Great Clips Uses Data To Address Franchisee Discontent

In an effort to spur investment by small businesses and shore up the economy, President Barack Obama signed the JOBS Act into law in April. The law, which makes it easier for entrepreneurs to raise capital through public markets, is a potential boon for a number of business models, including people looking to buy into an existing franchise.

While franchises have obvious benefits -a proven business idea, and marketing and strategic support from the mother ship chief among them - there's also a downside, which is that franchise owners often allow a competitor to open new a store in or near an existing franchisee's territory, almost inevitably leading to tension between franchisee and franchisor.

The two sides of the franchise equation need each other. Franchises generate revenue by selling licenses for new locations, as well as through royalties on revenue generated by each existing store and, in some cases, sales of branded supplies. Because franchises grow principally by opening new outlets, the interests of franchise owners are in direct conflict with the franchisees to whom they've already sold stores, at least in the short-term.

There's not much franchisees can do to stop franchises from encroaching on their territories, but franchisors also need to keep their franchisees happy; an unhappy bunch of owners could, if they complain loudly enough, make it harder to sell stores to other franchisees, and ultimately damage the brand value of the company, according to industry experts. Franchisees also benefit from more stores openings because each new store increases a franchise's brand recognition, even if it's run by competitors. But it's difficult for franchisees to take into account the value of those longer-term benefits when they feel that their investment is being threatened.

Executives at Great Clips, a hair salon franchise, have sought to mitigate this built-in conflict using analytic software to bring data into an otherwise emotional discussion. Using software to generate real data may not solve the problem entirely, but it may help create a more meaningful dialogue between the parties.

Two years ago Great Clips, a salon chain with 3,200 locations around the country, was facing heat from its franchisees, who believed the company was expanding too quickly, building new stores too close to existing ones, and cannibalizing customers. In response, the company decided to try using business analytics software to calculate the loss that creating a new salon would cause to a nearby existing one, in an effort to reassure owners that harm to their business would not be as great as they feared.

Great Clips began using business analytics software from Alteryx in 2011. Rob Goggins, Great Clips' senior vice president of real estate and development, said the software helps the franchise's corporate officers estimate how much existing franchisees will lose by the creation of a new store a few miles away.

The software crunches information from sales data and customer addresses, gathered and inputted at salons. Based on the distance customers are traveling to get to salons and the amount of money they spend, the program estimates how many customers will defect to a new location, and predicts the sales loss, or "transfer," to existing owners. In the majority of cases, existing stores lose 4% of their annual gross income in the year that a new store opens, on average. One-third of the time there is no loss, or even a potential gain.

Goggins says showing existing franchisees a computer-generated financial model gives them more confidence in the data.

"It's a lot less subjective. The conversations are now more productive and forward-looking and less tension filled and backwards looking," Goggins said.

Prior to the move, relations between store owners and management became increasingly testy between 2008 and 2010 as the company grew rapidly, adding around 200 stores per year. Franchisees, who invest an average of $150,000 to start their businesses, were growing distrustful of company projections used to justify expansion near existing locations.

"Tension is O.K., conflict is O.K., but it gets to the point of being unhealthy," Goggins said. "A lot of the information we were presenting was just from inside the head of the corporate real estate manager." Though franchisees often remain resentful of the encroachment, and fearful for the loss of their investment, all franchisees benefit in the long term from greater brand recognition, as more stores move into an area, Goggins said.

"We have to convince them that the power of the brand still exists - as you add more units overall, sales increase across the system," Goggins said.

If a store does face a loss, the company will sometimes help soften the blow by providing additional marketing support during the first year following the creation of a new location, when the existing franchisee faces the biggest drop.

Goggins says he plans to use Alteryx to also decide the best locations for new salons, and the best way to market to existing customers.

Jeff Salmon an owner of four Great Clips in New Jersey said presenting a franchisee with a computer generated analysis of how much business he stands to lose might make the move "a bit more palatable." But he is skeptical of the model, as he said his experience shows the opening of a store nearby can grab a far larger share of business than the software estimates.

In 2010, before it starting using Alteryx, the company gave Salmon the option of opening a salon four miles away from his Waretown location, or facing competition from another owner. Salmon, who already owned three stores in New Jersey, complained that his Waretown location was only a year old and not yet mature enough to weather a hit from a new competitor. The franchise delayed the new store opening for one year and Salmon took the option to open the new salon himself. But he saw what the impact would have been, had he allowed the site to fall into a competitor's hands: the new location grabbed 20% of his Waretown location's customers, Salmon said.

"I felt forced to take the site - it was a defensive position," Salmon said. "I was royally pissed off. We weren't financially in the position to open a fourth store. It was a big stretch." Indeed, encroachment is an issue for most franchises, straining relations between corporate management and its owners, according to Ed Teixeira, creator of franchiseknowhow.com, an information website for franchisors and owners. That tension can lead to lawsuits and a loss of morale for franchisees, making them less willing to implement special promotions the chain is looking to put into place. Great Clips says it is not facing any pending franchisee litigation.

"It's a difficult balance because the by-product of franchise expansion is heightened brand awareness," Teixeira said. But "if it's going to detract from existing market share it's very difficult to convince [franchisees that] they should be happy with that approach." Goggins says the company has an appeals process if an existing franchisee disagrees with the decision to allow a close competitor. But ultimately the company has the final say over where to create a new location "If we determine another salon should go there, yes it may be unfortunate that you experience sales transfer. But realistically the market needs another salon," Goggins said. "And if we don't build it there our competitors will."

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