Multi-Brand Franchising

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Institutional Affiliation

Introduction

Multi-brand franchising refers to a business growth strategy whereby businesses focus on

two or more brands and multiple units in similar or different sectors. Multi-brand franchising

utilizes human resources and infrastructure to provide a franchise organization with the power of

numbers, sharing of best practices across different industries, and spreading of security risk

across various sectors. The payoff of multi-brand franchising usually is more lucrative than

single-brand franchising, but it introduces management complexities associated with diverse

systems requirements. Multi-brand franchising requires experienced, skilled, professional, and

knowledgeable operators who can manage operations under varying consumer preferences,

customer profiles, and market conditions.

Analysis

Strengths

Multi-brand franchising increases profitability especially for single unit franchisers since

it promotes growth and expansion for businesses that only collect revenue from a single brand.

Growing additional brands is logically sensible since if the franchise system has already worked

for a single successful brand, it is highly likely that another franchise network will also work for

other products as long as the investor chooses new business opportunities wisely (Bodey,

Weaven & Grace, 2013). The existing streamlined infrastructure, robust unit economics, and a

strong capital base, single unit franchises can bring in more profit with every additional brand

added to the business.

The idea of diversification creates the advantage of risk dispersion. Multi-brand

franchising strategy hedges businesses from negative market conditions such as encroaching

competition from new or existing business players or economic downturns. Investing in a

diversified portfolio is a high motivation behind the growth of multi-brand franchising strategy

(Antia, Mani & Wathne, 2017). A single business may have an excellent ROI from its

operations, but sometimes unforeseen and uncontrollable external forces may interfere with a

thriving business and affect its profitability adversely. Multi-unit business franchising seeks a

myriad of growth avenues, sometimes increasing the numbers of business holdings to more than

one (Wright & Clarke,2014). As such, multiple brands balance out each in uncertain market

conditions when and if one brand fails to perform as anticipated.

Weakness

Investing in a multi-brand franchise requires a line of substantial credit, and as such, it places a

lot of financial pressure of entrepreneurs, especially if the business owner is a single individual

(Badrinarayanan, Suh & Kim, 2016). Such entrepreneurs may have to depend on the backing of

individual assets to finance multi-brand operations. Even in cases where the entrepreneur

operates a single unit franchise, there is a considerable financial risk if the financing of the

additional brands depends on the first one for collateral. In such a case, multi-brand franchising

would only be dependent on the success of the initial business.

Franchise owners can easily overextend themselves in the name of expansion. As a result,

the quality of services provided to customers and products manufactured by the brand suffers.

Such a situation may happen due to stretched resources and cashflow problems (Weaven, Dant &

Brown, 2014). As such, the entrepreneur may be tempted to sustain the quantity of production at

optimum even without adequate financing by compromising quality. Multi-brand franchise

owners often manage a myriad of businesses, and as such, the detrimental performance of one

brand may distract the entrepreneur from being keen on the management of other stores. This

situation is more likely to happen who multi-brand franchisers who manage multiple business

sectors.

Companies with multi-brand franchises and owners with multi-unit franchise require a lot of

experience in franchise ownership. Having little experience in multi-unit franchising can pose

great differences in breaking into the business. Successful running of franchising requires

adequate skills and as such, companies and individuals need to run a multi-unit franchise

successfully (Mignonat et al., 2014). Additional complexities involved in the management of

multi-brand franchises arise from legal regulations compliance, financial restrictions, and

background checks. Essentially, business regulations are more stringent for multi-brand than

single unit franchises, thereby increasing operational risk.

Legal, regulatory regime

Both Australian and American multi-brand franchises have specific legal definitions and

follow closely similar regulations. Both countries have two levels of regulations; the federal and

the state levels. In America, the Federal Trade Commission (FTC) is the regulatory body for

franchises and sets the basic requirements for the presence of a trademark, substantial operating

assistance, and operating gees by the franchisee. All franchisers must provide franchisees with

disclosure obligation documents called the Franchise Disclosure Agreement, and in case of

multi-unit stores, the franchiser must provide multiple FDD documents to various franchises,

each addressing 23 specific items including contract terms (Khan, 2013). Other daily sets of rules

that govern multi-brand franchises include limitations on financial performance representations

to what is contained in the FDD document. Franchises that opt to operate without providing a

financial performance presentation to potential franchises are not allowed to give the prospects

financial information about earnings. The franchiser may give details on expenses, but only if

this information is presented in a manner that does not allow calculation of revenues.

