For franchises, a blend of concepts, geography and margins are key to surviving economic downturns.
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There’s no polite way to put this: The coronavirus (COVID-19) crisis is going to cause a lot of franchise owners who aren’t properly diversified to take it in the teeth.
Like other tough times before it — from 9/11 to Hurricane Katrina to the 2008 financial meltdown — the current COVID-19 pandemic, which shows no signs of immediately letting up, has reinforced the importance of franchise diversification.
Diversification is a smart move for any kind of portfolio or investment. You wouldn’t want your retirement savings to be entirely in stocks — you’d want it spread across a mix of cash, bonds, stocks and other assets. The idea is that a downturn in one category is offset by steady performance or gains in the other categories.
Not being diversified means exposure to more risk and considerably more financial pain when things go south, as they inevitably do from time to time. Given this troublesome fact of life, the franchise owners who will best be able to withstand the economic havoc from the coronavirus crisis are those who are properly diversified.
Anyone who is thinking of getting into the franchising business needs to understand this important lesson.
Doing franchise diversification right
Diversification doesn’t just mean owning more than one unit of a particular franchise. That’s certainly helpful, but it’s a one-dimensional approach. True diversification comes by approaching your franchise portfolio from multiple angles and employing a multi-dimensional strategy.
Geographical diversification, of course, is key, especially in light of the varying degrees of lockdown that different towns, states and countries are experiencing right now. For example, franchisees with units in Texas, which was relatively quick to lock down, might have been looking longingly across the border at Oklahoma, where bars and restaurants stayed open for several weeks longer.
And while no one knows exactly how the recovery from COVID-19 will unfold, it’s likely some regions or states will open up before others do.
Likewise, franchisees with a blend of concepts and offerings in their portfolio are better positioned to ride out this storm. Having a mix of casual dining, quick-serve and fast-food restaurants, for instance, can provide some lift when your fine-dining options take a hit due to unforeseen economic circumstances.
At an even more granular level, having a drive-through or a to-go component in the mix can help hedge your risk — especially when the business landscape changes virtually overnight and people want to limit in-person transactions.
Other important considerations
Franchise owners should also look at operational diversification. Put another way: How easy is it to run the operation? A steak and seafood restaurant requires a lot of different SKUs, chefs and waitstaff to properly operate. A coffee place, by contrast, only needs a few essential supplies and a couple of key people to keep the cash register ringing. Each of these configurations has a different profitability profile depending on wider economic considerations.
Speaking of supplies: how diversified are you in that dimension? If you own a sandwich shop, a pizza place and a donut shop, and there’s suddenly a global shortage of flour, you’re going to be hurting. If your franchise mix includes some smoothie bars and barbecue joints, the pain will be diluted.
Last but not least, look at the margins. Do some of your operations have razor-thin margins? If so, balance it out with franchises that have some wiggle room for rent and labor and cost of goods, and can more easily adjust to a financial shock. The bottom line? You want a mix of margins across your franchise portfolio.
Even with proper diversification that takes these different factors into account, the next few months of the coronavirus crisis are going to be rough. So, what steps should franchise owners be taking right now to make it through to the other side?
For starters, if you don’t already have an SBA-approved lender, find one ASAP and make him or her your best friend. When the Small Business Administration starts handing out loans —many of them forgivable if used to keep your employees working — you want to be first in line.
Then, focus on doing what you need to do to stay afloat. If you’re able to hold on to your people and keep paying them, that’s fantastic –— but that can’t continue indefinitely if there’s not enough revenue coming through the door.
Layoffs might be necessary, but will hopefully be temporary. It’s far better to endure some short-term pain to ensure that the business is still around in two or three months. As the saying goes, you need to save the ship in order for there to be anything for people to come back to once the tough times go away.
Times are dark right now, but once this crisis subsides, businesses will come out of survival mode and get back to doing what they do best: building wealth and creating value for society. Fortunately, franchisees and franchisors have always understood the value of the long view.
They know it’s not necessarily about making a dollar today — it's about making lots of dollars for lots of days.
Director Of Franchise Development