Reference no: EM131708873
Marc Shuman tries to solve a problem common to most every homeowner—getting to their cars without tripping over tools and toys or hurdling barbecue grills and bikes. “Garages can be a lot more than just a place to dump junk,” says Shuman. Shuman’s solution to the war on clutter is a “garage organizational system” consisting of patented slotted wall panels and an array of modular attachable cabinets, shelves, bike racks, and workbenches—all styled in the same light-gray steel and plastic and bearing the yellow GarageTek logo.
Marc describes himself as a “neat freak” and devised an early version of the slotted wall panel while running his family’s store-fixture manufacturing company on Long Island. He and a partner adapted the panels and tested them out on his mother-in-law’s two-car garage, which was packed with 30 years’ worth of junk. “The transformation was just staggering,” he says.
Selling the panels at home-improvement stores such as Home Depot and Lowe’s was tempting, but eventually Shuman decided to build a garage-makeover business. He could envision GarageTek experts going to customers’ homes, designing and installing organization systems— complete with shelves, cabinets, bike racks, and workbenches. Custom work justifies a premium price so margins would be higher. No one sold such garage systems, but it would not be difficult to copy the idea so Shuman needed to be the first in the market and get big fast. Franchising seemed like the best way to do both.
Shuman placed an ad in the Wall Street Journal soliciting franchisees. The phone started ringing. His attorney advised him to choose carefully, but Shuman’s first-mover advantage could be lost quickly so he approved anyone that met minimal standards. Franchisees invested between $200,000 and $250,000 up front, including a $50,000 licensing fee, and pay 6 percent of gross sales as an annual royalty, plus another 4 percent for advertising. He believed that should have been enough to purchase supplies, buy newspaper ads, and turn a profit within 18 months. Franchisees received three days of basic training and a manual written by Shuman. “If they had the money and a strong sales and marketing background, we felt they were qualified,” Shuman says.
All went smoothly—at first. 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. In the summer of 2003, Shuman detected 15 franchisees who 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. Top managers began benchmarking successful franchisees for tactics that worked best. Franchisees wondered where their royalty and franchise fees were going.
GarageTek’s target market is owners of houses worth an average of $350,000 or more, or roughly the top 20 percent of the nation’s 50 million houses with garages. The company’s average sale (including design, components, and installation) is $4,500.
About three-quarters of GarageTek’s franchisees were doing well. But, of course that means that 25 percent were losing money or barely breaking even. Complaints from disgruntled franchisees were pouring in. Shuman and crew were struggling to create operational systems that would help the unprofitable franchises get back on track, but they were losing ground. The picture painted by financial statements made Shuman start to think about closing the failing locations and get it over with.
Shuman and his managers knew they needed more data before making major decisions, so they 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. Two trends became apparent: The failing franchises were either underfunded or being run by non-owner managers hired by hands-off investors.
Shuman knew he bore some of the blame approving marginal franchisees in the first place and that GarageTek training and support had not been first rate. At the same time, the struggling franchisees were at fault too. Shuman, who had a reputation for being a tough boss, was torn. He, his management team, and the consultant from iFranchise all wanted to close the doors of struggling locations.
But legally, pulling franchise agreements could get messy. GarageTek’s contract clearly stated that the franchisor could shut down franchises that failed to meet specific sales goals. But Shuman’s attorney warned that could cause more problems. “I envisioned a bloodbath,” Shuman says.
Sources: Stephanie Clifford, “Case Study: Hooked On Expansion,” Inc., March 2006, 44–50; Patricia Mertz Esswein, “Extreme Makeover: Garage,” Kiplinger ’s Personal Finance, July 2005; Patrick J. Sauer, “Garage Makeover,” Inc., July 2007, 7; and Joseph Rosenbloom, “Space Man,” Inc., May 2002.
Case Questions:
1. What should Shuman do? Should he shut down the failing franchises? Why or why not?