Every week, we seek out expert advice to assist a small or medium-sized company in overcoming a key issue it is facing in its business.
Frogbox Inc. founder and president Doug Burgoyne struck gold when Dragons Den, the reality TV show for entrepreneurs, featured his eco-friendly moving box company in a January episode.
Investors Jim Treliving, chairman and owner of Boston Pizza International Inc., and Brett Wilson, chairman of Canoe Financial LP, awarded him $200,000 for a 25-per-cent stake in Frogbox, which rents out and delivers plastic moving boxes.
That allowed Mr. Burgoyne to jump to 16 stores from three in just two months. His Vancouver-based firm, which employs 35 people, has stores in every major Canadian city except Calgary – and enough resources to pursue its goal of expanding into the U.S.
However, Mr. Burgoyne faces a tricky choice. He doesn’t know the best way to expand: sell franchises, as he has done in Canada, or set up corporate stores?
“We have access to enough money to do this corporately,” he said. “But the U.S. is such a huge market, we want to pick the right strategy before we go in there.”
One of the key questions facing Mr. Burgoyne is how best to maintain the integrity of the Frogbox brand. The former physiotherapist said he deliberately chose to get into the moving industry because it has a “terrible” reputation. He wants to maintain Frogbox’s reputation for quality and reliable customer service.
Corporate stores would be more profitable, he said. Profit margins run at about 20 per cent, while franchise agreements might bring in a 7-per-cent royalty, he estimated.
But Mr. Burgoyne also believes that, because franchise owners have a direct investment in their businesses, they are more likely than corporate-store general managers to deliver good service. That’s one of the reasons he chose to franchise in Canada.
He benefited enormously from the publicity that came with his Dragons’ Den appearance. He had 1,500 applications for franchises in Canada and “got to pick from the cream of the crop.”
He won’t have that benefit in the United States. And with plans to expand to 100 U.S. cities within four years, he is concerned he won’t be able to attract the same quality of candidate to set up stores.
“You can mandate things like quality and customer service in a franchise agreement, but it’s very hard to enforce that,” he said. “Once someone is in the system as a franchise owner, it’s hard to get them out. A corporate store is easier to police because, if you find breaches in service, you can just fire the manager.”
Mr. Burgoyne is also concerned that U.S. franchisees may be more litigious.
The challenge: Mr. Burgoyne wants to expand Frogbox rapidly into the United States while maintaining the integrity of his brand and his commitment to high quality and customer service. He wants to know whether expansion through franchising or corporate stores would best allow him to meet both goals.
The experts weigh in
Ken Hardy, expert in marketing channels of distribution, Richard Ivey School of Business, University of Western Ontario, London, Ont.
Mr. Burgoyne wants to expand quickly, which makes sense, since he has a concept that can be easily copied. But I don’t think he can expand any faster with franchisees than he can with corporate stores. The main reason he might prefer to franchise is because of the financial resources franchisees bring to the table. Since he says he has financing, he can afford what I call the Cadillac of channels, so I think he should think long-term and retain control. He’ll have it in spades if he develops a corporate channel.
