
High-growth franchisors may spend fewer resources on internal support, such as opening support, and more on external growth initiatives. This approach allows them to allocate more resources towards marketing and attracting new franchisees.
Effective resource allocation is critical for franchise growth. Franchisors should evaluate their support and marketing strategies to ensure they are investing in areas that will yield the highest returns.
Market Awareness and Brand Growth
One of the most significant indicators of franchise growth is market awareness. In our research, we have found that most academic studies agree that brand growth and market awareness are critical to franchise growth.
Franchisors who can effectively grow their brand’s awareness will likely experience faster growth. This can be achieved through a combination of marketing strategies, public relations, and community engagement.
Franchisors should invest in marketing campaigns that raise awareness about their brand and the benefits of their franchise system. Participating in industry events, engaging with local communities, and leveraging media coverage can all contribute to increased market awareness and franchise sales.
Importance of Data-Driven Strategies
Data analysis plays a crucial role in franchise development. By analyzing various data points, franchisors can identify trends, measure performance, and make informed decisions that drive growth. This includes tracking website traffic, social media engagement, franchise sales, and more.
Franchisors should implement data-driven strategies to optimize their operations and marketing efforts. Utilizing tools and software that provide insights into franchise performance can help franchisors make strategic decisions that enhance growth.
Comprehensive Marketing Strategies
Aligning digital marketing efforts with franchise recruitment is essential. This involves creating content that resonates with potential franchisees, optimizing it for search engines, and ensuring it addresses the specific questions and concerns of prospective buyers. For example, understanding that 67% of purchasing decisions are made online emphasizes the need for strong digital marketing tactics.
Creating engaging and informative content is key to attracting and nurturing leads. This includes testimonials, case studies, and detailed explanations of the franchise’s value proposition. High-growth franchisors understand the importance of content marketing in educating and converting prospects.
Allocating sufficient budget for lead generation is crucial. According to FranConnect’s Franchise Sales Index, franchisors need to spend $10,000 to $20,000 in advertising for each franchisee they wish to recruit. This investment ensures that marketing efforts are robust enough to attract qualified leads and convert them into franchisees.
High-growth franchisors allocate their budget effectively, focusing on strategies that yield the highest return on investment. This includes targeted advertising, content creation, and lead nurturing efforts that align with the buyer’s journey.
Final Thoughts
As the franchise industry continues to evolve, staying informed and adaptable is key to success. By learning from high-growth franchise systems and implementing proven strategies, franchisors can position themselves for long-term growth and success.
Krieger Analytics Can Help
Krieger Analytics has several small business owners who rely on them as their outsourced CFO. These businesses range in size ($1M to $15M in sales) and industries. We are an expert in servicing small businesses because we have been entrepreneurs. Our expertise doesn’t just come from theory, it comes from practice.
Contact us now if you want to learn what a CFO can do for your small business. We’d love to see if we are a good fit and can help you accomplish your goals.