Franchise Company

The housing boom created an exuberant environment in which many residential remodel businesses dismissed standard business models, focusing on increasing market share at the expense of the bottom line.

A canonical franchisee's specialty remodel business model (as those at Rebath or Bathfitter) relied on harnessing network effects at a sustained net loss to build market share/brand awareness.

The franchisee expected that they could build enough brand awareness to charge profitable rates for their services later. The motto of the franchisor "get big fast or get out" reflected this strategy.

During the loss period the franchisee's relied on tapping the build up of equity of their homes due to the housing bubble, personal saving or inheritances to pay their expenses

Network effects become significant after a certain sales level has been achieved, called critical mass, a term to describe the existence of sufficient momentum that the momentum becomes self-sustaining and fuels further growth.

As the value of the goods is determined by the user base, this implies that after a certain number of people have purchased the goods, additional people will purchase the goods due to the positive perception of utility: price ratio.

Much of the growth was driven by unsustainable increases in home sales and the harvesting of the equity by homeowners. Not surprisingly, the "growth over profits" mentality and the aura of invincibility led some franchisees to fail when the housing bubble burst: declines in sales of 30 to 60% were reported thru-out the franchise.

The revolutionary optimism of the boom faded, and rather than a reflection of a fundamental shift in customer preference the franchisee once again recognized the relevance of an "old economy" business model.

Several franchisees, burdened with unredeemable debts from their expansion projects, sold their assets for cash or filed for bankruptcy. This capitulation thus became a symbol for the ultimate survival of the remaining franchisees.

It will unlikely that the industry will resume the 2005-2006 highs because of fundamental changes in the residential remodel industry.

Franchises will again have to accept realistic expectations of business growth and return of the market to the 1990's era pricing and sales. Seemly the return to the "old business" model where profits drove economic activity will be the one necessary for business survival.

A company like North Star Bath Remodeling, Southlake, TX was able to quickly adjust to the changes in the market conditions. Surival of the company required the freedom to do the surgery necessary to insure the firm's surival.

The company not only surived the turn-down but was named one of the TOP 500 Remodel Contractors for 2008.

(ArticlesBase SC #1209748)

Lloyd Summy - About the Author: