• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL

Chapter 8. Financial Analysis > Focusing on the Key Transactions

Focusing on the Key Transactions

The following list is our take on the Bagelz six key transactions. Bagelz should prioritize its attention and efforts on these items to maximize financial return.

  1. Revenue: Not surprisingly, the customer is the unit of analysis in the revenue transaction. How much will the average customer spend in a Bagelz restaurant? How many customers can be served in a day or day part? These questions motivate many of the system’s activities. Sell more to each of an increasing number of customers is the charge of every SDS. Of particular interest is throughput during peak periods, such as lunchtime for Bagelz, morning drive time for Dunkin’ Donuts, and Saturday morning for Jiffy Lube.

  2. Labor: What human assets are required to earn revenue? That question often defines a key competitive advantage of a franchise. A strong brand attracts customers who are willing to pay a premium for a product or service. Labor cost absorbs a percentage of that revenue. The stronger the brand, the lower the percentage of labor required to deliver the product or service. Strong brands command premium pricing. By pushing up the unit revenue, you force down the labor percentage. McDonald’s engaged in a $0.99 price war in 2002 and suffered its first quarterly loss ever in that year. Of course, technology or operating efficiencies push down labor costs. The more streamlined the system’s SDS is, the more efficient its labor usage, and therefore the higher the capacity utilization.

  3. Cost of Goods Sold: After the components of the product are paid for, how much revenue is left to cover other costs? For many franchises, economies of scale in supply are a key competitive advantage. Dunkin’ Donuts is one of the largest buyers of coffee in the world. Jiffy Lube is one of the largest buyers of motor oil. Virtually every franchise has the opportunity for regional or national supply contracts. The Bagelz income statement points to food and beverage as key supply needs. Everything that Bagelz buys in those categories, from flour to tomatoes, should be bought under a regional or national contract. Size matters in product purchase, and advantageous national contracts often result in more money for the store operators at the bottom line.

  4. Royalties: The simple test of a franchise is to look at items 1, 2, and 3 and ask if the advantages in the franchise pay for the royalty. If the advantages of being a franchise are not sufficient to rationalize the ongoing royalty payment, then clearly tension will exist between franchisee and franchisor. The question then arises, What am I paying for as a franchisee if the business model cannot support the royalty, which is essentially the payment for a competitive advantage? A franchisee may begin to wonder if he or she would be better off running the same business as an independent operator. Some franchisors show royalties as a part of cost of goods sold. To develop a comparison with other non-franchised outlets, you should show net revenue as sales minus royalties. Both the franchisee and franchisor should do this. If the comparison doesn’t yield positive comparisons for the franchised outlet, why would anyone buy the franchise?

  5. Rent (sometimes referred to as occupancy cost): This line item directly relates to our SDS discussion. Please refer back to Chapter 4 for a detailed discussion of real estate and the SDS. The most appropriate real estate location for any franchise is the one that produces the lowest rent as a percentage of revenue dedicated to occupying that location. It is important not to confuse percentage of rent with the absolute cost of occupying the real estate. When assessing the interconnection between real estate selection and revenue generation, remember that revenue projections arise from customer needs and associated demographics. The best real estate attracts the most revenue at the lowest price, when real estate price is calculated as a percentage of revenue. For example, if your location’s rent is $100,00, but the revenue stream is $1 million, then its rent as a percentage of revenue is only 10 percent despite the seemingly high absolute cost. But if another location’s rent is $5,500, and the income stream is only $50,000, then the rent as a percentage of revenue is 11 percent, although the absolute amount is lower than at the previous location. Absolute rent cost is one concept to consider, but more important is the ratio of rent to revenue for a given location. Of course, this is important for the franchisee, but it is equally important to the franchisor. Failed locations reflect poorly on the brand and hurt everyone associated with the franchise.

  6. Adverting and Promotion: Bagelz is typical in the way it allocates advertising costs. The 2.5 percent advertising line item is the system fund used by the franchisor to create materials and sometimes buy media. The local advertising and promotion line items are monies spent by the franchisee in the markets surrounding their store(s). Local advertising or promotion might take the form of the sponsorship of local youth sports teams, whereas the purchase of electronic media would be allocated to the advertising line item.



Not a subscriber?

Start A Free Trial

  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint