A definite trend of multi-unit franchising has emerged in South Africa in recent times. There may be various reasons. Access to funding has been tight as a noose rendering it less risky to lend to existing, financially sound franchisees with a proven track record.
Some franchisors have also actively pursued a strategy to recruit multi-unit operators or following the sequential franchise model by offering expansion opportunities to existing franchisees to open further stores.
This is in the pursuit of quality over quantity as it is less onerous to support sophisticated, experienced entrepreneurs and for others it ‘better the devil you know’.
More than half of the franchisors allow multi-unit ownership with the average number of units owned across all business categories being 2 to 3 per franchisee. Franchisors indicate that the benefits for both parties are:
- Ambitious franchisees can grow within a network;
- Skilled franchisees operate business units and enhance the required operational standards within the franchised network;
- Financial benefits to franchisees through economies of scale;
Whilst we note the trend of a growing number of multi-unit franchisees here, the total number at approximately 10% is still relatively low by international benchmarks. The Franchise Relationships Institutes statistics reveals 22% of franchisees in Australia and 53% of franchisees in the United States of America operate more than one unit. The Franchise Excellence Research Report also revealed that successful multi-unit franchisees have higher levels of business acumen, more developed leadership skills, greater productivity and better health. They are also more profitable because they objectively ‘work on their businesses and not in their businesses’.
With that said the study also indicate that while multi-unit franchisees are significantly more satisfied with their life balance, they are significantly less satisfied with the competence of their franchisors. So with the sophistication comes a far more demanding kettle of fish, not very simple to pull the wool over these eyes!
So multi-unit franchising offers an efficient path to boost sales, profits and market share for both franchisor and franchisee – there are significant dangers for the unwary.
Here the Franchises Relationships Institute share 5 strategies to manage the risks and maximise success.
1 Use solid expandability criteria.
These are the capabilities and resources that will make a difference to a franchisee’s future performance. The expandability criteria should be linked to an objective rating system. Franchisors need to assess franchisee’s readiness to expand by measuring identified factors.
2 Don’t say “No” say “not yet”.
Rating franchises will inevitable expose gaps which may or may not be easily rectified. Franchisees keen to expand, but who are rated as ‘not ready’, should be coached on how to close these gaps and encouraged to apply again. A sophisticated coaching process to help the franchisee develop a plan for improvement should be put in place.
3 Prepare franchises on what to expect.
While a good franchisee can go from one to two units without too much trouble, everything changes when they more to three units or more. The franchisee is now a CEO instead of a manager and will need more sophisticated financial reporting systems, performance management process and staff engagement programmes.
4 Provide relevant support.
Franchisors need to provide ongoing business development and educational opportunities for their multi-unit operators. For instance many of our franchisor clients schedule multi-unit break out sessions at their annual conferences and hold special multi-unit workshop to meet the specific needs of these larger operators. This also provides them the opportunity to network amongst one another specifically to discuss common business challenges. Because multi-unit franchisees are more demanding about the support they receive, higher calibre field support / business advisors will also be required.
5 Manage the ego factor.
While the Franchise Relationships Institute research shows multi-unit franchisees make more money, are less stressed and have more life balance, this can be a double edged sword. A taste for the good life can result in complacency and serious operational problems which can quickly bring a multi-unit franchisee’s empire crashing down.
There are pros and cons to this new trend in the franchise industry. It has largely evolved out of trying economic conditions where both franchisors and franchisees have had to change their models in order to keep afloat and stay relevant.
Multi-unit franchisees are able to prioritise staff training and have the ability to move staff seamlessly across operational outlets. It also can be motivating for staff who have the potential for better career opportunities in a multi-operations system. It also provides the franchisee with more power when engaging with the franchisor as they will be engaging with an operator that has more strategic intent than a single unit operator. These franchisees have greater opportunity to exercise economis of scale, absorb losses as well as access more finance from the banks.
However, there can be some disadvantages. These are particularly magnified if the location of the multi units is geographically dispersed. There is also a heavy reliance on the managers of the individual outlets who should be incentivised, as the owner can not always be the operator. The owners of such systems need to have macro-perspective of the outlets they are running and keep working “on” their businesses – even if they are not “in” their businesses.
In summary, multi-unit franchising offers exciting opportunities for franchisees and franchisors to expand their businesses, providing there are clear expandability criteria, relevant support structures in place and franchisors keeps a close eye on the performance of these larger operators. Also be wary of the ‘tail wagging the dog’ scenario. The franchisor remains a strong leader and makes decisions in the best interest of the brand and the network as a whole – not under the whip of sizable multi-unit operators.
Lindy Barbour is a Director at Franchize Directions,
a franchise development consultancy which since 1997 has developed and served the franchise sector through specialised development and support services.