📄 The franchise model is fraying. Why?


December 3, 2020

PLUS: Reddit finally released its user numbers.

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YouTube wisely decidedly to not do its annual “year in review” video wrap because…#2020. 

However, the video-sharing platform did just release its top trending video list for the year and — holy smokes — does video No. 2 put a smile on our faces: “Building the Perfect Squirrel Proof Bird Feeder” by Marc Rober.

The pandemic is straining the franchisee-corporate relationship

Franchises are an American staple.

Born out of a network of sellers that peddled the Singer sewing machine in the late 1800s, the modern-day franchise model became popular after World War II.

However, according to the Wall Street Journal, the (relatively) happy marriage between franchisees and corporates has frayed during the pandemic.

Wait, how do franchises work?

Small businesses and their corporate parents have traditionally run on the ol’ “you pat my back, I’ll pat yours” mantra.

And it’s worked.

As of 2019, there were 774k franchise establishments employing over 8.4M people in the US, with 55% of hotels (e.g., Econolodge) and 84% of chain restaurants (e.g., McDonald’s) using the model per WSJ.

Here’s the swap:

  • Franchise owners get an operational playbook and brand loyalty (e.g., everyone that goes to Dunkin’ Donuts knows that its 32oz iced coffee will have you typing emails faster than Usain Bolt at the 2008 Beijing Olympics)
  • Corporates get to operate “asset light” and receive an upfront franchise charge and ongoing royalty fee

The pandemic has strained margins…

…and the royalty fees are a huge drain on a franchise’s monthly revenues.

For context, this is what a McDonald’s franchisee has to swallow:

  • Initial fee is $45k
  • Royalty fee is 4% (actually on the lower end)
  • An ongoing percentage of monthly sales for construction costs and kitchen equipment

Corporate is also adding more costs for franchisees in the form of big cleaning bills and hefty promotional discounts.

It’s not all doom and gloom

Some brands (e.g., Dunkin’, Subway) are deferring royalty payments. 

Others have capitalized on the lockdown, using a tech overhaul and unexpected demand to drive business.

  • Ace Hardware is capitalizing on people finally fixing “that porch” and is seeing record revenue in 2020
  • 7-Eleven pounced on a weakened competitor, purchasing Speedway’s network of gas stations for $21B
  • Domino’s — which is 5+ years into a massive digital turnaround — has crushed it during COVID

“I get that franchising isn’t a democracy,” says one Subway franchisee who fought back against an unprofitable 2-Subs-for-$10 promotion. “But at the same time, it’s not a dictatorship.”

Check out more coverage here:

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Snippets

  • Brown is not down: UPS is putting shipping limits on certain retailers (Nike, Gap) as the holiday ecommerce surge is getting very real and straining its network. 
  • This has got to be the biggest upset ever: According to TikTok, its most viral video of the year is not the skateboarding-and-cranraspberry-Fleetwood Mac singing guy… it’s Bella Poarch’s “M to the B” video (43m views).  
  • Meanwhile, at an age most of us were figuring out how to scramble eggs, TikTok’s 16-year-old superstar Charli D’Amelio just made her first tech investment… as part of a $50m round for Step, a mobile banking service aimed at teens.
  • The Department of Homeland Security (DHS) has been tracking smartphone activity for years. Finally, the tables have turned and the DHS’s internal watchdog is opening an investigation into whether the tracking (usually without a warrant) is legal. 
  • Back-berry?: The former smartphone king, Blackberry, had its biggest one-day market gain since 2015. Why? It scored a partnership with AWS to develop sensors to help automakers read vehicle data. 
  • ‘Google illegally spied on workers before firing them, US labor board alleges,’ per The Verge. Remember when Google’s motto was literally “don’t be evil”?
  • $70k is how much Jan Bednar won in a series of student business plan competitions. He used that money to launch ShipMonk, a logistics startup that just raised $290m.
 
Clean Energy
Climate change

Stripe’s unique approach to climate change

Stripe is on a tear.

In 10 years, the fintech firm has grown from a startup founded by 2 brothers into a $100B payment-processing behemoth.

