Case Study: Hooked On Expansion
Marc Shuman was determined to expand fast. Then a quarter of his franchisees started to struggle. Was shutting them down the best solution?
Marc Shuman couldn't bear to open another e-mail. Hunkered down in his office in Syosset, New York, the president of GarageTek was reviewing the financial statements of his company's 57 franchises. It was fall 2003--three years after he'd launched his garage makeover business--and he was starting to worry.
A quarter of GarageTek's locations were losing money or barely breaking even, and complaints from disgruntled franchisees were pouring in. Meanwhile, Shuman and his corporate team were struggling to create operational systems that would help the unprofitable franchises get back on track. It had begun to feel like a losing battle. As Shuman analyzed one disappointing financial statement after another, he started thinking about shuttering the failing locations altogether.
GarageTek had seemed like a no-brainer when Shuman founded it in 2000. He got the idea when he and his father, with whom he outfitted department store interiors, designed and built a set of slotted wall panels with moveable shelves for a retail client. When several of his employees began using the panel systems to organize their own garages and basements, Shuman realized he had a potential hit on his hands. And the timing seemed perfect: The housing market was heating up, garages were getting bigger, and closet organizers were all the rage. Shuman decided to sell the display business and open GarageTek.
Rather than simply selling the panels at home-improvement stores, Shuman decided to build a garage-makeover business. GarageTek would perform in-home consultations, then design and install the systems--complete with shelves, cabinets, bike racks, and work benches. Homeowners, Shuman figured, were likely to pay a premium for the service. The biggest risk was competition. After all, anyone could have the same idea. But if Shuman could establish a foothold in markets around the country, GarageTek had a better chance of survival. Franchising seemed like the best way to pull off such an ambitious expansion.
In early 2001, Shuman placed an ad soliciting franchisees in The Wall Street Journal, and phone calls poured in. His attorney advised him to choose carefully. But Shuman, eager to get started, approved anyone with a business background, a $25,000 franchise fee, and $200,000--which, according to Shuman's calculations, was enough to purchase supplies, buy newspaper ads, and turn a profit within 18 months. Each franchise would pay GarageTek 8 percent of annual sales, a portion of which would help fund national advertising campaigns. In exchange, they received three days of basic training and a manual written by Shuman. "If they had the money and they had a strong sales and marketing background, we felt they were qualified," Shuman says.
At first, everything seemed to go according to plan. In the first half of 2001, GarageTek franchises opened in Connecticut, New Jersey, and New York. By 2003, 57 franchises had sprung up in 33 states, and annual revenue at the corporate office was on track to top $12 million. That summer, however, Shuman began to realize that while many franchises were thriving, 15 were struggling. One franchisee in California begged Shuman to send executives out west to train his staff. Another complained that GarageTek's suggested marketing method--ads in local newspapers--was ineffective, costing as much as $500 per lead. Desperate for help, Shuman enlisted iFranchise Group, a consulting firm in Homewood, Illinois, to help him develop a strategy. Meanwhile, the corporate team tapped franchisees for tips on which sales tactics worked best--a move that frustrated many of the struggling franchisees, who began to wonder why they were paying GarageTek at all.
Determined to get a handle on the situation, Shuman and his managers compiled a spreadsheet with information on every GarageTek franchise--including the size and demographics of each territory, overhead costs, pricing models, management assessments, and the amount of capital being invested by owners. The data revealed a distinct trend: The failing franchises were either underfunded or being run by nonowner managers hired by hands-off investors.
Shuman was torn. On the one hand, it was his fault for green-lighting those franchises in the first place and providing inadequate training and support. But he couldn't help blaming the struggling franchisees. After all, most GarageTek locations were doing well with minimal handholding. Shuman, who prides himself on being tough, was leaning toward folding the failing franchises--a decision supported by his management team and iFranchise.
But his lawyer warned him that things could get messy. GarageTek's contract stipulated that the corporate office could shut down franchises that failed to meet specific sales goals. However, the attorney warned, disgruntled franchisees could still file lawsuits and ensnare GarageTek in costly litigation. Shuman also worried about GarageTek's reputation. If he shuttered a quarter of the company's locations, it was bound to hurt the brand, especially if angry franchisees griped to customers or the press. "I envisioned a bloodbath," Shuman says.
The Decision
One afternoon in November 2003, Shuman strode into the conference room at GarageTek's headquarters for the company's annual meeting. The eight members of GarageTek's franchise advisory council sat at a large table, unaware of the major shakeup that was about to happen. Shuman ran through a PowerPoint presentation that explained why certain franchises were failing. He also outlined how corporate profit would improve if they were shut down. "We sold the idea of folding the failing locations to the council as a matter of courtesy," he says.
