What is the impact on a franchisee when a franchise brand joins or acquires another brand?
The number of multi-brand franchisors in Australia is on the rise. This means that it is becomingly increasingly common for franchise brands to join with or acquire other franchise brands. Well known examples include Retail Food Group which owns the Gloria Jeans, Brumbys, MichelsPattiserie, Donut King, Pizza Capers and Crust brands;the Fitness and Lifestyle Group which owns the Jetts, Goodlife and Fitness First brands; and Retail Zoo which owns the Boost Juice, Salsa’s and Cibo brands.
The impact on a franchisee when a franchise brand joins or acquires another brandcan be both positive and negative.
Some of the positive impacts can include (depending upon the type(s) of businesses owned by the franchisor group):
If the brands are similar and purchase the same kinds of goods and services to use in their businesses, the joining with or acquisition of another brand can lead to greater purchasing volumes and therefore better purchasing power for the group. This usually means more competitive supply terms for all franchisees within the group such as better pricing and better payment terms. There may also be the ability to access a greater range of approved suppliers, which can be useful when particular suppliers are for example, either unable to supply or become less reliable.
The joining with or acquisition of another brand may enable the brands to combine and share resources across the group. For example, services such as IT support. This may make the franchisor(s)and the franchisees within the group more competitive than those operating under a single brand who require the same services but are unable to share the cost of the service with another brand or business.
The combining of brands that operate in the same industry can lead to additional resources, knowledge, market intelligence and expertise in the industry within which the brands operate. For example, a stable of fitness brands will likely have better resources and more market intelligence and expertise in the fitness industry than a single brand operating on its own in that industry. Or a franchisor leasing sites for multiple brands may have better knowledge of the leasing market, and therefore better leverage and negotiating skills because of that additional experience and knowledge.
If the joining with or acquisition of another brand is successful and the group becomes stronger as a result, this may enable the franchisor to provide more resources and support which in turn improves the performance and increases the value of the franchisee’s business.
Common ownership of different brands can more easily facilitate the ability to run cross-promotions between brands (this is usually only appropriate for non-competing brands).
Multi brand groups can enable franchisees to more easily acquire additional businesses or move between brands within the group. For example, if one brand is failing or becoming redundant, the franchisee may have the opportunity to re-brand to another brand within the group. Or a franchisee with a successful business under one brand may be considered favourably for an opportunity to acquire another business within the group under a different brand.
On the other hand, there can also be negative impacts. Thesecan include:
If the brand which joins with or is acquired competes with the franchisee’s brand, the franchisee may find that its competitor is owned by the same franchisor as their franchisor. The franchisee may become concerned that its franchisor will no longer act in its brand’s best interests or share certain confidential information with the competing brand. The franchisee may find that by owning a competing brand, its own franchisor is competing with its brand for sites and customers.
If the franchisee has an exclusive territory within which its franchisor has agreed not to allow any competitors to operate, the other brand may have a competing outlet within the franchisee’s exclusive territory. This may mean that the franchisor is in breach of the franchise agreement. Alternatively, the franchise agreement may have been carefully worded by the franchisor to allow a competitor in the franchisee’s exclusive territory, provided it is not of the same brand.If the franchisor becomes too focused on acquiring new brands and less focused on attending to the brand(s) it already owns, the franchisee’s business may suffer because the franchisor has failed to give the franchisee’s brand the attention it requires. Similarly if the franchisor acquires a brand in an industry it does not have experience or expertise in, this may distract or cause the franchisor to over-commit and neglect its other brand(s).
If the franchisee’s franchise agreement entitles the franchisor to require the franchisee to change brands, the franchisee may be required to re-brand to the new brand at its cost. The re-branding costs may be significant and the franchisee may not like the new brand.
A prospective franchisee wishing to reduce the risk of any negative impacts should seek legal advice prior to signing a franchise agreement. That way, if its franchisor does join with or acquire another brand, it can hopefully enjoy the positive impacts and reduce the risk of any negative impacts that this change will bring.