Risk / Reward: Investing Early In Emerging Franchises

"Be fearful when others are greedy, and greedy when others are fearful.”

Warren Buffet's sage advice resonates beyond the stock market, acting as a guiding principle for investors looking at various industries, including the growing sector of new franchise opportunities. This wisdom is especially vital when considering emerging franchises, where the initial risk may be high, but so are the potential rewards for early adopters. Identifying undervalued opportunities in franchises before they hit mainstream success can position an investor lucratively, much like catching a unicorn in its infancy in the venture capital world.

Risk is often what stops a potential buyer from making that initial investment. There are a number of reasons, ranging from psychological to financial, that make it difficult to take a leap of faith. While in retrospect certain investments appear to have been obvious home runs, market sentiment during the early stages actually indicates quite the opposite.

Investing in emerging franchises offers a unique opportunity to enter the market with a fresh concept that has the potential for significant growth. For investors, it offers the chance to get in on the ground floor of potentially the next big thing in the franchise world. The prospect of lower initial investment costs compared to well-established brands, coupled with the opportunity to shape the franchise's direction and identity, makes emerging franchises an appealing choice.

While the allure of being part of a brand's success story from the ground up is strong, it's vital for investors to identify the right franchise opportunity for them and approach them with a strategic mindset, balancing the excitement of potential rewards against the inherent risks.

How to Identify a Top Emerging Franchise

Identifying a successful emerging franchise requires due diligence and a keen eye for a few critical elements:

• Strong Branding and Unique Selling Proposition: Look for franchises with a clear, strong brand identity and something unique that sets them apart from the competition.
• Proven Business Model: Even if the franchise is new to the scene, there should be a proven business model, preferably with at least one successful pilot location demonstrating viability.
• Market Demand: The franchise's product or service should fulfill a current market demand, or better yet, anticipate future trends.
• Leadership Team: A committed, experienced leadership team with a clear vision and the skills to execute the franchise's business plan is crucial.
• Support Structure: Check for a well-thought-out support system for franchisees, including training, marketing, and operational support, which is a good indicator of the franchisor's commitment to their success.

Investing in Industry Giants: A Case Study in Early Risks and Rewards

Amazon's trajectory from a modest online bookstore to a global retail juggernaut illustrates the Buffet philosophy almost perfectly. In its nascent stage post-IPO, Amazon endured dramatic stock price plunges, at one point losing 94% of its value.

Today, the once Silicon Valley startup is now valued at over $160B, has reported EBITDA well over $85B, and is still growing. 

Similarly, AirBnb, the online marketplace for lodging and tourism experiences, was laughed out of multiple venture capital boardrooms when the founders were seeking funding, and they only booked 5 rooms on the night of their website’s “Grand opening”.

Amazon, starting as a small online bookstore, was up against giant incumbent retailers such as Borders, and Barnes & Noble. AirBnb started as a little known website, offering users to stay in strangers' houses as an alternative to established motel and hotel chains like Best Western, Holiday Inn, Marriott, Hilton, etc. 

Despite what we know today, it’s difficult to say anyone would have had the conviction to hold on to shares of Amazon, or to invest in AirBnb if they had the chance to do either. Industry incumbents can cloud perspective on the potential upside of an investment, as companies with established strongholds in their market seem unlikely to lose their advantage to a new player in the game. Incumbents, regardless of what sector they’re in, must be weary of becoming the Blockbuster of their industry and giving way to a Netflix.

Granted, transitions such as these do not happen overnight. But, when a company is not looking to evolve their business and adapt to changing consumer preferences and industry landscapes, competitors who do notice the shift can gain market share at a rapid pace. Among other things, what we can learn from Amazon, Netflix, and AirBnB, is that they knew the status quo in their respective markets was changing, and that having the advantage of making the first move can allow investors to reap huge rewards.

Break Coffee: Capitalizing on Changing Consumer Tastes

Break Coffee (formerly Xpresso Delight) exemplifies an emerging franchise seizing a shift in consumer behavior. Prior to March of 2020, catering to a growing demand for high-quality office coffee, eco-friendly products, and the convenience of subscription services, Break positioned itself uniquely in the B2B coffee service market.

Today, Keurig, Nespresso, and standard pot coffee represent the status quo for office coffee. These options utilize pre-ground beans, offer minimal to zero beverage optionality, and do not integrate milk into the poured cup (not to mention the large concern over the environmental impact of plastic K-Cups from POD coffee systems). Meanwhile, Break’s Coffee-as-a-Service model has its proprietary coffee blend drop shipped straight from the roaster to clients offices and grinds the beans in a premium espresso machine, all while enabling clients to pay on a per-cup basis. By adapting to millennial preferences, which skew towards premium, sustainable options, this franchise offers a Coffee-as-a-Service model that represents a significant departure from the traditional office coffee solutions. 

Its rapid expansion, with over 20 new franchise units in its first year in the U.S. alone, signals Break’s acute recognition of evolving market dynamics and its potential for considerable growth. And now, with a full rebrand, fresh partnerships, and new franchise opportunities, investors looking for the next big thing in franchise opportunities might find Break’s forward-thinking approach and market positioning to be a compelling case for investment.

The coffee service franchise appears to be a business that, like Amazon, AirBnb, and Netflix before it, recognizes the evolving expectations and dynamics of their target clientele.

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Investing in emerging franchises like Break Coffee, guided by Buffet's philosophy, offers fertile ground for investors to uncover undervalued opportunities similar to the early days of Amazon and Airbnb. By combining vision, patience, and strategic insight, such investments can yield significant rewards, embodying the "early bird catches the worm" ethos for prospective franchise investors and franchisees.

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