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Multi-Unit Operators Witness A Growth Spurt in Spawning New Business

The old news is that franchise growth was stymied by the recession. What's new is that franchising is growing at a phenomenal rate once again and the momentum is building.

However, trends are changing in the way one works with a franchise organization.

The first thing to note is what the "big boys" are doing. In the foodservice sector, franchisors like Cara, for example, are also becoming franchisees or master franchisees of other chains (Cara is the master franchisee of Church's) which complement their portfolio of restaurants.

At the same time they are working toward diversification of their current offerings with new concepts created "at home".

The reasons for this diversification are several fold. First, the recession taught us not to have all of our eggs in one basket. It has become time to not only build vertically within a particular section of the market (i.e. Quick Service Restaurants), but to build horizontally by having units in various sectors of the industry (i.e. Quick Service Restaurants, Family, Casual and Fine Dining.)

When one sector weakens, the others strengthen, and the diversification makes the firm less vulnerable to the fads and short term trends in the marketplace.

TWINNING

There is also a new trend toward "twinning" restaurant operations. While combination stores have been around for quite some time, they were always built from the ground up as a two restaurant concept with common seating.

The new twinning trend has been created in order to allow franchisors and franchisees to maximize and leverage their current operating spaces, kitchens and locations by adding a second restaurant to the current location.

By implementing this type of twinning process, a franchisee is leveraging their location, creating a second draw card for the site and is offering customers more diversification in product (i.e. one person in a group can purchase food from one restaurant while the other purchases from the other).
The objective is to maximize revenue off of the limited space, thereby reducing overhead costs.

The benefits of providing franchisees with the twinning concept is very good, especially where older concepts are losing their drawing appeal and a new operation will likely stimulate new sales. The franchisor also receives very strong benefits.

First, there is a new franchise fee paid by the current franchisee as well as additional royalties. However, it should be noted that the additional royalties come from increased unit sales, so the franchisee is not in a worse-off situation. Second, the franchisor appears, and in fact may really be, adding value to the franchisees' operation, which will appease franchisees who are just starting to recover from a very difficult recession. The added value is measured in terms of adding a concept which will increase customer demand and appeal.

MULTIPLE CONCEPT

Multiple concept franchisees are also becoming more appealing to major institutional operators such as hospitals, airports and universities. A franchisor or franchisee which offers multiple concepts has the ability to offer these larger institutions branded name concepts, which are easily recognized by potential customers, a variety of offerings and diversification of product.

At the same time, those who offer multiple concepts enable the institution to only have to work with one operator or foodservice contact person.
Franchisees should take note. The "big boys" are developing multiple concepts in order to diversify and solidify their economic base. Franchisees should do the same.

In fact, several franchisees are doing the same. I have a client who currently owns three donut shops and one casual style restaurant.

As markets change and demand for one product increases while the other declines, my client is assured of stability. In the tough economic times his donut shops flourished, but prior to the recession, and I believe over the next few years his growth will be based on his casual theme restaurant.

JOINT VENTURE FRANCHISING

Another trend which is starting to emerge in the franchise field is that of joint venture franchising. In these situations the franchisor wants to retain some real equity and better control over the franchise operation.

This approach is currently used in unique situations only, however, I believe that this will become a more common methodology for rolling out franchise operations and will create a better partnership between the franchisee and the franchisor.

A joint venture franchise is a partnership between the franchisor and the franchisee. The franchisor pays part of the initial investment, collects a more reasonable royalty and shares in the profit.

The franchisor also gets a manager who has an equity stake in the business and one who gets a piece of the profit commiserate with the amount of capital put into the property.

The franchisee also obtains great benefits. First, they can buy into a franchise system, a system which is tried and true, for a smaller fee than if they were to be a full franchisee (i.e. they are sharing the cost of development with their joint venture partner).

Second, they can rest assured that if the franchisor is putting money into the development of the property, they must have really done their homework and site analysis to ensure that the particular site is the best available in the market.

Finally, the franchisee knows that if the sales are ever too low, or the labour too high, or profits too thin, the franchisor partner will come in full force to rectify the problem. This is an advantage which many franchisees can not currently expect.

The only downside in this model for the franchisee is that they may not achieve the autonomy they may be looking for in buying a franchise operation and going into business on their own. However, if they are successful and operate the restaurant in a financially sound manner, the franchisor will likely never be there.

Therefore, the protection of having the franchisor as a partner will offset, in my opinion, any of the potential negative impact of not being entirely on your own.

MODERNIZATION

Modernization of units is an important aspect of increasing the life of a restaurant concept. Restaurants usually have short lives, usually 7 years, to hit a peak and many die within 10 to 15 years. As a result, many smart and aggressive franchisors have been modernizing their franchises and the results have been more than impressive for franchisees.

One large coffee chain has redeveloped many of their outlets. The franchisees have experienced sales increases of 30 to 35 per cent immediately upon reopening. Several of the older roadhouse concepts have converted their restaurants to a more modern bar and grill style operation and have also experienced large increase in sales immediately upon reopening.

Many operators know that concept life is short and that in order to keep up with trends and customer behaviour and buying patterns, modernization of existing operations must be implemented.

This modernization trend must be done every ten years in order to stay current. Those who do not try to keep their concepts current die a slow and painful death. Those who stay close to the changes in their customer base, win. They win by being able to maintain their concepts for twenty or more years, maximizing their return on investment.

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