Franchising

As a former official eBay Trading Assistant, Trading Post owner and master franchise representative for an eBay drop store franchise chain. I would like to weigh in on the subject of franchising and stand alone eBay drop stores or consignment locations.

My experience on both sides of the fence has revealed certain truths, and since I was at one time a proponent of the franchise model, I believe my views could be helpful to anyone considering the purchase of a new franchise eBay drop store. These views are my own opinion and do not reflect upon eBay any eBay franchise drop store chain in particular or upon eBay consignment as an addition to any other type of business. I am simply expressing my views regarding the stand alone drop store franchise model and why it has failed.

The Promise:

eBay drop stores came upon the scene with a great fanfare and promise. Initially it was considered a unique and interesting proposition by both business pundits (Entrepreneur Magazine) and investors alike. The promise of the initial drop store franchise operations seemed limitless and they expanded like weeds across the land. Soon it would be difficult to pick up a newspaper or read a business magazine without seeing some reference, either advertisement or article, about the eBay drop store franchise revolution. It was an exciting time...

These franchises promised individuals an easy way to be in business for themselves - a way to "have a store without investing in inventory" by offering a simple effective solution to everyone in America's battle with clutter. People heard the story and they believed; they read about eBay's fabulous growth and the amount of merchandise sold every moment on eBay and they felt it was a sure thing. If any franchise could work for them, this type would because it was easy and it was new and customers would clamor over themselves to get in the door. And really it was a "cheap" franchise to buy....

The Deal:

The deal was simple.

Anyone could own a store if they agreed to the franchise terms. Most of these terms included a simple up-front franchise fee of about $25,000, an added expense for signage and fixtures of anywhere from $5,000 to $25,000, plus a continuing monthly national advertising fee and a royalty fee on all sales of about 4% (of Gross Sales), some with a cap at $1,250.00 per month but most with no cap on the royalty fee.

Once "accepted" into the franchise, the new store owner would be "helped" in finding a suitable lease for a prime storefront (its all about location). These prime retail locations usually were recommended to have a footprint in excess of 2500 square feet. (The storefront itself did not require more than 300 square feet, but storage would be large consideration). Usually the overhead numbers involved with operating a 2500 square foot space in prime retail locations were not stressed to the new store owner, but it would be mentioned to cover the basic requirements of disclosure.

Every franchise must comply with the U.S. government rules regulating franchises and they do so with a document called the UFOC. The UFOC is a very verbose & complicated document which provides both parties in a franchise transaction certain definitions, disclaimers and disclosures. The document can reach 400 pages in length or more and is simply not easy for a layman to understand or evaluate. The U.S. government requires this UFOC document, but they do not provide a course in how to read it. I will say that it is intended to provide many worthwhile protections for prospective franchise buyers, but since most of those same people do not read the document, these protections are rarely understood.

The Process:

A new store owner is first given a training course, usually lasting approximately 7 days. This course is given by the franchise at a franchise designated location (travel expenses are not included in the up-front franchise fee). The course is designed to teach the standard methods and practices of the franchise methodology of drop store operations. The class will also include many details about eBay rules, eBay practices and eBay listing procedures. Very little time is usually devoted to the calculation of eBay fees. Intake, Description, Software Operation, Photography, Storage & Inventory, Shipping, Customer Service (both store front and online) and numerous other topics are covered in this 7 day course. It really is a lot to absorb, especially if the new store owner has never sold an item on eBay before.

The Program:

The newly trained store owner is then released to complete his store construction phase according to franchise regulations. Counter colors, sign placement, numbers of computers, placement of interior walls and paint colors all are defined in the materials given to the new store owner. He has bought into a "proven" system and he must follow the franchise specs.

Once the new drop shop franchise owner's store is complete, he is ready for business. Some franchises will use a portion of the "National Advertising" budget to send out flyers and possibly buy a newspaper ad or a radio spot for the grand opening of the new eBay drop store. Initially the store owner is pleased with the small amount of initial business which results from this advertising push because he and his staff (usually 4 or more employees to start) need to get up to speed on all of the procedures of both eBay and the franchise and they need to learn each step of the process. The store owner is responsible for training his employees or he can send them to the franchise corporate headquarters for a training class at his own expense. Usually it is a trial and error method with the new store owner teaching his staff as much as he can remember from his short training class.

The Grind:

Now that everyone is all "trained" and the initial "ad buy" is over, the store owner is now looking for ways to drive business into his new store. He has more overhead than he initially had envisioned so he must get to work. Staring at a monthly nut to crack of nearly $8,000 on average, most store owners realize fairly quickly that they need items to sell on eBay. Where to get them? Some store owners simply advertise the store and wait behind the counter for customers to stream in. In certain areas of the country and in the early days of drop store operations history, this "tactic" did work. It is less likely to work each and every day however.

The average customer of an eBay drop store, franchise or not, is someone who is not tech savvy, has no internet access, is elderly or is wealthy and has little time. Initially the pool of prospective customers was much larger than it is today because more people now have internet access, more people are familiar with eBay and eBay has made it much easier for people to list a single item on their own. eBay classes are taught by certified eBay education specialists at retirement centers nationwide and these classes are sometimes free. People would rather realize 100% of net profit from a sale than 60 or even 50%.

The drop store owner is now on a mission to bring in customers.

He/She must have products to sell. If it become apparent that advertising and location simply do not provide the traffic he needs, the store owner will try different tactics. Sometimes the franchise will offer assistance in the form of "outside sales" seminars, conference calls and the like. These sales ideas are offered as a way to show that the franchise is on the side of the store owner. (To be honest, most employees of franchise operations are honest hard working people who want nothing more than to help the store owners).

