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The pros and cons of multi-franchise ownership

In this environment, multi-store ownership has emerged to create better economies of scale.

Just like so many others, the franchise industry has been impacted by difficult economic conditions. This has resulted in franchise concepts needing to adapt their business models to remain relevant. 

According to the latest SA Franchise Market (Fasa) survey, 79 percent of franchisees claimed to own more than one franchise, the majority being of the same brand. And with the fast food and restaurants sector accounting for 29% of the R587 billion franchise market in South Africa, there is no wonder that many existing franchisees are keen on expanding their operations.

Advantages

According to a Johannesburg-based Spur franchisee, there are numerous benefits to being ‘part of the family’ chief of which is the support provided by the head office.

In fact, this is vital to the success of a fast food outlet or restaurant. While franchises differ in terms of what is provided, many include prioritising staff training through a combination of online and office courses to ensure quality of service.

And then, as is the case with Spur, the franchisee has the benefit of being part of one of the largest franchise marketing budgets in the country to drive awareness for the brand. This is critically important in the South African market where consumers are spoilt for choice and expect value for money.

Selecting a franchise is the most crucial step as reputable ones have been around for many years and have all been tried and tested. Franchisees can then benefit from the experience and lessons learnt and potentially be in a better position to expand operations with more outlets.

Owning multiple franchises can unlock the potential for better cost management and cross subsidising of stock purchases. Being able to share resources across multiple stores can significantly save costs in the long run. And then there is the advantage of having bulk buying power when approaching suppliers for preferential rates.

Given how important job creation is in South Africa, being a multi-franchise owner means staff have opportunities to transfer between stores and get exposed to different elements of the industry. Providing employees with better career opportunities across several stores will also result in reduced churn.

From a reputational perspective, multi-store owners have more influence with franchisors. For example, instead of dealing with five stores with five different owners, the franchisor can engage with one person who owns five stores and has a better strategic and long-term focus.

Additionally, finance for multi-store operators is more flexible and dependent on the group performance whereas single-store franchisees need to invest a fixed 50% in unencumbered funds towards the purchase of a franchise.

Challenges

However, owning multiple franchises can significantly increase the number of obstacles to navigate. According to the Fasa Survey, the three main challenges for a franchisor are finding the right franchisee, attracting qualified staff, and identifying the correct location.

They are not that much different for the franchisees themselves. But even once these have been addressed, managing multiple stores requires a different focus to just being dedicated to a single franchise.

Owners need to place more reliance on their managers as it is not always possible to check in to every store daily. If they do not have good staff or can rely on them to adhere to the same quality of service, the brand damage to the store (and franchisor) can be significant.

Cost is another element that can quickly spiral out of control. From staff management to accounting, stock management to maintenance, the owner must ensure all things are kept in check while still trying to turn a profit.

Perhaps contradictory, but part of this is also the pressure to expand operations. Franchisors give the option of refusal to existing franchisees within a certain radius. In other words, the more stores owners have, the more opportunities for new ones will be offered.

For the franchisor, multi-store owners can potentially become very powerful in terms of influence in the group due to their enhanced buying power. They could also pose a concentration risk for the brand in case of store failures that negatively impacts people’s perceptions.

Owning multiple franchises therefore becomes a careful balancing act between risk and reward. Those franchisees capable of getting it right are in prime positions to keep growing and expanding their reach in the South African market.

Brought to you by Nedbank Franchising.

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