Five Forces in Franchising

Posted by: Josiah GoJuly 6, 2015ArticlesLeave a comment-->

One of the key contributions of Harvard Professor Michael Porter is popularly known as the Five Forces.
Simply put, it defines the five major forces that affect profitability in an industry. These five forces are
bargaining power of suppliers, bargaining power of customers, competitive intensity, threat of new
entrants as well as threat of substitutes. One of the many features I like about the five forces is that the
concept of profitability does not need to come from operations. Profit can be sourced directly from better
sourcing which gives you an advantage over new and existing competition, and even substitutes. That is
why trusted managers or partners are in charge of purchasing as the changing prices of different raw
materials and marketing investments may affect the bottom line.
Let’s apply the five forces to the franchising industry, specifically to a product, the water refill station. For
bargaining power of suppliers, the franchisor has high power as franchisees cannot buy replacement
parts elsewhere and need to recover the franchise fee they paid. Bargaining power of customers is also
high with the proliferation of many neighborhood water refill stations who will even deliver with a single
bottle purchased from them. There is high competitive intensity as the prices of water refill stations have
dropped from its initial P100+ per 5-gallon bottle when they started some two decades ago to less than
P30 today. Prices are still dropping with promotions being given by new entrants as there exists no
barrier to entry for any new water refill station. Finally, there is also a high threat of substitutes as
consumers can simply boil water, buy bottled water from supermarkets instead of from water refill
stations, or own home water purifiers. While the latter is more expensive, a few like Waters
Philippines has installment plans priced near the monthly expenditures of households for their drinking
water.
As can be observed, the water refill station industry with high ratings in all five forces is not as profitable
an industry in as far as the franchisees are concerned. That is the reason why many operators of
individual stations are looking for greener pastures. Unless the operator of the water refill station is the
only one in a particular area or is an early entrant who has attained critical mass early enough, it is
doubtful that they can make substantial money to attain personal and financial freedom promised in a
franchise.
There is a need for the water refill stations to reinvent themselves in order to make their industry more
attractive. For instance, some franchisors are selling acombination franchise that package water refill
station with laundry. Since over half of the water are wasted anyway in the reverse osmosis machine
used by the water refill stations, the wasted water is being used in the laundry franchise, saving them
from water cost for the laundry business. Other franchisors use their water refill stations as a distribution
point to deliver allied products like LPG however, there are issues related to sanitation and permit to
operate. Others with more funds offer free use of hot/cold dispenser. Another pain point is the increasing
health consciousness of consumers learning that most water refill stations become acidic water, not
alkaline, hence, instead of losing customers to those wanting to drink alkaline water; some franchisors
have started adding alkalinity to their water albeit at much higher selling prices.
The water refill station franchise is classic example of an industry that desperately needs reinvention.
Year after year, prices have been dropping while costs have been increasing. The enthusiasm of the early
franchisees have been waning, andno further investment is expected from them in an unattractive
industry which means that the attention of the owners will turn elsewhere and you can only imagine what
that means about their hygiene and cleanliness. The franchisors of the water refill station industry
desperately need to wake up with new innovations