A strategy of diversification - how the benefits of operating multiple concepts can outweigh the risks

On Wall Street, smart investors will tell you that diversification is a critical part of any portfolio. It's an approach that can shelter investors from significant losses by spreading the risk. It's also a good way to ensure consistent dividends. And diversification is a strategy that is being adopted and becoming more and more popular among franchise operators.

No longer content to operate within the framework of just one franchise concept, some area developers are broadening their horizons. There are risks involved to be sure, but many are finding the rewards to be well worth it.

So what are the benefits to operating multiple concepts? Well, there are a number of economies of scale that can result from expanding into other franchise concepts.

For example, single-concept multi-unit operators can grow beyond their existing territories or in areas where they may not be able to add new locations with their original concept. You're already familiar with the territory and the dynamics of your market. And you have knowledge of essential components such as local developers, and zoning requirements.

Multi-concept franchising also allows operators to hedge their investments against shifting consumer tastes. Consider how a number of food-service brands have experienced flat or declining sales in recent years. Adding a concept outside of service spreads the risk and can offer a steady revenue stream elsewhere. It can also buy you some time to make adjustments in the under-performing concept.

And financially, a successful track record with one franchise concept demonstrates your ability (and offers collateral) to a host of lenders who can help you launch that next concept. And your existing operation and the value of your can help you acquire a second or third concept, without putting a stranglehold on your cash flow.

Adding another concept to your organization also creates the possibility for co-branding opportunities. Depending on the compatibility of an additional concept, and any franchise restrictions, co-branding and co-marketing can make more efficient use of your dollar.

There are economies of scale in administrative functions as a result of multi-concept diversification. Many management and functions, for example, can be handled by your existing team. And, speaking of your team, if you've saturated the market with your original concept, you may have a dilemma to face, because you've likely got some well-trained employees seeking upward mobility or advancement. If you don't provide the opportunities you face the risk of employee turnover. Adding another concept can provide the opportunities they desire and allow you to grow with employees whose strengths will benefit the entire operation. All of this can help ensure the retention of good employees from the unit level on up through the main office.

Multi-concept operators are even finding some opportunities for maximizing vendor and supplier channels for their expanding operations. For example, one vendor may be able to service all of your equipment and as a result, offer you a more economical rate.

The dynamics are far reaching and there's much to consider, but synergies do exist.

Diversification and synergies

John Betz is president and CEO of Betz & Associates, which operates six Auntie Anne's Pretzels franchises and is a licensee for three Starbucks locations, all in the Philadelphia and southern New Jersey area. He says the combination of these two concepts has been perfect for his company and his business operating style.

"When the Starbucks opportunity came up for us, we looked really hard at the synergies that would be involved," he says. "It was important to determine if the style in which we operated our Auntie Anne's would fit with Starbucks." It did and he's been happy with the co-existence so far. Betz says it's important for the culture of operations to be complementary, even if the concept itself is not. He credits his management team and employees with much of the success.

That's something James Walker is quick to recognize as well. His company operates more than 600 units comprised of Baja Fresh (298), Cinnabon (138), Sweet Factory (110), and KaBloom (80). That's a lot of oversight, but he's got 5,000 employees to do it and he says it has happened through "hard work, great partners, and most importantly, a fantastic, talented, engaged team of professionals."

Multi-concept diversification has been a great for Walker. "I think there's a clear advantage to having a portfolio that occupies a number of different venues. Even within each of our brands we seek to diversify the venues in which we operate." He says his concepts have complemented each other well. The from Sweet Factory and the flowers from KaBloom work well together for a similar buying occasion and consumer. Likewise, his Cinnabon and Sweet Factory locations are mutually beneficial because they operate in the same type venue.

Sally Brewer knows a little something about complementary franchise concepts. She and her husband, Robert, operate a Merry Maids, a Furniture Medic, (both ServiceMaster brands) and a SIGN-A-RAMA store in Spartanburg, S.C. She says when she goes out to bid a job for Merry Maids, and even when her crews go out to clean homes, they look for cabinets, and upholstery that need repair or restoration. That's her chance to bring up the Furniture Medic franchise that her husband manages. "It's been effective, we don't try to be overbearing about it with a hard sell, but both of us are keeping an eye out for possible referral business, whether it's Merry Maids or Furniture Medic," she says.

Brewer also takes advantage of the cross-marketing synergy that multi-concepts can offer. "We sent letters to our Merry Maids customers letting them know that we had added a Furniture Medic franchise and could service those needs as well," she says. She also sends her new Merry Maids customers packets that include collateral material on Furniture Medic.

As for the SIGN-A-RAMA store, it handles all of the signage needs for the Merry Maids and Furniture Medic concepts and provides them with office space. And, not to miss an opportunity, Merry Maids and Furniture Medic marketing materials are prominently displayed inside the store.