Specifically, the franchiser cannot express costs as a percentage of total revenue (Hoffman,

Munemo & Watson, 2016). Other regulations state that franchisers should provide equivalent

treatment to prospects situated in similar positions. A multi-brand franchiser cannot change or

negotiate material terms with certain franchisees while excluding others working in the same

brand.

30 states currently regulate franchise business opportunities using unique definitions

under state laws. Majority of states define franchises using community of interests, shared

trademark, and fees payment while others like New York provide franchisers with room to

trigger multi-brand franchises without the business trademark (Buzza, 2016). Terms of payment

for a $500 fee also vary from one state to another with Illinois requiring that the franchisee pays

this fee throughout the franchisee franchiser relationship while other states like Nevada require

payment of the $500 within the first six months of activity and operation. Additionally, the

federal level provides some exceptions for disclosure requirement that is not applicable to filing

and registration at the state level (Kellner et al., 2016). Seven states add further complexities by

requiring that multi-brand franchises submit their advertising for approval before actual

implementation. Most states regulations stipulate that the timing of disclosures should take a 14-

day waiting period from the time of disclosure to signing contracts, while a few continue to

subscribe to the ten-day waiting rule. Some states continue to enforce the cumbersome multi-

brand franchising requirement of broker registration.

YUM! Multi-brand franchise

Yum! Brands Inc. runs over forty-four thousand restaurants across a hundred and thirty-

five countries. Pizza Hut, KFC, and Taco Bell are its bet restaurant brands and are global leaders

of Mexican style foods, chicken. On average, Yum! Multi-brand franchise pens six new outlets

daily, putting it at the forefront of global retail development. The company's commitment to

continuous growth influences its commitment to development. As such, the company has not

only invested in multiple brands within the restaurant sector; it has also extended to the real

estate sector. Restaurant development continues to be the key component of Yum! Brands'

growth strategy and is directly linked to real estate development (Brookes, Altinay & Aktas,

2016). Each brand within the restaurant sector is responsible for individual construction and real

estate activities within America. These brands consist of teams whose mission is providing

customers with accessible, convenient, and desirable locations for restaurants across the country.

Yum! Brands understand the value of growth and has invested substantially in the strategy.

Within the restaurant sector, Yum! Brands’ co-branding franchise system employs an

aggressive operational strategy of combining multiple concepts within a single location. This

strategy boosts sales per unit by increasing customer traffic and sales within a single sitting. It

increases system-wide sales by providing a one-stop shop for customers who project varying

requirements say families whereby some members would want to eat pizza while the rest would

rather indulge in chicken wings (Khan, 2014). Locating multiple brands within the vicinity of

each other was Yum! Brands’ strategy of taking optimal advantage of customer traffic.

Conveniently located stores encourage customers to shop for multiple foods, thereby optimizing

the franchise’s revenue stream from a limited consumer base (Dahlstrom & Nygaard, 2016).

After the implementation of the co-branding strategy, dramatic improvement in unit sales

motivated the company to remodel outdated restaurants. It also led to structural management

changes whereby unit design had been decentralized to the brand level before 2002 (Dant &

Grünhagen, 2014). Later, Yum! Brands adopted a new corporate position and centralized unit

design. The creation of new positions such as vice presidents for multi-branding and concept

design further advanced these structural changes (Lafontaine, 2014). Currently, the company’s

unit design concept is directly linked to consumer preferences and brand marketing and no

longer serves a development function.

Yum! Brands began the multi-brand franchising frenzy in 1992, and a decade later, this

strategy became its biggest sales and profitability, driver. It uses multi-brand franchising to save

in operational costs such as leasing of staff, building maintenance, advertising, and kitchen

equipment. The concept further eases out customer flow in multiple restaurant brands since one

restaurant appeal to customers for breakfast, the other for lunch, and the other one for dinner.

