The statistics all point to a continued increase in multi-unit franchise operations, but we wanted to investigate the how and why of this increasingly popular business model.
Multi-unit and multi-brand franchise ownership has increased dramatically over the past decade, with more entrepreneurs opting to open several units with a brand as opposed to a singular location.
In addition, franchisors are beginning to consider multi-unit expansion over master franchising when entering particular foreign markets; especially those where a more hands-on style of management lends itself to increased chances of success. This comes in the wake of horror stories where master development has gone awry; when franchisors can choose a route that minimizes risk, they will.
“On the international front, the knee-jerk reaction was always master franchising. But it was done in a way that left an awful lot of responsibility with the master franchisee to determine what was going to be done in a foreign jurisdiction,” says Edward Levitt, a partner at Michigan-based law firm Dickinson Wright.
“That had a lot of blowback when things didn’t work out so well – for both the master, as well as the original franchisor. Leaving an entire country or a large region within a country in the hands of one master is risky. Things could go wrong, or your decision may not have been a good one. You’re stuck solving that problem with the one country master.
“If you have a number of multi-unit franchisees, you may have ways of shifting in one or more of those multi-unit franchisees to a territory that another multi-unit franchise owner was having problems with.”
A maturing franchise industry
As well as potential protection against problems caused by master mismanagement, multi-unit franchising edges out the likes of single-unit or direct franchising because of its financial incentive.
It costs a lot to onboard a franchisee. You need to ensure that they are correctly trained, and provide ongoing training months and years into their running of a location. If you can choose between five individual franchisees who need training or one single multi-unit group that operates five sites, it becomes clear which one franchisors may want to align themselves with.
“Multi-unit has grown because of the cost of identifying, signing, training, and supporting individual franchisees, versus supporting multiple multi-unit franchisees,” says Bill Edwards, CEO of international focused consultancy Edwards Global Services. “You have to put an amount of support into every franchisee. And if a franchisee owns three, five, or 10 units, then you put your support into them. If they only own one, then you still put your support into them.”
Alongside the rise of multi-unit franchising is an equal increase in the popularity of MUMBOs. That is, multi-unit, multi-brand operators that have a diverse portfolio of franchised locations.
“[MUMBOs] are becoming more prevalent; they’ve been in the U.S. for a while, but they are largely all in food. So a franchisee starts out with a burger brand, and then they want a chicken restaurant and then a seafood shop and so on,” explains Edwards.
“What’s the benefit of that? It’s very simple: economies of scale. They have built an infrastructure with people, real estate, vendors. It’s working for them, and they’ve built out 10 locations in a territory, and so they decide to pursue other brands.
“They then use that proven infrastructure to go to another brand and show that they can manage this kind of network, and then bring on another concept. By and large, brands love this. Not only is it a proven operator, but it’s one that knows what the concept of franchising is.”
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