When Brewer attends various local civic and community meetings she often has the opportunity to discuss all three concepts with those she rubs elbows with. Brewer also likes the fact that her mechanically-inclined husband can handle necessary repairs for Merry Maids equipment. And, with the centralized office, they can even field each others' customer calls when necessary.

Lloyd Robinson has created a harmoniously complementary home furnishings multi-concept in his hometown of Glenn Allen, Va. That's where he keeps busy operating a Floor Coverings International, a California Closets, and a Marvin Windows and Doors (not a franchise, but a complementary business nonetheless).

"We use our 10,000-square-foot main office and showroom to display each of our concepts," says Robinson. Customers can see samples of closets, flooring, and doors at the location. He says customers routinely come to the showroom looking for one type of product only to discover that Robinson can offer several other complementary products and services. "The cross-sales opportunity is perfect because people can see everything that we do in one place."

Robinson says he has been able to add the two additional concepts without increasing his front office costs. His 22 employees have been versatile adaptors. "My people have been able to handle the needs and requirements of all the product lines at little or no additional expense," he says.

Risks and rewards

Smaller franchise operators will want to make sure they don't spread themselves too thin (in terms of personnel and other resources) in the quest to add concepts. "We're a pretty small operation," says Brewer. "What we've done has worked out well for us, but any further expansion would probably spread our resources too thin." And obviously, the risk of overworking your best employees could result in them burning out or quitting under the added pressure, and that could compound your problems.

Adding another concept is a big step. Those who do it say you should conduct due diligence, do your research, and don't get caught up in the mindset of needing to make the move as quickly as possible. In most cases, the opportunity will still be there tomorrow.

"Take your time and really assess if this move is going to be complimentary and right for your organization," says Betz. "Does the concept fit your existing style, expectations, and requirements?" When you've properly made all of these assessments, then begin the process, he says.

There are other potential pitfalls to avoid. For example, cross-sales opportunities are great but Robinson emphasizes that when meeting with a customer, don't be heavy-handed about your product offerings. "If it comes up in discussion that's fine, but otherwise, they will see that we have additional offerings when they come to the showroom." Likewise, in most cases, trucks, signage, and marketing materials are best kept at arm's length.

Robinson also recommends having dedicated employees for each brand so that there's an expertise factor at work. Walker agrees whole-heartedly with that and adds, "I guess from my perspective one of the most important lessons was learning what could be a shared resource and what couldn't. Unit level managers and second P&L level multi-unit managers require brand loyalty and specific operational knowledge that makes it difficult for them to oversee multiple brands, whereas some resources, like accounting and human resources, work better."

And then there are territorial issues. Robinson's territorial rights for his California Closets franchise are more extensive than those for his Floor Coverings territory. "If I begin working with a customer with my California Closets, I make sure that if they are outside my territory for Floor Coverings that I refer them to the proper franchisee," says Robinson.

Walker addresses another territorial concern. "In order for any concept to be successful you must focus on the day-to-day operational execution of your Density within any given geography is key. Spread too thin and the cost of second and third concept P&L level supervision goes up due to travel," he says. "Too much density in any given geography and you run a sales risk due to over-saturation. But having multiple brands within a given geography, or even within a given venue, there are some clear cost advantages."

Robinson is quick to point out that although he has a lot of products on display under one roof, he doesn't want to become "a big box retailer." He says finely-honed customer service is imperative no matter how many concepts he operates.

Watch out for potential pitfalls as well, says Robinson. In a more technical franchise where the intensity of training and the need for ongoing training is applicable, it can suck up a lot of employee time.

And of course, keep open lines of communication with the franchisor. Let them know you are considering and then adding a second or third concept, says Robinson.

One recurring theme with each of these multi-concept operators was the availability of strong franchise support. "Auntie Anne's and Starbucks both offer us incredible support mechanisms," says Betz. Brewer concurs, "We've been fortunate to have had great training and support from the ServiceMaster corporate office."

And, say multi-concept operators, you can sometimes adapt policies and procedures from one concept to another. Robinson found that the requirement of a project manager within the Floor Coverings International franchise was a great idea he could also add to his California Closets operation. "It turned out to be a great way to stay on top of all of the projects we were working on and consistently get the jobs done for the customers on time."

That's similar to what Betz discovered while attending training meetings at Starbucks. "There are many ideas, techniques, and management approaches that will translate from one concept to another easily and enhance productivity and efficiency."

In the end, Betz' model is a textbook example of diversified complementary concepts generating consistent revenue. "Our Auntie Anne's stores are extremely busy during the holiday season. We focus a lot of and resources there during that time," he says. But Starbucks is key for him during most of the rest of the year. "We always have strong sales at one of the concepts, if not both. Typically, if Auntie Anne's drops off, Starbucks picks up." It helps insure steady revenue.

Ultimately, say each of these multi-concept operators, putting customer service first is going to help you succeed whether you have one franchise concept or a half dozen.

As Betz says, "Bring the same quality to every concept you have and you'll be successful."

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