I had a great chat with a local business leader the other day.
He is part of a business that, I’m certain, will continue growing in size and profits. Simply put, it is innovative, has an excellent brand, and the product line resonates with consumers. That’s all great, but the most impressive part of the business is that it is intensely focused on local vertical integration; that is, locally-grown products are processed, packaged, and distributedï all while trying to keep local farmers and suppliers in the process.
During our conversation, we talked about what our businesses were doing, and, surprisingly, we found that many of our clients were their clients and suppliers. Almost all the names we both mentioned were mutually familiar. We ended up chatting about the community of small and local businesses in Kona, Hawaii that is committed to creating a better, more sustainable community. And don’t be fooled; all of these businesses are for-profit companies with a keen eye on bottom-line results. They are all from what I know profitable, some very profitable.
Many franchises on Hawaii Island don’t do that well. In fact, there are relatively few franchises in Hawaii compared to the Mainland. There are many reasons, of course, but I think one of the reasons is that many franchises do poorly here because of a lack of connection to suppliers, and to some extent, consumers. For example, a franchise will be unlikely to use any of the following local services: accounting, marketing, advertising, design, signage, and public relations, and add to that most of the franchises must source their supplies from the franchisor. The craziness of a sandwich shop flying in bags of week-old lettuce, peppers, and tomatoes is case and point. They just don’t have any connections to the community.
I remember getting a call from a franchise owner several years ago asking if I’d like to buy his business. When I heard about his lease obligations on his equipment, his building lease (it was expensive because the franchisor made him lease a space in a high-traffic area), and the percentages he had to pay to his franchisor (as a percent of gross revenue) for fees and contributions to the advertising pool, I knew why he was leaving quickly. His business made no sense on an island. His business was bleeding cash at an unsustainable rate. I didn’t even want to ask him about where he could buy his supplies!
What’s an entrepreneur to do in Kona?
First, if you are considering a franchise, do a lot of legwork and be very circumspect of the franchisor’s claim. Is the business right for Kona? Are you sure there is sufficient demand in our small community–200,000 or so on the island, maybe a 1/3 of that in the Kona-Kohala areas? Can you achieve the same goals without a franchise? What are your true expenses to set up and run the business? Are you able to source locally? Do you have a plan for making connections with consumers and businesses in the community? How can you connect with customers outside of traditional media like TV and newspapers? Will your franchisor help you with local marketing campaigns?
In the end, I would argue that few franchises make a lot of sense in Kona. Subway and McDonald’s both locally owned seem to have some good economies of scale, but there are few one-off restaurants or other businesses that seem to do well. Part of the reason, I believe, is that franchisees are looking for a Mainland business model to do well in Kona, and it is just not that easy to do in a small, isolated community.