Monday, April 5, 2010

Profit (or lack of it) in Multi Unit Franchisee Operations

Is multi store ownership a path to increased profitability? While FranchiseFacts’ National Franchisee Survey provides some support to this belief, our preliminary results suggest that multi store operations may be riskier, and result in a greater likelihood of business losses. Put differently, these preliminary results suggest that multi store ownership leads to either higher profitability or no profitability. There does not appear to be a middle ground here.

For a multi store operation to be successful, two factors should be considered. First, the business must be one where tasks and knowledge requirements are sufficiently straightforward so that training of staff is simple. Second, the franchisee must have above average business and organizational skills. Operating more than one location requires that the owner’s expertise be split among multiple locations. In some instances, the owner lacks the skills to make this work. In other instances, the skills that make a single operation successful are not in sufficient supply to support multiple operations. When both factors are in place, the franchisee is likely to be extremely successful in operating their multi unit operation. When one or both of these factors are lacking, the result appears more likely to be failure. Dunkin Donuts is just one example of a major franchise that I think has been quite successful with their multi store ownership business model. The tasks needed to service one customer are relatively simple. And an employee normally services one customer at a time. Other franchises, such as The UPS Store, require a higher level of knowledge, experience and organizational skills that I don’t think are conducive to a multi unit franchisee operation.

The FranchiseFacts survey asks respondents to provide their profitability for the prior calendar year. Later in the survey, respondents report on the number of locations owned. This article considers the correlation between these two questions.

Not surprisingly, single location operations account for 86% of all respondents with declining percentages for multiple store operations. To better evaluate the profitability of multi store operations, the table below separates single unit franchisees from multi unit franchisees.

86% of
9% of
5% of
$100,000+ 3% 3%
$75k-$100k 6% 6%
$50k-$75k 6% 6%
$35k-$50k 5% 5%
$20k-$35k 3% 2% 2%
Under $20k 17% 17%
Not profitable 61% 52% 8% 2%
Percentages subject to rounding

It can reasonably be assumed that franchisees who own more units have invested more money in the hope of greater profitability. That is, opening four locations costs more than opening a single location and should result in higher overall profits. However, there is also the risk of greater financial losses since success is never guaranteed. This is consistent with our preliminary findings. Franchisees with four or five units (the highest level reported) were the only ones to report in excess of $100,000 in total profitability and accounted for 60% of all responses in this category. However, 40% of those franchisees with four or five units report being unprofitable. There was no middle ground. Reporting suggests either high profitability or no profitability.

At the other extreme, single location franchisees account for 86% of survey respondents. They report a wider range of incomes with 17% reporting income in the range of $35,000 to $100,000.

Most surprising are the results from franchisees owning two or three locations. None reported profitability in excess of $35,000 for the most recent calendar year and a disproportionate percentage report being unprofitable during the same period of time.

Note: When reading the accompanying table, the “All Respondents” column adds up to 100%. Likewise, the three Location columns combine to reflect 100% of respondents (subject to rounding.) For example, franchisees owning 4-5 Locations AND reporting $100,000+ in profitability last year reflect 3% of all respondents.

FranchiseFacts – Capturing the franchise experience

Perry Shoom, FranchiseFacts
Capturing the franchise experience!

Franchisee Survey in progress at

If you are a franchise owner or store manager, please participate!

Understanding the Franchise Experience blog can be found at

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