Frogbox looks to leap into the U.S.

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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.

If he were to set up a franchise network, the franchise owners would really have the balance of power until the concept is proved and the franchises are profitable. Until then, he's at the mercy of the occasional bad franchisee, who may be apt to misfire, especially when you get into something where service must be delivered day after day. This is especially true if it's an early-stage concept, where franchisees are not making as much money as they hoped. They can start putting their energy into fighting the franchisor or complaining, instead of making the amendments required to move.

I think Mr. Burgoyne can get everything out of store managers that he could out of franchise owners, if he gives them good guidance and a piece of the action through profit-sharing. He can identify the best corporate managers by working with Better Business Bureaus and by creating a clever viral ad to help attract people to his concept.

Whether they are franchised or corporate, Mr. Burgoyne will want to open clusters of outlets, rolled out by region, in order to gain efficiencies by sharing resources and marketing costs.

Tony Wilson, franchise and intellectual property lawyer at Boughton Law Corp., and an adjunct professor at Simon Fraser University, author and Globe and Mail Report on Small Business columnist, Vancouver

Either option comes with baggage. Corporate locations would give Mr. Burgoyne control over his brand and his employees. But he may be underestimating the cost of going that route, since employees, rent, and other costs may make corporately run offices very expensive when compared with franchising, where such costs are passed on to the franchisee.

Unless he has access to large amounts of capital to finance his expansion into the United States, he might have to consider franchising the concept there, especially if he wants to roll out the brand quickly before other competitors copy his business system and beat him at his own game.

One option might be to grant shorter franchise terms of perhaps two or three years, with no renewal options. He would only grant a new agreement to those franchisees who are in full compliance with their original agreement, making it easier to weed out the underperforming franchisees. He would still have to comply with U.S. franchise laws, which are far more onerous and expensive than Canadian laws from a legal and accounting perspective. And he would still have to deal with the fact that the United States is a far more litigious society, meaning that any breach of the franchise laws in the U.S. will be met with legal action.

Another option is to sell master franchises on a state-by-state or region-by-region basis, using a contract that requires performance quotas so that the brand is rolled out on a predetermined schedule and the enforcement of brand standards and quality rests squarely on the shoulders of the regional-master franchisee. The master franchisee would lose his right if individual franchisees did not maintain brand standards. Under this system, master-franchise holders would also bear some of the cost of complying with U.S. laws and some of the legal liability.

Jen Ger, co-owner of Toronto-based Foxy Originals Inc., with outlets across North America

They have a very innovative concept and a wonderful idea. But there's nothing proprietary about it so I'm concerned it could be replicated and that they will lose their competitive advantage unless they move quickly. Franchise stores are a good way to scale a business but they may not give Mr. Burgoyne the control he wants.

Since he is concerned about protecting brand integrity, he should go with a model that combines franchises with flagship corporate stores. He should first determine which states would be the strongest markets and then set up a single corporate flagship store in each of those states. He would then partner with an experienced master franchisee in each state who takes responsibility for developing franchise stores. The master franchisee will have to make a significant investment of time and money so he is essentially a partner who is highly motivated to make the business work. Each flagship store would serve as a central location for training, which would help ensure that all owners deliver the same standard of service.

A significant public relations campaign with the opening of each flagship store would be essential to draw interest from the best potential master franchisees. Mr. Burgoyne should consider movie-product-placement deals or an appeal to investors on a U.S. reality TV show similar to Dragons' Den.

Three things Frogbox should do now

• Begin to plan for the long term
• Develop strict criteria for the ideal corporate store manager and for the ideal franchise owner.
• Put PR into place
• Develop a strong public relations campaign to attract the best managers or franchise owners.
• Research
• Careful research to determine which states would be most welcoming to Frogbox’s environmentally friendly concept. Values vary widely between the U.S. states so the first stores should target those that are already environmentally aware.

Special to The Globe and Mail

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