Now, it’s applying its knowledge about scaling and its position as one of the world’s most valuable startups to fight climate change. 

The typical move for corporations to combat climate change… 

… is through the purchase of carbon credits. Effectively, an organization can “offset” its pollution by funding carbon removal elsewhere. 

As highlighted by The Atlantic, though, “capturing all the carbon pollution released since 1850…would require more energy than all fossil fuels have generated since that year.”

Stripe’s solution is to help fund the development of technologies that can remove carbon efficiently.

The initiative is called Stripe Climate and, crucially, is available “in just a few clicks” to millions of businesses that already use its payment technology. 

Carbon removal is a costly venture 

And without scale, it is difficult to bring the price down to a point that the technology makes economic sense.

By being an anchor partner, Stripe Climate is helping these 4 startups get to scale: 

  • Climeworks “which captures carbon directly from the air and injects it into underground basalt.”
  • Carbon Cure “which injects carbon into concrete.”
  • Project Vesta “which uses a common mineral to convert carbon in the ocean into limestone on the seafloor.”
  • Charm Industrial “which produces an oil from biomass and then injects it deep into the earth.”

“By buying from these companies now, at a relatively high price point, Stripe is aiming to let everyone pay less later,” writes The Atlantic.

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Show Us The Numbers
Reddit

For the very first time, Reddit revealed its user numbers

Reddit is like the person who can’t stop talking about how different they are. And to be fair, when the book about your company is called “We Are The Nerds”, you probably are a bit different. 

Founded in 2005, the platform hosts 1.2m+ message boards (AKA subreddits) about every topic imaginable. It facilitates conversations by using moderators as well as an up-or-down voting system instead of likes and shares.

The setup has created a different — and less lucrative — business outcome than 2 other social platforms founded around the same time: Facebook (2004) and Twitter (2006).

Those 2 election lightning rods held their IPOs long ago 

Meanwhile, Reddit remains private and has largely stayed mum on even its most basic social engagement stats.

That is, until this week: According to the Wall Street Journal, Reddit averaged 52m daily active users in October — a figure that pales in comparison to its mid-2000 startup pals, Facebook (1.82B) and Twitter (187m).

Reddit is growing, though 

Its reported daily user number is up 44% YoY while the company’s ad business — which did $100m in 2019 — is projected to grow by 70%+ this year. 

One ad exec told the WSJ that “Reddit is in the experimental bucket of budgets for advertising,” and falls far behind its social competitors in scale. 

However, the “potential for upside is big.”

Being different makes Reddit special — and maybe, sooner or later, a real moneymaker.

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The Hustle Says

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A whopping 1 in 2 people won’t return to jobs that don’t offer remote work after Covid-19. Get all the juicy details on how work has changed this year with Owl Labs’ State of Remote Work 2020 report.*

As 2020 comes to a close, we’re all in desperate need of catharsis. Might we suggest… a dumpster fire?

One of the best ways to improve your local SEO, according to Neil Patel? Reviews. Watch the full conversation with Podium’s EVP of Marketing and hear how to grow your business during uncertain times.*

*This is a sponsored post.

Company of the day

Chick-fil-A is a fascinating franchise business. 

Our Zack Crockett did a deep dive on the business earlier this year and found that the company has a much lower barrier to entry than any other franchise:

  • It has no minimum net worth requirement (other franchises require $250k – $5m)
  • It has the lowest franchise fee of any chain (~one-fifth of what others charge)
  • It has (by far) the lowest total investment cost for a franchisee ($10k vs. $800k+)

But this “ownership” comes with some big caveats:

  • “Owners” don’t truly own the franchise; Chick-fil-A retains the real estate, equipment, and inventory.
  • At 15% of sales + 50% of net profit, it charges the highest royalty fee of any chain.
  • Of 60k franchise applicants each year, it only accepts 80 (0.13%); this is a lower acceptance than Stanford, Google or — most insanely — the Secret Service 

Based on these odds, you have a better chance of protecting the President of the United States than running a franchise that sells crispy chicken sandwiches.

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