8 August 2023

    One of the prevailing trends in the franchise industry is the formation of multi-brand franchise systems within a specific market segment. This concept, popularized by giants like Groupe Recipe, MTY, and Foodstatic in the Canadian restaurant sector, as well as the American group Neighbourly in the home services industry, offers evident benefits such as reducing network management costs and increasing market share.

    However, I firmly believe that, for most franchisors, this approach entails seven major risks for their business.

    Brand Dilution: One of the most significant risks is brand dilution. If the franchisor fails to maintain a strong and consistent brand identity for each brand, it can lead to confusion among customers and a loss of brand recognition. Brands may become less distinctive in the market, impacting their attractiveness and competitiveness.

    Operational Challenges: Managing multiple brands also means handling various operational systems and internal processes. This can lead to increased complexity and challenges in maintaining uniform quality standards across all brands. Operational hurdles can manifest in resource management, procurement, information systems, and more.

    Limited Resource Management: Managing multiple brands can result in competition for internal resources, such as staff, funding, and marketing efforts. The franchisor must strike a balance between investments and attention for different brands, which can lead to conflicting interests and priorities.

    Franchisee Resistance: Franchisees may feel neglected or less prioritized if the franchisor focuses on developing new brands at the expense of growing their existing businesses. This can lead to franchisee resistance and decreased engagement, negatively impacting the overall network performance.

    Consistency in Operations and Standards: Maintaining consistent quality and service standards across different brands can be challenging. If some brands are better managed than others, it can result in performance disparities and customer satisfaction issues, affecting the overall reputation of the franchisor.

    Legal Complexity: Managing multiple brands can result in increased legal complexity, particularly regarding franchise agreements, intellectual property rights, and regulatory compliance. The franchisor must ensure compliance with all legal requirements and brand protection for each individual brand.

    Lack of Focus: Concentrating on developing multiple brands can result in a lack of strategic focus for the franchisor. This can make it difficult to define a clear vision and pursue specific strategic objectives for each brand.

    Three Major Reasons Why I Think It’s a False Good Idea: 

    Value creation relies on brand recognition as much as financial performance: Managing multiple brands can quickly become a challenge for an organization that lacks the deep expertise required for each brand. The success of a brand depends on a dedicated team that patiently works to develop its strategic advantage.

    Spirit of Unity and Unwavering Loyalty are essential for a network’s sustainability; Unfortunately, most franchisors under-optimize their brand’s potential, whether it’s through incomplete market penetration, operational culture deficiencies, a lack of growth mindset, insufficient franchisee profitability, or leadership mismatches within the network. For them, embarking on the acquisition of another brand for growth is simply a path to long-term failure.

    And Acquiring Another Network? Acquiring another network requires being a “World class” franchisor with exceptional franchising expertise. The acquired network’s culture will be different, and franchisees may resist changes more aggressively out of insecurity and lack of trust in the acquirer. Transforming something old into something new requires more resources, patience, and finesse.

    So, how to become a successful “Megazor”?

    Here are three prevailing criteria, in my opinion:

    Extremely Strong Financial Position: The franchisor should not rely on new entry fees to generate profitability. Be “Royalty Sufficient,” meaning that you are profitable solely with recurring revenues generated by the network. Ensure that the level of profitability is high enough to meet the challenges of developing or acquiring another brand.

    Develop World-Class Franchising Competence: An ultra-competent team creates a network of satisfied and engaged franchisees without major problems. Remember, franchising isn’t like mathematics—two weak entities don’t make a strong one. A competent team is essential for success.

    75% of Franchisees in the Original Brand Generate a +15% ROI: These franchisees can become a significant potential pool for the new brand to develop, giving the brand a strong initial impetus in the market.

    “Riches are in the niches, but the fortune is in the follow-up.” – Pat Flynn

    While some franchisors dream of becoming “Megazors,” for 90% of them, the best option is to maximize their brand’s potential, stay relevant through regular reinvention, and demonstrate exceptional leadership. Perhaps, one day, a “Megazor” will want to acquire them, and on that day, the valuation of their brand will be based on the criteria of “world-class” franchisors.

    (1) I base this indicator on successful networks I have worked with. 75% is not the ultimate figure, but an excellent indication of the network’s strength. So, no, it’s not scientific.

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