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Minyan Mailbag: The Franchise Conundrum - Bone-Fones in Earningsland


Friday's can get a little wierd.


Minyan Rob "RF Micro" Fraim writes:

Dear Mr. Jeffmacke,

I'm confused on the whole Blockbuster (BBI) thing. Yes, I know EVERYBODY is confused by Blockbuster, but I'm confused in a very me-centric way. (And isn't it really all about me after all?)

As noted in one of my recent useful daily emails (click
HERE to get on the list), recently Blockbuster charged me very little a late, late movie - not the $24.95 kind of thing- and then credited it back in real money. Actually they never really charged the credit card. I left happy the store happy with BBI and annoyed at the local store for their silly handling (of my chronic late-return ways.) Is there a store-by-store Blockbuster policy going on or do some of the local managers not know how to run the company-endorsed scam?


I'll answer your queries in order of import:

No, the world is not about you. That's both "Silly" (in layman terms) and what the Psych guys would call "the manifestation of a childlike fantasy view of the world as being under your control." I know that's a harsh cup of coffee for a Friday afternoon but it's better that you hear it from me, a buddy, than someone who didn't share my concern for what we'll simply call your "stunted emotional growth."

Besides, the world, as other longtime readers know, is about me, Jeffmacke. The rest of my answer should help clarify this subtle point:

In stock matters, beyond being not very well managed, Blockbuster's store consistency issue is rooted in its franchise structure. The problem isn't (necessarily) that the managers don't know how to run the company-endorsed-late-fee scam. The problem is that the company can only endorse the plan--as opposed to mandating it--in franchised stores. Thus, even managers with a firm grasp on the scam can opt not to run it on their customers.

A fundamental lack of corporate parental control plagues even the best-run franchised chains. The problem gets much worse when the franchisers don't respect management and, as a result, opt out of more and more corporate initiatives. In contrast, improving chain consistency can be a fairly early (and investible) indication of a turnaround. McDonald's (MCD) was clearly an improving chain before the stock even left the low 20's.

This is an important point which is easier to understand when considered from the perspective of a fast-growth start-up company as opposed to the forensic work required to understand Blockbuster. In order to both illustrate our Mackicentric Universe idea as well as better understand the structural differences of Franchise vs. Corp. Owned, let's you and I go into business!

Selling Bone-Phones In Earningsland

Let's say that, during the course of your normal business day, you stumble upon an idea of such obvious vision and genius that you decide to chuck it all and dedicate yourself to seeing it to fruition.

You pack your hopes and dreams in a woolen kit bag and travel to the Empire of Earningsland where, as I'm sure you'll recall, the daft populous is led by the wise and benevolent King Jeffmacke. Bribing your way past Collins, you present the king with a plan to mass-produce Jeffmacke Bone-Fone's (JBF's) and sell them through a chain of trendy House of Jeffmacke's Bone-Fone stores.

We (speaking, of course, in the Royal "we") strike a deal and put up 25 stores, all wholly-owned by us and located in Earningsland, where things like "zoning" and "labor laws" are entirely based on my mood at the time.

Twenty-four of our 25 locations look exactly alike. At the 25th we had a little issue with a free-thinking manager who didn't bring the proper zeal to one of our promotional ideas (he refused to threaten the families of customers refusing our extended service plan).

That manager is now stuffed and posted at the front of our 25th store as a chilling example of the destiny awaiting those who refuse our future initiatives. Except for Halloween, when we drape him in Bone-Fones playing "Monster Mash."

We no longer have a problem with in-store compliance. Our consistency, coupled with a Kingdom-Wide Bone-Fone ownership mandate, has led to some pretty decent same store sales growth. We are pleased.

Coming to America

Alas, Earningsland is not a growing country. Once we achieve 300% of the Bone-Fone market share domestically our growth begins to slow. What's worse, the kind of growth we'll need to take our company public on the NYSE can only be achieved in America, where, due to a perversely limited notion of free markets, we can own neither our own stores nor "All those who shall enter or labor there".

In a decision so bad that we will later attribute it to Collins, we decide to expand throughout America via franchises. Much like Krispy Kreme (KKD) who came to America from a mysterious land called North Carolina with promises of fast growth and a product that looked a whole-bunch like an old idea.

What we like about the franchise plan is that it allows us to grow fast. We don't buy the land, build the stores or manage the employees at our American JM's House of Bone-Fone locations. We simply sign up franchisees and send them the plans, along with about 100,000 JPF's, then wait for the money to come flooding back to us.

But the money never comes back. The folks running our US stores just can't get the hang of relating the unique product benefits of the Jeffmacke Bone Fone to customers. Our business falters and, as it does, our franchisees become more rebellious.

We become aware of horrible, dark, rumors that some of our partners regard us as incompetent and vaguely crazed. None of our US locations "opt" to implement our "Buy 2 Jeffmacke Bone-Fones or agents will steal your children in the night" promotion, calling it impractical and illegal.

The stores in Earingsland, which we own, begin to get dragged down by our desperate attempts to save the US stores. Customers begin complaining that the policies and look varies from location to location. Our employees begin stealing us blind because they are sick of having angry customers shout questions like "How come the last store threatened to light me on fire when I tried to return this but you guys don't even want a receipt?" all day.

Back to Grim Reality

The details vary (slightly) but the basic outline for a struggling franchise is a constant:

  1. A chain sacrifices control for the reduced financial commitment (and therefore faster growth) of owner-operated franchise locations.
  2. The franchise-owned locations begin making rules and/or stocking product unique to their store.
  3. Which is fine for the Superstar locations but makes the bad customer experiences dramatically horrible; resulting in lower overall traffic.

At this point, the chains either:

4a: Merrily bounce towards zero (KKD, BBI)

4b: Find corporate leaders who can both find the solution and then gain the buy-in of all the locations.

In the late Jim Cantalupo, McDonalds found a boss who came up from within and had the energy to get the stores on the same page. You didn't have to be the guy from "Super Size-Me" to see the improvement in consistency, at the very least. Love it or hate it, your experience was at least the same from McDonald's to McDonald's. Initiatives started making sense again.

You could literally taste the difference and, if you did, you could have caught more than 30% on a generally staid, Dow-type stock.

Blockbuster, in contrast, still tastes like it's on more of a Jeffmacke's Bone-Fone business trajectory, headed for zero.

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