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.
Words by Kieran McLoone, editor of Global Franchise
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.”
All of the above would give the impression that multi-unit and/ or multi-brand ownership is set to completely dominate the franchising world. And yet, master franchising, area developments, and even single-unit deals are still very prevalent amongst all industries under the franchising umbrella.
This is because as flexible and beneficial as multi-unit is, franchise growth is always best observed on a case-by-case basis. What works for the growth of one brand may not for another, and franchisors need to be mindful of the potential downsides that come with multiunit expansion.
“You may be one-and-done with the master franchisee, whereas you have to keep searching for and dealing with many multi-unit owners,” says Levitt. “Multiunit territories may also be smaller, depending on your strategy. Let’s say that you’re dealing with England; it depends on how you may carve the territories. You may have just four multi-unit franchisees for the entire country, or you could end up having to deal with 20.”
“Leaving an entire country or a large region within a country in the hands of one master is risky”
Like the good old days
It can be easy for the traditional mom-and-pop form of franchise ownership to get lost amidst the discussion between multi-unit and master franchising. After all, a family passing down a single restaurant location through the generations is one of the oldest and most revered profiles of a franchisee that veterans of the industry still hold close to their hearts.
Thankfully, there’ll always be a place for this kind of franchising in the future – even as the corporate world becomes increasingly invested in multi-unit ownership.
“There’ll always be a space for mom-and-pop locations, but you might find that the multi-units will be in population centers, and single-units will be in smaller markets,” says Edwards. “That means the suburbs or very small towns that can’t support more than one unit. And I hope they don’t go away, because that’s the core of franchising: the single-unit owner that puts their life savings into a franchise.”