The Low-Down on Multi-Unit and Multi-Brand FranchisingPublished on December 15, 2020
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It used to be very different when an entrepreneur wanted to buy a franchise. They found a system they liked, signed the contract, paid the fees and that was that. For many it was an entry point into going into business for themselves. It was the favorite option for many first-time business owners. Things changed however. Individual franchisees started wanting to grow their success, and started opening more locations under the same franchise system.
The experience gained operating the first franchise unit helped franchisees replicate their success. Soon they were running three, four or five franchises under the same banner. Larger investors went even further, opening dozens of units across the country. These multi-unit franchisees saw a return on investment greater than they would have seen otherwise. This strategy became a favorite for investors and franchisors alike, particularly in the Quick Service Restaurant (QSR) industry. It helped increase the amount of revenue that could be earned and the growth of the franchise. Franchise industry data shows no signs of the strategy slowing down either.
In 2019 the percentage of franchisees who owned multiple franchise units was at 21.4%, which increased from 16.2% just five years earlier. However, those numbers look significantly different for the QSR industry. In 2019, 46.2% of franchisees owned multiple QSR units, which was up almost 15% from 2014. Digging deeper, the numbers show that in 2019 84.3% of all QSR units are part of a multi-unit franchise. That’s up from 51.7% in 2014. Compared to the franchise industry average, which was at 52.6% in 2019, those numbers are much higher. Multi-unit franchising is clearly on the rise, and there are many reasons why.
On top of increased profits from opening multiple units, there are other benefits for franchisees and franchisors as well. Multi-unit franchisees have better access to capital and have already gathered franchise and business experience from their previous locations. They know the system and usually forgo franchisee training. In some cases, franchisors will give multi-unit franchisees an exclusive area they can develop and discount the initial franchise fee. This will help them avoid competition from others using the same brand in their area. Other benefits include volume purchasing discounts, capitalizing on local real estate, labor that can be shifted from store to store, a knowledge of local trends and demographics and an easier time withstanding disruptions to their businesses, like those caused by a pandemic, including the closure of some of their locations. Franchisors find it beneficial having to deal with one franchisee instead of many, because it lessens the amount of recruiting, training and support they are responsible for. It also helps them enjoy a faster growth.
For the ambitious multi-unit franchisee there will come a time when they notice the brand they’ve bought into has reached a level of saturation that prevents them being able to expand their reach further. They could look beyond their market, but that takes a different skillset, and could be outside their comfort level. There is another option to help them to continue to expand however, multi-brand franchising.
Multi-brand franchising occurs when franchisees own not only multiple units of the same brand, but multiple units of other franchise brands. This allows for diversification within a tighter geographic area, while increasing their overall revenue stream. This concept has exploded in recent years, especially within the QSR industry. In 2014 the franchise industry had 7.3% of multi-unit franchisees operating more than one brand, and it increased by 1.6% in 2019. During the same time period, QSR multi-brand franchisees went from 9.5% to 14.6%. By operating non-competing restaurant brands multi-brand franchisees can take advantage of the same benefits of multi-unit franchising, while staying within their original territory and avoiding oversaturating the market. Industry sources have indicated that there is a growing interest from private equity and other financial firms in franchising because of this, and because they can see millions of dollars in profit in joining a system with a predictable result.
Multi-unit and multi-brand franchising have grown so much over the last few years that some franchisors are recruiting and requiring it as their primary franchise development model. While the outcome has yet to be seen, the numbers are showing that there is a growing concentration of units controlled by multi-unit operators, with no sense that it will be slowing down any time soon.