Multiple-Concept Franchising: The Growing Allure of Operating Several Brands
Diversification, a recommended strategy in designing an investment portfolio, is a big part of the thinking behind the growth in multi-brand franchising. No matter how good the ROI may be from a single brand, savvy investors know it's not wise to put all their eggs in one basket. As multi-unit franchisees seek new avenues for growth, increasing numbers of them are adding second, third, fourth concepts, and more to their franchise brand portfolios.
The increase in multi-concept franchising has been accompanied by a growth in the number of franchisors offering multiple concepts from under the same corporate roof. Usually, the family of brands is limited to a single industry segment (retail fast food or home repair services, for example), but not always. This growing trend offers benefits to both franchisors and franchisees.
For franchisors, it means dealing with fewer franchisees to sell more units. The multi-unit franchisee partners they work with also tend to be successful operators of other brands who understand franchising and have industry-specific experience. For those franchisors with multiple brands, it means working with a team they already know, saving countless hours of startup time, training, and relationship-building.
For franchisees, building on an already successful relationship also saves time and helps them open units sooner. It also can mean discounts on franchise fees for those buying the right to open an additional brand from the same franchisor.
In fact, there are many reasons, taken alone or together, that inspire multi-unit franchisees to become multi-brand operators:
- Territory built out. For an area developer who has built out their territory, or a franchisee of a brand with no local opportunities for opening new units, adding a new brand (or two) can be the perfect path to continued growth in their current region — without having to travel to new, distant locales.
- Balance economic cycles. In an economic downturn, fast-casual dining as a segment suffers, while bargain-priced fast food does fairly well. New car dealers also suffer, while automotive maintenance and repair businesses hold their own or expand. Operating brands in several market segments can help smooth the ups and downs of an uncertain economy.
- Balance geographic or seasonal cycles. A lawn care franchise in a four-season climate slows to a crawl in the winter. Ice cream, lemonade, and frozen desserts peak in the warm weather, so why not add soup and sandwiches? Adding a year-round business to ride out the winter will keep employees engaged and the cash flowing in. The new brands can be in related sectors (maid service, electrical, plumbing, home insulation), or in completely different areas (food, rental centers; see next item).
- Balance cash flow. One multi-brand franchisee owned several Applebee's restaurants and several Aaron's rental stores. Stocking an Aaron's with rental merchandise is expensive, and monthly rental fees don't cover the purchase price for 6, 12, or 18 months, tying up valuable cash in inventory. The daily cash flow from the Applebee's was the perfect complement to keep the enterprise afloat until the Aaron's stores started showing a profit — which they did handsomely in time.
- Balance day parts. Breakfast, lunch, dinner, late night, and in-between. Whether it's food or services, consumers and businesses have needs 24 hours a day. If your business makes the majority of its sales at breakfast and lunch, adding a brand that peaks in the afternoon and evening will make for a longer day, but also add to profitability.
- Hedge against surprises. Fast food operators have been hit hard over the years by cases of salmonella, E. coli, and other developments beyond their control. Having diverse brands in their portfolio can help them stay afloat until the situation is remedied and trust in the brand is restored.
- Co-branding. Locating two or more brands in a single location also allows behind-the-scenes efficiencies, which boosts profits. For example, an ice cream brand located next to a sandwich brand can share the same back room, and employees can be shifted from one brand to the other to meet changing customer flow. Be careful to keep in compliance with each franchise agreement.
- Infrastructure. Multi-unit franchisees with their own accounting, human resources, and other internal departments often have excess capacity. Adding brands can take advantage of their existing infrastructure, boosting profitability without greatly expanding the home office staff.
- Hiring and retention. With two or more brands, a franchisee can offer employees cross-training, flexibility, promotions, and a growth path as their skill sets improve. This helps to attract and retain top talent, always a challenge in any business.
- Cultures. One of the challenges in operating more than one brand is that each brand has its own culture. Sometimes those cultures are not compatible, and considerable energy is expended trying to make them work together. Some multi-brand franchisees prefer to keep the operation and personnel of their brands separate. Regardless, it's important to choose a "brand champion" for each concept to prevent its being ignored. And remember, you have your own company culture as well, and may run into difficulties fitting different franchise systems and values into your operation.
- Entrepreneurial spirit. The challenge and excitement of starting something new and the satisfaction of expanding their "empire" can be an irresistible attraction for an entrepreneur. Starting a new venture and making it grow is much more satisfying to many business owners than the nuts-and-bolts of daily operations.
- Same industry or different? This is a highly individual choice. For one person, it's a love of restaurants and customer service that gets their juices flowing. For another, it's knowing their B2B brand is open only Monday to Friday, 9 to 5, leaving evenings and weekends for family, friends, and themselves. And for others still, it’s the satisfaction of knowing that their enterprise is providing jobs and supporting families in their area.
- Synergy. Each franchise brand has its own proprietary operating system, perfected over many years and many, many thousands of customer transactions. While the operating systems differ and must remain separate, sometimes elements of one can be applied to another, or to internal operations at the franchisee's home office.
- Limitations/restrictions. New brands cannot be in competition with existing brands. Check with your franchisor, franchise agreement, and franchise attorney before you start shopping for a new brand.
11.2: Area Development
12.1: Why Franchising is Going Global