I first noticed multi unit franchisees on a trip to the US about 10 years ago. At that point, Australian franchisees predominantly owned and operated a single unit. Over the last decade the multi unit franchisee model; that is where a franchisee owns more than one outlet, has been rapidly gaining popularity in Australia.
The Franchising Australia 2008 Survey conducted by Griffith University identified that 32 per cent of franchisors are utilising multi unit franchising as a growth strategy. In the US McDonalds franchisees on average own five outlets each. In Australia over 50 per cent of Subway franchisees each own more than one outlet.
Franchisors are attracted to the multi unit franchise model because it can help drive rapid growth, especially when high calibre franchisees are in limited supply. It also helps to inspire and retain outstanding franchisees who have ambitions beyond operating one outlet. There is also the expectation of efficiencies in administration as well as support and training for both the franchisor and franchisee.
The attractions
There are benefits to a franchise system when franchisees own more than one unit and that can benefit everyone. Accelerated growth Active multi unit franchisees will facilitate faster growth for a franchise system. Having a number of multi unit franchisees growing in neighbouring markets can help penetrate the market faster than granting individual franchises.
To a lesser extent we are seeing multi unit franchisees diversifying into other franchise brands. Initially this concept may seem unpalatable but individuals with a proven track record in running successful franchise outlets and system compliance can bring welcomed business acumen, capital, energy and ideas, while accelerating growth.
Financial strength: One of the biggest attractions a multi unit franchisee can bring to a system in the current environment is their financial ability. Multi unit franchisees can be more experienced and have greater financial scope and stability. Depending on their size, they may also be able to leverage their overheads.
Stronger business acumen: Multi unit franchisees tend to have a more sophisticated approach to building and running businesses, with a stronger emphasis on planning, managing, analysing, innovating, people development and systems.
To use a cliche, they are more inclined to ‘work on their business, rather than in their business’. Consequently, they can be a rich source of ideas, debate and market testing of new ideas. Also franchisees with a larger business are more likely to have a more substantial management and support infrastructure.
Efficiencies in training and support: As franchisees gain experience and strength, they usually require less training and support. Their experience and infrastructure can often be utilised to train and support individual franchisees on behalf of the franchisor, especially in territories that are remote to head office.
Operating efficiencies can also be achieved by the franchisees: Quest multi unit franchisee, Michael Hibberd, enjoys administration efficiencies and can comfortably swing staff and reservations between his two city properties.
The downsides
But there can be negatives to multi unit ownership too.
Additional operating overhead: A multi unit franchisee needs to build an administration and field support team. Greg Patterson, multi unit franchisee with Subway found that you can juggle fairly well with two stores but from the third store onwards, your overheads escalate. Patterson has store managers performing the role he did as a single operator and also employs field support. At a certain size payroll tax will also come into the cost equation.
Loss of focus: Attention to detail can be lost as a franchisee expands. Unless strong leadership and communication skills are developed, the store performance and ambience are likely to suffer, because it won’t be possible to micro manage. This is particularly the case beyond two stores and also as the geographic spread grows.
It is not uncommon to witness a lower performance in an outlet run by a multi unit operator compared to a focused single operator, because the franchised business is not as closely monitored.
A major franchisor reported that their multi unit outlets are more likely to deviate from the business system, because unless their managers have equity they are not as committed to the business.
Financial strength of the franchisee: A franchisee needs to have the capacity to fund each additional unit. If their assets are fully utilised after establishing the first two outlets, they will be hamstrung and unable to open any more.
The lessons
Market observations indicate that expansion plans are not always strategically pursued. Franchisors often react to opportunities, rather than take a planned approach. Multi unit franchising may be more challenging than the franchisor or franchisee first realised.
Most franchisors report that their multi unit franchising plans emerged with little planning, but the successful brands are good learners, and below are the common elements of a successful multi unit strategy. Interestingly, the successful multi unit franchisees largely highlight the same qualities as their franchisor.
Multi unit qualifying criteria: Instead of just reacting to approaches from existing franchisees, the leading franchisors apply extensive and strict qualifying criteria, which is specific to their business. Subway has over 31,000 stores in more than 85 countries.
Victorian area developer Theo Tsianakas firstly looks at a franchisee’s record in operating a single store, with an emphasis on their core values of quality, service and cleanliness. Tsianakas also assesses the franchisee’s commitment to people development, store reinvestment, and local marketing.
Nick Suriano, general manager franchising, Quest Serviced Apartments assesses a franchisee’s track record with regards to their performance, compliance, financial capability and succession plans for the franchisee’s replacement.
Business plan: Business plans are commonplace for first time franchisees and are usually driven more by the need to satisfy their lender, rather than to enhance their business success. PwC Private Business Barometer reports the survey findings from 750 businesses every six months and the May 2009 findings reported that 70 per cent of private businesses that prepared a business plan did so in response to a credit application.
On the other hand, a modest 19.5 per cent of businesses surveyed drew up a business plan because it made good sense. The survey also found a strong link between having a business plan and meeting or exceeding expectations. The same applies for a successful multi unit franchising strategy.
The verdict
Multi unit franchising offers tremendous advantages for both the franchisor and the franchisee, and this has been clearly demonstrated in Australia and overseas. The most dynamic and inspiring example of multi unit franchising I have witnessed was a Burger King franchisee from Florida who had expanded from owning a half stake in a single store to building a network of almost 250 Burger King franchised outlets.
While he simplified his formula for success, he claims that the secret was to simply repeat what worked in his first store another 250 times. And furthermore, he learnt his store success secrets while working hands-on in his outlets.
However, multi unit franchising is clearly not for everyone. Planning and detail are paramount to a successful multi unit franchise growth strategy. I have observed far too many cases where multi unit franchising has emerged with little planning and discipline, only to result in personal and financial disappointment for both parties, sometimes ending in costly and disruptive litigation. The opportunity for growth is often too difficult for a franchisor to resist.
Multi unit franchising is a specialist discipline and thorough research and planning is essential to ensure that this particular road is strategically right for the franchisor’s business. Likewise, franchisees need to carefully assess their expansion plans before committing to invest in opening and running multiple outlets. If a franchisee is passionate about their business, has good people on the team and is a strong leader, then multi unit franchising can be a very exciting proposition.
Sergio Alderuccio is a director at PricewaterhouseCoopers.