🍟 A Franchise Surprise

Do you know who Ray Kroc was?

…

Hint 1: He did not invent Crocs, the plastic activewear clog things.

Hint 2: He was played by Michael Keaton in a movie.

Hint 3: He built the largest fast food chain in the world by perfecting the franchise model.

Raymond Kroc was a salesman in the 50s. He sold 8 milkshake mixers to a couple of fellas in San Bernardino, CA by the name of McDonald - and he took a liking to their restaurant concept: simple burger stand, with fries, pop, milkshakes, and a heck of a process. He opened a franchised location of the McDonald’s concept in 1955 and the rest is history.

Btw - by all accounts, Ray was a real big jerk. He took advantage and lied. But, for our siloed purposes, he was one heck of a franchisor.

👍 What is a franchise and why did Ray like them?

A franchise model is one where a franchisee has a license for the know-how, process, and trademarks of the franchisor. The franchisee usually pays a startup fee and royalties based on sales for this privilege.

For the franchisee: get a turnkey business up and running quickly, with limited capital.

For the franchisor: scale the brand quickly, receive % of sales revenue without doing much.

Franchise models are particularly compelling when they are based on a proven business with a defensible moat - McDonald’s, for example, had the Speedee Service System (the assembly line process) and delicious burgers (the product).

Although the franchise model existed for (literal) centuries before Ray, he did some innovative things at McDonald’s:

• Whereas many franchise businesses allowed franchisees to buy up many restaurants in one region, Ray limited franchisees to one at a time - this ensured standard and deliberate growth, and uniformity in standards and quality across the board

• The franchise model allowed for zero deviation from standard operating procedures, down to the number of pickles per burger

His strict, measured approach clearly worked.

🍃 What about cannabis?

So: a business that normally require lots of capital to startup; a business that would benefit from strict adherence to a good process; a business that would benefit from the head start of a great brand?

We’re describing cannabis retail. How come we haven’t embraced this model?

I’ll explain, but first, props where props are due:

Franchising in cannabis presents some unique problems, of course.

1. The business is federally illegal, but franchising is federally regulated. That’s complicated.

2. The business is federally illegal, so you can’t ship products between states (so supply chain needs to be solved and optimized in every state).

3. The business is federally illegal, so you can’t deduct operational expenses related to cannabis.

Sensing a trend?

The franchise model hasn’t been embraced because its federally illegal nature requires a ton of legal firepower, easy supply chain access, and a whole lotta capital. A lot of retail brands just aren’t there yet.

🍔 Will we see more franchising in cannabis?

Back to Ray Kroc and McDonald’s for a sec:

Their franchise model worked because the first McDonald’s had a defensible moat in its process and products - and because, after handing over the keys, the franchisor spent every second relentlessly enforcing deliberate, standardized growth.

If cannabis franchisors follow that pattern - providing something unique and valuable, then relentlessly enforcing adherence to a model that highlights that special thing - the cannabis franchise model can work.

The franchise model will also be adopted much more broadly when more franchisors can offer a strong brand (like Cookies), a strong, proven operational model (like Unity Rd), or an established franchise network (like Lotus Gold).

One huge caveat, and an issue I’m not sure anyone has solved yet: if a franchisor does not require standardized technology systems across locations, you’ll have a disjointed data mess. Audits and improvements will be near-impossible.

Systems should be treated the same as branding - here’s the game plan, we know it works, go do exactly this. When a franchisor is willing to enforce tech stack choices in addition to branding or process, that’ll be a long-term player.

📚 tl;dr

• Franchise businesses allow entrepreneurs to borrow branding and operational know-how in exchange for startup fees and royalties

• Ray Kroc scaled McDonald’s with a maniacally-strict franchise model

• Cookies, Unity Rd, and Lotus Gold are executing the franchise model (there are probably more, sry if I missed you)

• Franchising in cannabis retail will become more prevalent, especially if we go federally legal

• It is Wednesday