With the businesses reopening phase now well underway, several franchise networks have embarked on the long road back to profitability in a world very different from the one before COVID-19.
This new environment presents, at least for many months, several major challenges (distancing, limitations and safety and hygiene measures) and will probably be characterized by several changes in consumption habits, many of which may well prove to be permanent (online purchases and transactions, delivery, pick-up, appointments, reservations, etc.).
On the other hand, the last few weeks have shown that customers are reluctant to assume the additional costs of these new challenges, especially since, at the end of this first acute phase of the pandemic, a certain inflation seems to be on the horizon in several sectors of activity.
This new business environment and these major challenges, which are unprecedented, call for new approaches and new tools to enable our franchise networks to become more efficient and effective.
One of the major avenues that can facilitate a return to profitability (and, why not, even better profitability) consists of greater collaboration between businesses (especially complementary businesses) and better sharing of resources.
We have already addressed this topic in our Franchise Bulletin entitled Beyond COVID-19: A Different World and Improved Collaboration Between Businesses and Within Networks.
This newsletter focuses on one of the ways in which such collaboration between franchise networks can be profitably articulated: the combination of franchises.
Basically, combining franchises can be defined as a form of collaboration between two or more franchise concepts in order to increase the revenues and/or profits of each of these concepts.
Such a combination is obviously simpler to achieve when the concepts to be combined are controlled by the same franchisor, but it can also work very well when this is not the case.
The principle consists in combining two or more different concepts that nevertheless present a certain potential for complementarity in order to increase their visibility, their efficiency and, ultimately, their respective profitability.
There are several ways to combine franchise networks and each of them can be adapted to the needs and characteristics of each business sector and each franchisor involved.
Here are five examples:
Combining franchised businesses in the same location
In this first model, it is simply a matter of placing franchised establishments of more than one concept in the same location.
The main advantages are, on the one hand, a certain sharing of rental costs and, on the other hand, the greater visibility and attractiveness of a common location where customers can choose from more than one offer.
A classic example of this type of combination is food fairs in shopping centres.
It is also found in several other areas of activity, particularly in retail.
For example, a typical big-box pharmacy is made up of two businesses: a pharmacy where a pharmacist sells drugs and offers her professional services, and a retail business that offers a wide range of personal hygiene, cosmetics and household products.
A second way in which franchise networks can combine is by sharing resources that are important to their profitability.
These shared resources may be advertising or promotional (e.g. a joint online sales platform, joint loyalty tools or joint advertising or promotional campaigns), logistical (e.g. a warehouse, delivery service or central kitchen) or technological (e.g. a call or service centre).
It may also consist of the pooling of certain important activities such as, for example, group purchases of certain products or services.
The integration of a franchise into another enterprise
A third method is to locate and operate a franchised business of a first network within a larger establishment of a second network.
Examples include a bistro café in a large sporting goods store, a tool-rental business in a large renovation centre, an electronic equipment franchise in a furniture store, etc.
In a completely different field, we can think of a car rust proofing franchise in a car window repair centre or in a body shop.
The counter, kiosk, island or display in another business
A fourth method consists simply in promoting and, obviously, selling certain products of a franchise network in a dedicated and identified space within establishments of another network without setting up a separate franchised business there.
This dedicated space can take various forms, including a kiosk, an island, a counter or even a display stand.
If the two businesses involved offer complementary products or services, this combination can be bilateral, with each concept being present in a similar manner in the other's establishments.
This is a model that is very little known in most industries.
It is, however, one of the keys to the recent evolution of several car dealerships networks.
This model consists of authorizing, under certain conditions, certain franchisees (generally chosen among the most successful) to own and operate one or more franchises (or dealerships) of another concept.
This allows better use of the capacities of larger franchisees and optimizes the use of their resources, particularly when there are off-peak periods for one of the concepts. Because of the diversification of their investments and sources of income, it also makes these multi-franchisees more resilient in the event of a crisis or unforeseen event.
This model could be interesting for concepts that are complementary or have different cycles, such as, for example, for seasonal businesses.
These are just a few of the already used, often successful, models of combining franchise concepts. With a little creativity, it is quite possible to design several other interesting models of combination and positive collaboration between franchise networks.
In addition, each of these models is also available in various variants that allow for better adaptation to the needs of the partners.
To illustrate some of the possible variations, let's take the case of a franchisor of a coffee-bistro network who wants to operate establishments of his network within a department store.
The agreement allowing such a combination can take one of the following forms:
- The simple rental of space in the department store for the establishment of a franchised café bistro;
- The granting a franchise (which can be adapted for this particular context) of the café-bistro concept to the department store operator;
- The granting by the department store of a form of business licence to a franchisee of the coffee shop network;
- The establishment of a master agreement between the franchisor of the coffee shop network and the operator of the department store (in the case of a sole proprietorship or chain store) or the franchisor of the department store network (in the case of a franchise network) governing the operation of coffee shops in the department stores of the latter.
Here is another illustration: an agreement to install a counter, kiosk, island or display from one franchise network in the stores of another franchise network may also take the form of a form of licence (or a lighter form of franchise) that allows the operator (e.g. franchisee) of each host store to operate the counter, kiosk or display itself, island or display case or, in a completely different manner, an agreement between the franchisors of each of the networks concerned allowing a franchisee of the concept to be promoted in that counter, kiosk, island or display case whose franchised establishment is located in the vicinity to operate that counter, kiosk, island or display case as a satellite to its franchise
In each case, it is important to design, draft, negotiate and implement the type of agreement that best suits the partners and that truly helps them to better achieve their objectives and take maximum advantage of the synergy resulting from the chosen combination.
Of course, the assistance and advice of a franchising expert will be a key ingredient in the success of any such combination. The services of a competition law expert may also be relevant if the partners, or their franchisees, can be considered to be in competition with each other.
Fasken has all the expertise and resources to help you better manage your franchise network, achieve your goals, take advantage of opportunities and avoid potential pitfalls.