If you are thinking about taking the exciting step of buying a franchise, there are numerous decisions you will have to make in order to find the best opportunity for your needs, goals, skills, and budget. One of the most fundamental decisions involves the choice between retail or service-based franchises. Understanding the differences between these two types of opportunities, as well as the pros and cons of each, is the key to choosing the right one for you.
When most people think about franchises, it is typically retail franchises that come to mind. Retail franchises—which usually occupy brick-and-mortar locations and provide products to the general public or other small businesses—encompass widely known fast food restaurants, coffee shops, convenience stores, and much more.
Owning a retail franchise offers certain unique advantages. For example:
- High volume of sales. Because retail franchises generally cater to a vast customer base and keep long operating hours, they tend to complete a high volume of sales transactions—allowing the potential for greater profitability. Of course, however, the franchise owner’s bottom line depends on several other factors, including expenses and the profit margin per sales transaction.
- Strong brand recognition. Another advantage of catering to a large customer base is that people tend to be more familiar with retail franchise brands. Therefore, these types of franchises often have steady traffic and a loyal customer base as soon as they open, thus helping the franchisee begin yielding a return on their investment.
- Potential for semi-absentee ownership. Many retail franchises lend themselves to semi-absentee ownership, in which the business is primarily run by a manager who has been trained in the company’s policies and procedures. The franchisee oversees the operations and has final decision-making authority, but only needs to be physically present at the franchise location for a few hours each week—allowing them maximum freedom and flexibility. Therefore, owning a retail franchise may be an excellent option for those who still want to maintain a full-time job or anyone else looking to cultivate an additional income stream that does not require too much time and effort.
However, retail franchises also carry some disadvantages:
- Higher start-up costs and capital expenditures. Retail franchises tend to carry higher costs, at least initially. Since most of these franchises have brick-and-mortar locations, the franchisee must pay to purchase or rent a building, insure the building, and stay on top of maintenance and repairs. Retail franchises also require large amounts of inventory and supplies. In addition, they generally have large staffs, which carry the costs of training, wages, and benefits, if applicable.
- Long operating hours. Most retail franchises are required to stay open for long, fixed hours, which often include nights and weekends. Even in the case of semi-absentee ownership, this may place a strain on the franchisee.
- HR issues. Any business with a sizable staff will inevitably encounter issues with employees. Owners of retail franchises must hire the right employees and train each individual to ensure that they will be able to meticulously implement the franchise’s systems and deliver the level of quality that customers associate with the franchise brand. Owners may also have to deal with employee conflicts, performance issues, firing, and efforts to retain top employees.
Service-based franchises encompass a wide range of industries, such as home care (like landscaping, painting or maid services), personal care (including hair salons, massage studios, or fitness training), business services (like staffing or career coaching), and many more. These franchises may cater to either the general public or other businesses.
One of the most significant differences between retail and service-based franchises is that those providing services often—but not always—do not require a physical building or a large staff. Many can be operated from the franchisee’s home and need only a few employees. Therefore, service-based franchises offer certain advantages, such as:
- Lower start-up costs. For the many service-based franchises that do not require brick-and-mortar locations or large staffs, franchisees may save a great deal of money on capital expenditures, wages, building maintenance, and more. As a result, their upfront risk is lower and their businesses may become profitable more quickly than retail franchises.
- More flexible hours. Without the requirement to keep a store open during designated times, owners of service-based franchises can often set their own hours. However, owners who enjoy this degree of flexibility must be very disciplined to ensure that they maintain a separation between work and their personal lives.
- Reduced dependency on employees. In addition to the money saved by not having to employ several people, owners of service-based franchises have to deal with fewer personnel issues, such as hiring, training, and managing employees.
As with retail franchises, service-based franchises carry their own set of disadvantages. These include:
- More hands-on responsibilities for the franchisee. The obvious downside of having a smaller staff is that the franchise owner must be more involved in the day-to-day operations of the business. Many (though not all) service-based franchises are incompatible with semi-absentee ownership, and franchisees often handle a wide variety of duties, ranging from customer service to sales and marketing to accounting.
- Requirements for specific skills, training, or licensing. Because these franchises typically provide specialized services, those performing the services often need to have technical skills, professional training, or licenses and certifications. Acquiring these credentials may be expensive and time-consuming, cutting into the franchise owner’s bottom line.
- Fewer sales transactions. Providing services takes time, and since many service-based franchises have small staffs, the owner and their employees are limited in how many customers they can assist. Therefore, service-based franchises tend to complete far fewer sales transactions than their retail-based counterparts. Owners of service-based franchises must be adept at controlling costs, managing their schedules, and pricing appropriately in order to ensure that they are reaping a healthy profit margin from each customer.
As an aspiring franchise owner choosing between a retail or service-based franchise, it is crucial to honestly answer several questions: how much can you afford to invest upfront? Would you prefer a semi-absentee ownership arrangement, or are you comfortable performing most of the everyday business operations on your own? Are you willing to manage a staff? As you consider questions such as these, a franchise consultant can help you weigh the pros and cons of numerous retail and service-based franchise opportunities, ultimately guiding you to the best option for your needs and goals. Call Franchise Logic today at 303.805.5078 to get started!
(Sources: https://www.franchising.com/guides/service_based_franchising_where_the_action_is.html, https://www.franchising.com/guides/choosing_a_service_franchise.html).