Multi-unit franchising grows, but expansion risks rising, says FNB specialist
Henk Botha, franchise specialist at FNB South Africa, says established brands are increasingly favouring existing operators when awarding new outlets. While this creates opportunities, he says expansion should be approached with the same level of scrutiny as entering franchising for the first time.
One of the main decisions facing franchisees is whether to grow within their current brand or move into another. Botha says cross-brand expansion is often restricted by franchise agreements, which typically limit outside business interests. Franchisors generally require owner-operators to remain focused on their brand and may only approve additional ventures if they do not compete for market share or management attention.
He adds that expansion works best when businesses complement each other. Examples include grocery operators adding liquor outlets or hardware retailers introducing tool hire services, where customer bases and operations align.
Even within a single brand, location strategy is a key risk. Opening outlets too close together can result in stores competing for the same customers, reducing overall growth while increasing debt and operating costs. This can become problematic from a funding perspective if revenue gains do not match higher financial commitments.
Funding new outlets using profits from existing stores also carries risk. Supporting a struggling new store can quickly erode the performance of stronger outlets, particularly when franchisees take over underperforming locations. While some operational issues can be fixed, turnarounds may take longer and cost more than expected.
Cash flow pressure is a major consideration. Botha says a lower purchase price does not offset the ongoing strain of an unprofitable business, and walking away from an apparently attractive deal can sometimes be the better financial decision.
He notes that managing multiple outlets also requires a shift in role. While some franchisees can oversee up to six or seven outlets, beyond that point formal management structures, administrative support and stronger operational systems become necessary.
According to Botha, sustainable multi-unit growth depends on operational readiness, financial capacity and strategic alignment. Without these, expansion can turn a strong single outlet into a financially stressed group of stores.