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,"
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,"
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
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
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
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."