Saturday, September 16, 2006

Fad franchises: Should you bite?

By Manuel V. Siggaoat Jr.

When pearl shakes started mushrooming all over, a lot of people sat up and took notice. They saw the long lines waiting to get a cup of pearl shake. They heard of the phenomenal numbers experienced by these stores. Stories were passed around of Return on Investment (ROI) being attained in days, not months.

The entrepreneurial spirit even in the least entrepreneurial persons started to come alive. Excited about the prospect of their own success, these people began asking about franchise fees and looking at their bank balances. “If other franchisees, can do it, why not me?”, they proposed.

At the same time, cynics among their friends and family were also skeptical. They warned: “It’s just a fad”. The cynics claim that the trend won’t last and will just go the way of the Lechon Manok, or the Shawarma before that, or the hot pandesal before that (giving away their age in the process – the hot pandesal boom being a phenomenon of the early martial law years).

I won’t make a statement on whether Pearl Shakes are a fad or not. That’s not the intention of this article (besides, assessing the life span of a specific product or service will require a lengthy Marketing thesis that will have to take into account many factors such as consumer tastes, historical review, and anticipated category competitors).

Assuming a product or s service IS a fad, should you buy a franchise selling that product or service?

To answer that question, you have to first look at your objective in getting a franchise. Are you looking for a business that will be an ongoing concern for many years? Or did you just want an attractive return on your investment? Obviously, if you want a business that will still be around when your pre-school kid finishes his masters degree 25 years from now, a fad franchise is not the way to go.

However, if you just have available capital now and would like to get a good return on investment, then investing in fad franchises may not be such a bad idea. If your objective is just to get a good return on your investment, buying a fad franchise may be a good means to achieve that end. Especially if it is indeed a fad franchise and you get in while the demand for the product is still on the upswing, the payback on your investment can be very quick. It should be mentioned though that timing is important; if you invest in the fad business when the market has gotten tired of it, the crash can be very quick.

What happens when the fad is over? A typical exit strategy is to close down the business. Another course of action is to use the store space you have for another franchise or a new start-up business for yourself. Indeed, this may be a plausible reason why you would invest in a fad franchise in the first place – to get your foot in the door. For many malls, it is very difficult to open a start-up business – one whose brand is not known and will rely purely on the strength of the concept. Most malls are pragmatic in selecting tenants; they go along with brands that already have good track performance. So the fad franchise may help you start a relationship with the mall. When the fad is over, it may be easier for you to put up another business in the mall since you already have a location and have a relationship with the mall’s leasing office. However, this may not apply to the major malls - it’s no guarantee that you will be given the same location for your new concept just because you used to have a previous space in their e mall.

In closing, it is worth considering this reply from a pearl shake executive when considering whether to invest in a fad franchise or not. The pearl shake executive, when chided that their business is only a fad, replied: “if we are indeed a fad, then at least we were a fad; most businesses would never ever become a fad, let alone a permanent venture”.

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