The Right Stuff About Buying a Franchise – Lesson 1: The L Word

Location.  Location.  Location.  It’s true.  Location is the most critical factor in the success or failure of any new franchise business, and most other businesses, for that matter.

Some franchisors have locations already available for the consideration of potential franchisees.   Some facilitate the purchase of existing outlets in established locations from franchisees looking to sell.  Others may leave the choice of location entirely up to you, although they will normally keep a watching eye on your choice.

When I returned from teaching an MBA class in New Venture Creation at Utah State University in 2001, I explored franchise ownership for the first time.  I had enjoyed teaching about franchising and had enjoyed excellent customer experiences at franchises such as Subway, Cold Stone Creamery, and Boston Market.  At the time, none of these brands were established in Australia in any meaningful way.

Thus, soon after our return, I attended a Subway meeting for potential franchisees held at south-western Sydney.  After Subway’s Regional Manager informed us that franchisees must first select their own location, I discussed with him two possibilities I then had in mind.  To the first, he said that the site, a shopping centre under construction, was already taken by a new franchisee.  My second suggestion was a regional shopping centre then several years away from development.  Unfortunately, it too was taken, this time by an existing franchisee in a nearby area.  Since I had no other good alternatives, I let the idea drop for a time.

I got back on the franchise horse via the purchase of an existing bookstore franchise in late 2007.  Fronting a pedestrian plaza in the middle of a regional business district, I confirmed the value of its location by sitting out front of the store and counting customers as they entered and left one afternoon.  I counted both buyers and browsers for about 20 minutes.  The numbers looked good.

Looking back, they were good, but perhaps not as good as I had first hoped.  Why?  Because I had observed the store during that time of day when it was, by far, at its busiest.  It was lunchtime, and I have learnt since then weekday lunchtimes, from noon until around 2:00pm, can account for 70 percent or more of the day’s takings.

Therefore, while the store continues to perform well, it would work a whole lot better if the lunchtime crowd was representative of customer flows and revenues across the entire day.  It’s not, and that’s life.

At another time in the recent past, I created two temporary retail stores at other locations, taking advantage of the busy pre-Christmas period to sell as much as I could in as short a time as possible.  The first was again at a place disproportionately favored by the lunchtime crowd, however the rent and overheads were sufficiently low to make the economics of the store work in my favor.  It did pretty well.

The second store was much larger, something all retailers would normally see as a huge positive, however the building itself was isolated from the main center of a regional shopping mall.  While it received plenty of passing automobile traffic as they entered and left the car park, the effort required for shoppers to actually come across to the building worked against its success.  While I didn’t lose money on the deal, I had paid a much higher rental for the site in the hope that the additional space would mean higher sales.  I was wrong.  It was not nearly the goldmine I had hoped it would be.  Ironically, the building had formerly been a Boston Market, a franchise that didn’t last long in Australia since it didn’t catch on.  Perhaps I should have learnt from their failure at the site some years before.

The other day, a friendly supplier gave me a great piece of advice.  He said that the target for any new retail store should be an average of 15 people walking past the location every minute.  While I suspect that many stores may still succeed with fewer pedestrians than this, it is a great “rule of thumb” against which we can evaluate any locations we are seriously considering.

This is the kind of research that only you can undertake.  Franchisors will cover themselves in legalese to ensure that they are not held accountable for any preliminary estimates of customer numbers and turnover.  The owners of shopping malls will do the same.  This is a job for you. 

Learn from my mistake.  If it is an existing site, survey the traffic flows at various times of the day and at different days of the week.  If you are thinking about an entirely new site, find comparison shopping centers and malls that have similar demographics to yours and a similar mix of tenants and make counts of the shoppers walking in and by stores like yours.  You will need to allow for the fact that the center may have grown its traffic over time, whereas a new mall will take time to pull a crowd, particularly in today’s challenging retail environment. 

If you get it right, however, a great location will ensure that your franchise business is a true boomer rather than a business which is here today and gone tomorrow.