In the end these outside sales ideas boil down to selling cars, RV's and boats - all of which are now precluded by eBay and some States as being illegal or unacceptable without special licenses for each. The franchise failed to mention that a store owner may need a car dealer's license and a boat broker's license or an auctioneer's license to operate a eBay drop off store and sell these types of items. Business-to-Business is another source of income promoted by franchises, but rarely do other businesses wish to split profits in the manner required to make the deal attractive for the drop store owner. This leaves only household merchandise, collectibles and toys, generally creating a garage sale type of atmosphere.

Processing becomes the key - reduce processing time, become more efficient, write shorter descriptions, shoot less photos and speed up the process for each item. This only serves to reduce the final sale price of those items.Store owners soon realize that selling any item worth less than $100 is not worth the expense of processing that item. They react by turning customers away with low value items. This is not always the wisest course of action because that customer will never return and one never knows - they could have been just trying you with a small item before bringing in a diamond ring.

Those rare occasions that high value items are presented are exciting to the store owner and stressful at the same time. The store owner knows the customer will want what he/she has been taught that diamond ring is worth. Unfortunately used diamond rings or other high value items are not always worth what some may think they are. We all like to buy low and sell high but when we buy high we really hate to sell low. eBay has a way of bringing reality to the equation. The store owner must now attempt to coerce the customer into selling a high value item with a low starting price and no reserve. Why no reserve? Because the store owner soon learns that items placed on eBay with a reserve price rarely reach the minimum bid and the number of bids on items with undisclosed reserves are are less than on items with no reserve at all. On eBay the game is to start low and hope to sell high. The store owner must get his customer to buy in to that theory.

Some eBay drop stores do survive with perseverance, skill and entrepreneurial spirit...

These stores would have survived and possibly thrived without a franchise but going in, the store owner did not know that he would have to find ways to make it work on his own. He purchased a franchise and this usually implies the investment in a proven system which will yield dividends if the system is followed. In most cases, in the eBay drop store business, if the franchise model is followed and the store owner does no more than what the franchise recommends, the store will not be profitable. The overhead, eBay fees, insurance, lease payments, employee costs and advertising costs are a tough enough nut to crack on a net of 30% of the net profit from used merchandise. Adding in a franchise fee, national advertising fee and royalty fee just makes the entire business model collapse upon itself.

Franchises sell a name and a brand in most cases.

In this case the franchises were selling someone else's name - they sold the name and brand and the cache of eBay. They did it with eBay's blessing in most cases, but they did it in a way which was not exactly providing the value of a franchise.

When one purchases a franchise like McDonalds, they are reasonably assured that people driving down the road who see the franchise sign will be familiar with that brand. When one purchases any eBay drop store franchise, no matter the name, they are not assured of the same brand recognition. They perceive a brand recognition for the eBay name, but that has little to do with xyz franchise signage. The franchises usually tried to capitalize on the eBay brand with similar color schemes or even by using the eBay logo in the franchise brand logo. This still does not make the consumer recognition for that brand any stronger than it would if a store owner who did not purchase a franchise used the same logo trick (which is not allowed by eBay) in their own non-franchise store logo.

Buying a franchise is a big step, one which should include a great deal of your own research and numbers crunching. Even if the idea of owning a franchise seems comfortable, be aware that it is not a guarantee of success. Many people who have purchase eBay drop store franchises feel as thought they were deceived into a purchase of a business model which never worked.

On the surface this is the truth, but it was not always the case. In the early days of the drop store boom the concept did work and store owners realized gross sales months as high as $200,000 or more. These numbers were widely leaked by the franchises because they helped sell franchises...and because at the time they were the truth. Leaking these numbers was a big risk. As a franchisor it is unlawful to share these numbers, but it was done on a consistent basis.

Times have changed for the eBay consignment business, the market has shifted, customers are smarter and eBay is easier to figure out. Retail lease space costs have increased and insurance premiums have doubled or more. The cost of doing business as a stand alone eBay drop store is just too high. It is no longer a viable franchise model and only in very rare cases will it work for non-franchise store owners with no other retail income.

What Will Save The Day?

Think long and hard about investing in this business model. If you currently own a franchise drop store, you need to seek other opportunities, find new ways to bring in income, reduce your overhead or increase your revenue per item. There are many options available but most store owners are swamped with the grind of maintaining the process of eBay consignment to fully explore these options.

For the owners of franchise eBay drop stores - only they can save the day. But if the franchise will not budge on the fees or on restrictions regarding secondary - or actually primary - retail solutions such as cellular (another iffy proposition) or some other form of retail, there is little hope of digging out of the trap. The current situation was not foreseen by the store owners or the franchisors, although the franchisors saw it sooner than the store owners in most cases. The situation remains, in either case...

eBay consignment can work as a tool for another business. In my view, it is not a business model which can support itself without some other form of business income. As a part of another business, eBay consignment can be a very attractive addition to the overall picture. By using eBay and consignment sales to boost revenue and provide customer service for another business entity while increasing the worldwide exposure for that business through eBay stores listings and auction listings of consigned or inventory products, eBay consignment can be utilized as a very good tool for marketing. eBay consignment, if used as a draw to get new customers in the front door, advertise an existing business in a new and interesting way, and to transition a brick and mortar operation to Internet sales can be a very nice marketing program for almost any existing business.

As a hobby or part time income producer, selling for neighbors or friends, eBay consignment can be fun and rewarding. But as a full time stand alone business model with no other income streams, your efforts and money could be invested more wisely elsewhere.

Written by: Scott Pooler - All Rights Reserved - All Business Auctions