The definition of franchise valueIn the investment world, franchise value refers to the popularity of a particular brand or product with consumers. In your own mind, the concept of bleach and Clorox, tissue and Kleenex, soda and Coca-Cola, soup and Campbell's, are probably not different. In fact, the franchise value of some businesses is so high that many people actually substitute the brand name for the item in every day conversation (in the Midwest, for example, any and all carbonated beverages are referred to as "Coke").
Spotting franchise valueIf you are trying to decide if a business has franchise value, ask yourself these three questions:
1. Am I willing to pay more for the brand (e.g., Hershey's) as opposed to another, cheaper brand (e.g., the generic chocolate bar)?
2. If a store didn't have the brand in which I was interested, would I walk across the street to buy the product I wanted?
3. If I started a business in direct competition with this product, what are my chances of success? Would I be able to make a dent in its market share or is the product so firmly entrenched it would be difficult to wrestle away even a small portion?
Profiting from franchise valueYou may wonder why the owner of business possessing high franchise value is, on average, more prosperous than his counterpart operating a commodity-type business. The reason is simple: if a product has strong consumer demand, the company that manufactures that product can raise prices to offset increased labor, production, inflation, and other costs. The company that does not have franchise value is forced to compete on a price basis; it is constantly required to undersell its competitors regardless of the profitability of such sales if it does not wish to lose market share. In an industry with high fixed costs, this is a recipe for disaster (consider the major airlines).