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Franchising Logistics: Franchising model gets another look as logistics providers search for new ways to grow, compete
by Kathleen Hickey

Smaller third-party logistics providers intent on growing and competing with larger 3PLs are considering a tried and trusted strategy long used in transportation - franchising.

The franchising strategy McDonald's uses to deliver your Big Mac is nothing new in logistics; it's been used for decades by freight forwarders and couriers, in particular.

But the business model reportedly is gaining popularity among nonasset logistics and transport companies looking to compete against larger players such as FedEx and UPS.

A franchise-type model gives freight forwarder SEKO Worldwide "the opportunity to compete head to head with the integrators," i.e., FedEx, UPS and DHL, said William Wascher, president and CEO of Itasca, Ill.-based SEKO.

Growing interest in franchising mirrors the current interest in outsourcing, Wascher said. Like outsourcing, franchising allows a company to focus on its core competencies.

"Our core competency is developing systems, backroom accounting, national sales and marketing programs and developing the network," Wascher said. "(The franchisee's) core competency is selling and moving the freight."

Still, it's not the business model for everyone. "It's been tried over the last 20 years many times without success simply because it isn't as easy to franchise logistics services as it is to franchise hamburgers," said consultant Ken Ackerman, president of Columbus, Ohio-based K.B. Ackerman Co.

The list of transport and logistics companies with a franchise-based business is long. FedEx Ground, FedEx Kinko's, The UPS Store (no. 6 on Entrepreneur's list of top 10 franchises for 2004) and DHL partner Unishippers are all franchise operations. BAX Global is one of many firms that combine franchises with company-owned offices.

The list may be growing longer. Franchising "is being looked at by more and more companies," said Robert Imbriani, vice president of international development for Team Worldwide, a forwarding and logistics company based in Winnsboro, Texas. "A few new companies are mixing the (franchising and corporate) structures together," Imbriani said.

Why would a logistics or transport company choose to franchise? For many companies, it's a way to expand into new territories quickly with limited investment.

Vital Express founder Dan Boaz plans to expand his small same-day delivery company from its West Coast base by selling 500 franchises. He sees franchising as a fast and comparatively inexpensive way to grow his Valencia, Calif., business. "We're not looking to build 500 trucking terminals, we're looking to set up 500 small businesses," he said.

"It's the best way to accommodate growth without making a significant investment," said Henry Rusch, IT manager for the ANC Group, a British parcel express carrier with 60 franchise locations and 15 company owned locations in the United Kingdom. "We've experienced double digit volume growth for the past 21 years," he said.

A franchise model is good if a company wants to grow quickly with limited resources, Wascher agreed. He also believes it can be more efficient than the corporate model. Franchising "turns (the business) more into a variable cost approach. In a lot of respects it's more effective to control than what you do under a closed network," he said.

By comparison, a corporation "has to have many more layers of management. A model like ours - it's more crystal clear and there are more natural checks and balances that drive the performance."

Franchising is a good business model when the franchises are self-sustaining, the customer base is local and all services are delivered by the same franchisee, said Satish Jindel, principal of SJ Consulting, Pittsburgh, Pa., a former executive with franchise-based RPS, now FedEx Ground. It can work if companies have good systems - good business processes and the technology to support them, he said.

Problems arise, however, when a company's franchisees don't maintain uniform service levels. In transportation, the franchisee may have control over only half the service - until the package is delivered to another location. And if the receiving franchisee is "having a bad day" the originating franchisee can't control it, said Jindel.

McDonald's is successful because of the consistency of its service: go into any McDonald's restaurant in the country and order a Big Mac and you know what you're going to get. Shippers demand the same consistency from their logistics and transport operators - franchised or not.

In a sense, the most successful franchise is invisible to the customer, so transparent that the shipper sees "The UPS Store" or "FedEx Ground," and not a locally owned small business. That transparency is becoming easier to achieve as technology allows franchisers to standardize service.

U.K.-based ANC, for example, uses technology as the glue to keep its franchisees in synch. Technology from Tarrytown, N.Y.-based Carrier Logistics has allowed ANC to map out its business processes and update its operating procedures, resulting in "a massive improvement in how we process shipments and provide information to our customers," said Rusch. All franchisees are subject to the same quality processes and the same compliance levels, he said.

Setting uniform service standards isn't the same as centrally controlling a company, and businesses that need highly centralized management lean toward the corporate model.

The Hub Group, for example, realigned its structure earlier this year by pulling back its franchise-like operation to a more centralized system, giving it a better handle on costs and allowing it to manage assets on a national basis.

In February the Downer's Grove, Ill.-based intermodal marketer consolidated separate profit and loss centers and began to reward sales managers for the amount of business they bring to the company, rather than the amount of freight booked from their location. The changes improved pricing decisions, volume and density, said Richard M. Rogan, Hub's executive vice president for Midwest regional sales.

SEKO's business has gone from being franchised to company-owned back to franchised as its ownership has changed in recent years, Wascher said. When USF purchased the forwarder in 1997, rebranding its USF Worldwide, it centralized ownership and control. When the current management repurchased it from USF in 2002 they returned to franchising, which they say will help Seko's global expansion. Not that it's easy.

"Managing and running a company comprised of independent contractors is much more demanding than ordering a lieutenant to do something with one of your own stations," said Wascher. "If you are going to deal in a franchise-type model, from a management standpoint you have to learn to step on somebody's shoes without losing their shine. If you don't you are going to fail miserably."