In recent years, the franchising landscape in South Africa has witnessed a significant shift as more franchisees embrace multi-franchise arrangements to ensure sustainable income in the face of inflationary pressures.
While owning a single store was once sufficient for the income needs of most franchisees, today’s challenging economic climate has prompted many to look to expanding their franchise holdings – and the trend that has gained momentum as franchisors have increasingly come to recognise the advantages of working with a smaller number of dedicated and successful franchisees.
“The move towards multi-franchise arrangements started with smaller franchisees looking to grow their businesses,” says Arthur Butler, Brand Specialist – Retail, FNB Franchising, “but it has quickly gained traction as franchisors have seen the benefits of dealing with fewer, more experienced franchisees.”
It’s not hard to see why franchisors like the idea. Multi-franchise arrangements offer them the opportunity to streamline management and monitoring processes by dealing with a reduced number of franchisees rather than having to spread themselves thin across potentially hundreds of separately owned operations. The multi-franchise approach also ensures a higher quality of franchisees, with well-run and successful stores that contribute positively to the brand’s reputation and reduce the potential for reputation risk.
Franchisees, on the other hand, benefit from the potential to increase their market share, networks, and of course their bottom line. “Multiple stores can mean economies of scale in terms of management and administration,” Butler explains. “If an office and existing administrative staff can run one store, there’s a good chance they can also run another one or two without the franchisee having to employ more admin staff or acquire more equipment or office space.”
Experienced franchisees also have the track record required to be able to leverage proven business models and practices from their first store to get additional stores off the ground more quickly. The lessons learned from the initial store can help avoid risks and address challenges more effectively.
And a second or third franchise undertaking may also be much easier to finance than the first one. Many banks will be willing to provide financing for additional stores given that the funding applicant has an existing operation and can demonstrate that they have achieved financial success with it, thereby lessening the risk that the bank has to take on when providing the funding.
However, while the benefits of multi-franchise arrangements are numerous, Butler cautions franchisees to be mindful that there are still risks involved in growing your franchise portfolio. He recommends the following considerations and precautions:
- Avoid a cut-and-paste approach – While franchise stores may carry the same brand name, each store exists in a unique market and may have a different customer base, requiring tailored market research and business plans.
- Stay focused – Balancing attention between a new store and existing successful ones is crucial to avoid compromising the performance of either.
- Time it right – Ensure that existing franchise stores are performing well before acquiring a new store, even if the opportunity seems attractive.
- Manage stock carefully – While bulk buying can provide economies of scale, be cautious not to overcapitalise on stock, particularly for new stores, to avoid surplus inventory.
“Ultimately, it’s important for franchisees to remember that a franchise is, and always will be, an active investment,” Butler concludes. “As with a first franchise acquisition, buying a second or third store requires that you do your homework, complete comprehensive due diligence, and go into the franchise agreement with your eyes wide open.”