Fat Profits? The Risks of Investing in a Franchise

There is profit to be made in the diet and fitness industry. But, do the risks outweigh the rewards for franchisees looking to run local classes?

This article in the Daily Mail will not make pleasant reading for the Rosemary Conley Diet & Fitness franchise, particularly if they are looking to recruit new franchisees. We should always question the validity of the data included in the article and perhaps the motives for publishing it. Nevertheless, for business students it contains some very useful insights into the risks involved in investing in a franchise.

Let's look at the numbers….

Within three years of trading (presumably it takes time to build the customer base of class attendees) a holder of a franchise can "expect" to achieve a turnover (revenue) of £112k per year by running 12 fitness and diet classes per week in the franchise area throughout the year and an annual profit of £41k after franchise costs. That is the upside - if things go well.

But what are the risks?

It looks like the fixed costs of operating these classes is pretty high. It is reported that there is a commitment to run at least 10 classes per week on which there is a management fee of £26 per class - that is a fixed cost (because of the commitment) of £260 per week or approx £12k per year. Plus, in year one there is a joining fee of £20k to buy into the franchise scheme. Add to that the variable costs of venue hire, transport etc and you can see that a class probably has a pretty high break-even output (measured in the number of people paying to attend).

The article describes in some detail the personal problems that various former franchisees have experienced which they attribute to their involvement in the business. Lots of bitterness expressed and perhaps a salutary lesson for anyone thinking that investing in a well-known franchise is low-risk way of running a business.

However, I suspect that the root of the problem for this franchise is the infamous product life cycle. The number of Rosemary Conley franchisees is reported to have dropped from 180 to 140 and the article describes several class operators reporting steady falls in attendance.

There are plenty of other ways for potential customers to experience supportive fitness classes cost-effectively - think Zumba and Boot Camps - do they really need to attend an expensive diet class? As class attendance falls, so does the return for the franchisee. The franchisor is protected because of the fixed management fee. But, when the attendance falls below the break-even output, things start to look pretty bleak for the poor franchisee.