This has seen a gradual but steady increase in sales since 2002. In 2016, Yum! Brands earned a

combined revenue of $12 billion from sales in co-branded outlets and a net profit of $3.2 billion

(Antia, Mani, & Wathne, 2017). Evidently, the company's income has grown tenfold since the

introduction of the multi-brand franchising strategy. Despite the numerous benefits achieved

through co-branding, the something for everyone model has presented some challenges to the

franchise. In 2016, the company acquired A&W and Long John Silver’s, which are food

companies, to its investment portfolio as a means of increasing unit revenue. Instead, these

concepts just increased operational costs and operational complexities (Griessmair, Hussain &

Windsperger, 2014). These changes increase the risk of compromising customer service and

product quality. Yum! Brands also experienced unforeseen challenges with diluted company

image for sustaining the core concepts of less trusted brands within their operations. Specifically,

Yum! Brands soon realized that the limited menus in its latest acquisitions, A&W and Long John

Silver’s, was unappealing to customers who viewed them as old-fashioned (Grünhagen &

González-Díaz, 2017). The situation worsened when the two brands were placed alongside the

franchise’s most popular brands, KFC and Taco Bell. The addition of the smaller brands had

little impact except interfere with customers’ focus on popular brands.

Proactive establishment of strong relationships and understanding between Yum! Brands

franchise with American federal and state leadership has strategic importance (Lafontaine,

2014). It is involved with the Food and Drug Administration (FDA) to ensure that the franchise

maintains safe restaurant food practices in reducing the occurrence of foodborne diseases (Moon,

Sharma & Lee, 2017). Food safety and quality regulations create an environment with minimal

food risk for customers in nearly all 43,000 restaurants. Every restaurant in the US conforms to

licensing regulations that impose compliance with safety, sanitation, health, and franchisor-

franchisee relationship (Hoffman et al., 2016). The franchise has to obtain an annual license for

beer and wine sales in Pizza Hut’s sales, which is subject to revocation and suspension at any

time. The franchise is compliant with federal and state minimum wage employment terms, pay

practices, working conditions, and tip credits. Majority of the franchise's employees work on

hourly wage rates that relate to legally acceptable wage rates. Other regulations applicable to the

franchise are prohibiting the use of hazardous equipment, compliance with Americans with

Disability Act (ADA) (Khan, 2014).

Critique of multi-brand franchising

Multi-brand franchising is a growth and expansion strategy that is suitable for certain contexts

of operations and unsuitable for others. Certain aspects make it easy for multi-brand franchising

to operate successfully, among them being access to better talent. With talented employees to

manage locations, companies and individuals can foster operations. Easy access to expansion

capital provides a company with ease of operations in which case, having a single unit franchise

is an advantage (Kretinin, Morgan & Anokhin, 2014). It provides a single unit franchise with

capital to set up new brands (Emerson, 2013). One of the most significant benefits of a multi-

brand franchise is diversification, thereby hedging risks of volatile market conditions. The

detriment of multi-brand franchising is the loss of control, considering that franchises are

independent businesses. Any operation that boosts sales but does not impact profits directly will

most likely result in franchiser/franchisee conflict.

References

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Efficacy of Franchisee Governance. Journal of Marketing Research.

Badrinarayanan, V., Suh, T., & Kim, K. M. (2016). Brand resonance in franchising relationships:

A franchisee-based perspective. Journal of Business Research, 69(10), 3943-3950.

Bodey, K., Weaven, S., & Grace, D. (2013). Multiple-unit franchising and performance

outcomes. Journal of Business Economics and Management, 14(sup1), S279-S312.

Brookes, M., Altinay, L., & Aktas, G. (2015). Opportunistic behavior in hospitality franchise

agreements. International journal of hospitality management, 46, 120-129.

Buzza, J. (2016). Franchising is Entrepreneurship. In United States Association for Small

Business and Entrepreneurship. Conference Proceedings (p. CV1). United States

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