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Apr, 01 2005

CO-BRANDING & RELATED ISSUES

While franchising involves a premises devoted to one particular brand, a new variation on the concept of franchising is initiating more than one brand in one premises. Though there are its advantages and disadvantages, it is now estimated that co-branding

LIKE many variations on the standard franchising theme, co-branding, possibly initiated in the USA, is now spreading with varying success to other parts of the world.

Essentially, co-branding involves two or more, usually complementary, branded businesses operating from the same premises, by one or more franchisees, and in turn, these brands, may be owned by one or more franchisors. So, there are a great many variable options for the various relationships, particularly when you consider that the landlord could be any one of the franchisees, any one of the franchisors, or an independent third party.

On the face of it co-branding presents a very attractive option, specially where the increasing cost and/or lack of availability of suitable premises, makes individual unit franchises difficult to position. Sharing premises has its own advantages:

  • It reduces rent and occupancy costs proportionally
  • It may be possible to share some equipment and staff
  • Possibly, a good franchisee can operate three different businesses without having to leave any of them
  • Possibly an under-performing unit can be resurrected by the introduction of a complementary offer
  • Possibly a franchise sales executive can show his boss he is now opening new units at the targeted rate.

But all of these perceived benefits bring associated disadvantages, which we’ll consider in a moment.

In our experience, many franchisors move blindly into the “latest idea” after having convinced themselves that this may be the panacea for all their problems, without actually devoting the necessary resources to research, consider and resolve the various downsides. The result is that they end up with more problems than they started with. You can be sure that co-branding will follow this pattern, but, if the model is thoroughly researched, and prepared, it presents great opportunities.

Options and issues

To help consider the various issues that may arise let’s use an example where three different food outlets are operating from a single premises, with a shared seating area, similar to a small food hall in a shopping mall. Other examples include petrol stations with convenience stores, and hotels with branded leisure facilities or restaurants.

The 1st scenario - Different franchisees for different franchisors: In our first scenario, all three businesses are operated by different franchisees for different franchisors. Such an arrangement should work well, provided that:

  • each franchisee operates his franchise properly within his section of the premises;
  • the common areas are compatible with the franchisor’s image and are properly maintained;
  • each franchisor is able to enforce his standards.
  • However, the use of a common premises presents several opportunities for dispute between the franchisors or the franchisees. These disputes can be in one of the following or all areas:

Who is the tenant of the total facility as well as the common area?

Who sub-lets to whom?

What happens if one franchisee runs a sub-standard operation, or does not meet his obligations for maintenance of the common area, and, thus, detracts from the reputation of the other brands?

What happens if one of the brands fails in that location, or the franchisor decides it no longer matches his requirements?

Who decides which new brand can fill a gap which appears in such a situation?

Maybe the answer lies in having an overall agreement between all the franchisors for regulation of the operations, and, perhaps with each of the franchisees also being a party to it so that the provisions can be enforced.

The 2nd scenario - One franchisee for three different franchisors: Here, the same franchisee operates all three brands for different franchisors.

At first sight, this appears to make things a lot easier since it is clear who is responsible for anything that goes on within the premises, including the common areas. However, this also means that the franchisee is not under the control of any one franchisor. He may, therefore, choose to play one franchisor off against another, arguing about conflicting standards of operation and cleanliness, typically using the lowest common denominator as his benchmark.

On the positive side, he could, of course, use the highest common denominator and improve standards all round, but one has to consider that unlikely in the real world. After all, he got into this relationship to maximise staff and space utilisation, and to minimise (or at best, optimise) costs.

With three businesses to run, how does the franchisee decide where to concentrate his efforts? Presumably, on the one which brings him the best return, which will be to the continuing detriment of the others as they may be promoted with less enthusiasm, resulting in a continuous downward spiral.

The most likely challenge arises when the complementary brands operated by the same franchisee have some overlapping menu items, for example fries, coffee or soft drinks. One of the first examples of co-branding we came across was in New York, when we went to an outlet of a particular doughnut chain which we knew from experience prided itself on serving great coffee, and which in this location shared space with a burger franchise. To our surprise the coffee we purchased from the doughnut counter was awful. You guessed it, the franchisee was being supplied much cheaper coffee through the burger franchisor, and decided to use it in both areas. Difficult to monitor on a regular basis, but, ultimately, seriously detrimental to the brand. Of course, the bigger challenge comes when that franchisor has to replace that franchisee - who will want to come in and operate alongside a disgruntled franchisee still operating the other system?

The 3rd scenario - One franchisee and one franchisor: Here, the same franchisor owns both, or all, the brands being operated by the same franchisee. One may think this would be the least complicated, but anyone who has ever worked in a large corporation will know that competition between sister companies, or even divisions of the same company, can be equally, if not more, intense than that between independent businesses. The chances of co-operation are not good, and it is usually impractical to have the same people managing different brands.

International variations

  • Turning briefly now to the international opportunities, there are a few variations worth considering:
  • Two (or more) franchisors can get together to go to a country with the aim of operating in shared premises with either the same master or direct franchisee or two (or more) different franchisees;
  • One franchisor can go into a new country and franchise to the franchisee(s) of another franchisor, or a company-owned network, which is already established there;

Two franchisors come to an arrangement whereby they agree to co-brand their systems wherever in the world they operate.

Several other permutations can be conceived from the above, limited only by the creativity of franchisors, but each will bring its disadvantages as well as potential benefits.

All business difficulties are more easily dealt with if they can be anticipated. And that brings us back to the necessity of thinking through all the possible developments and preparing for them, both contractually and operationally.

Unfortunately, time to do that is often perceived to be unavailable, particularly as co-branding may be seen as a way to achieve quicker growth than would otherwise be possible, though this itself brings the added challenges of ensuring correct recruitment, training, monitoring and support procedures and resources are in place.

As in all aspects of franchising, think it through and do it right, and you will probably succeed. Cut corners and it will all end in tears.

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