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There is some evidence that the incidence of multi-unit franchising is growing and Australia is following the US in the trend albeit many years behind. So is multi-unit franchising something you ought to consider?
At present, approximately 75 percent of franchisees in Australia are single-unit franchisees. This reflects the desire of most franchisors to harness the owner-operator effect – the almost magical effect on an individual’s motivation and performance that is legendary in the franchise sector. There would be few who would argue with the accepted benchmark that the owner-operator effect produces a 20 percent uplift in top line performance due to a range of behaviours which employees generally don’t exhibit. The question that must be asked when discussing multi-unit franchising is how much of the critical owner-operator effect is lost? Is the influence of the franchisee diluted as more units come withing his or her span of control? At what point does the owner-operator effect disappear completely? How many units are too many – two, five, 10?
There can be little doubt that single unit franchisees who work in their businesses have the highest potential degree of control over the performance of the business. As franchisees progress from one to two units, that level of control must logically decline but anecdotal evidence indicates that two units can be easily managed without any significant loss of control and performance rates as further unitrs are added to his or her span of control is clearly an issue of capability. Some franchisees will be able to do so, some will not. This is the question that the prudent franchisor must address, to at least the same degree of rigour as franchisees are selected in the first instance, if not more so. Inadequate consideration of this critical capability issue could easily see a decline in average unit performance to both the franchisee’s and franchisor’s detriment.
The other key consideration relates to the franchisor’s motivation to engage in multi-unit franchising. Some franchisors engage in multi-unit franchising to avoid having to operate corporate stores. They hold the view tha they are incapable of operating corporate owned units profitably and efficiently. They believe that multi-unit franchising is a solution to this issue and wind-up not operating any corporate stores at all. As a result, they (a) distance themselves from first-hand knowledge of the customer and (b) forego comparatively large profits from corporate owned stores.
Furthermore, they may be limiting their recruitment program as well. Some potential franchisees may view such franchisors with a healthy dose of scepticism – “why should I sign with a franchisor that isn’t capable of running its own stores?”
Other franchisors take a contrasting view and believe that the close level of control multi-unit operators can exert over each unit results in higher levels of performance in each of the single units. In some cases this is undoubtedly true; however, including a sophisticated multi-unit operator in the network raises further challenges for the franchisor. This type of franchisee will undoubtedly want a different (and higher) level of service and support compared to a single unit holder and the franchisor needs to accommodate this in its field support force if multi-unit operators are to flourish.
The other issue, rarely discussed, but nonetheless important, is that of power and influence. This issue depends on the maturity of the network and the support provided to multi-unit operators. If multi-unit franchising is begun too early in the network’s development, a very small number of franchisees could wind up holding a significant number of units, and power within the franchisee cohort. Adopted much later in the network’s development, multi-unit holders are unlikely to hold disproportionate power and influence.
While multi-unit franchising can be significant advantage to franchisors, it presents its own challenges which many immature franchisors are generally unable to meet. More mature franchisors, assuming they select multi-unit operators appropriately, can harness the capabilities of quality operators to build enterprise value for the franchisee and franchisor alike.
DC Strategy is your business growth specialist. For more information in relation to multi-unit franchising, please contact: (03) 8102 9200 or (02) 8220 8700.
