To close or not to close Featured

7:00pm EDT December 31, 2006

It's a challenging, competitive marketplace out there. Multiple market segments add to the complexity. Competition wants your share. Customers are more demanding. And when the going gets tough for franchisors, sometimes it seems like the only option is to permanently shutter one store … or more.

“Franchisors have to remember that things aren’t always as they seem,” says Mitch Phillips, director of network analysis at Urban Science, a Detroit-based channel optimization consulting firm. “Myriad factors are at play in a retail network and although some tweaking will likely be required, it doesn’t necessarily mean that closing stores is the only — or the right — answer.”

Smart Business sat down with Phillips to discuss the decision making — and crucial variables — involved in one of the most important issues a franchisor faces: Should we stay or should we go?

What are the first steps that franchisors should take in deciding this issue?

It’s necessary to remember that just because a store is underperforming does not automatically mean it should be closed. The first — and most important — step is to uncover why the store is not faring well. Are the assumptions used in picking the location accurate? Is there an issue with the operator? Has the competition taken a more significant position in the market? A franchisor must understand the market potential for its outlets and see if there’s room to make progress in that area. The good news is that if there’s still potential in the market, then the store — and an important relationship with a franchisee — can probably be saved.

The not-so-good news is that the discovery process doesn’t end there; the first step is to thoroughly examine the retail network.

Why is it important to look at the retail network?

There is a strong relationship between the number of stores a franchise has in a market and franchise performance. The franchisor should check for a causal relationship between the number and location of retail outlets and the performance of the outlet in question. The location could be poor, or there may be too few — or too many — outlets in the network. A poor location — one that’s not visible, inaccessible to/from major thoroughfares, or isolated from complementary retail activity — could easily account for poor performance. As most would suspect, improving market performance demands a significant effort on the part of the franchisor. To leverage time and effort and to really optimize performance, companies need tools that both simplify their work and amplify the results. Franchisors can access analytical decision-support software to help minimize the time spent on number-crunching and maximize time spent on decision-making in key areas that have the greatest impact.

What if you find that the poor performance is not due to the retail network?

If the retail network is not an issue, a franchisor should take a look at the specific retail outlet in question. Many factors play a role at this level, including price, selection, advertising, selling approach (how the customer is treated), service reputation, quality of the operator, local consumer preferences and the facility itself.

The facility can either be a help or a hindrance. In the automotive industry, for example, if a dealership has too few service bays, customers will have to make appointments days or weeks in advance, which can seriously degrade service reputation. A dealership that is a comfortable place for mechanics to work will attract the best service personnel; so in that case, service reputation may receive a boost. Selection requires space for inventory, so a facility that is too small will miss opportunities to capitalize on the selection factor. Convenience is important to customers, but if price, selection, selling approach and service are excellent, a retail outlet could pull in customers who might otherwise have gone to a more convenient competitor.

In fact, one of the most powerful ways to improve productivity is to increase the number of above-average operators/franchisees.

A franchisor can keep tabs on how well its franchisees are delivering on the original intent by using a performance management system, which monitors and measures outlets against the company’s desired standards. Performance standards are established by the fran-chisor and can cover everything from physical appearance of the store to selling approach and how salespeople follow up on sales leads. That way, the company can easily see where its outlets are hitting the mark and where they’re falling short. By concentrating on the areas that need work, the franchisor will foster an attitude of continuous improvement — and will hopefully see those poor performing outlets make significant progress over time.

Obviously, whether or not to close a store is a tough decision for anyone to make. But with the right information and analysis, a fran-chisor can be certain that his choice is the right one.

MITCH PHILLIPS is director of network analysis at Urban Science. Reach him at (313) 259-9900 or (800) 321-6900. Learn more at www.urbanscience.com.