In the January 12 Wall Street Journal, Stephanie Simon, in her article entitled Franchises, on a Smaller Scale, highlights the growing trend of franchisors (especially food franchisors) offering multi-tiered franchise concepts (meaning offering multiple price/size entry points to a franchise). As noted in an article in Entrepreneur magazine’s website by Jason Daley, Franchises Hop on the Food-Truck Trend, certain fast food and casual food franchises are looking into expanding their franchise systems through mobile food trucks, which would present a less expensive tier to their systems.
According to Ms. Simon, multi-tiered franchise concepts appeal to potential franchisees because it allows them to buy into a franchise system at varying price points that fit their budget. For example, a full restaurant franchise could cost $300,000 to build out, an express restaurant franchise could cost $200,000 to build out, a mobile truck franchise could cost $125,000 and a food cart franchise could cost $65,000.Ms. Simon attributes the growth of the multi-tiered franchise concept to the tightening of the credit markets. With fewer funds available to develop full restaurant franchises or other standard-size franchise stores, franchisees have been able to obtain financing to develop less expensive express locations, mobile trucks, kiosks and other types of franchises.
In determining whether to offer multi-tiered franchises, franchisors consider whether their standard franchise system translates well into the smaller scale business models. As Ms. Simon pointed out, franchisors should ensure that their products, design specifications, signage and other aspects of their standard franchise system are either suitable for the other business models or can be altered in some fashion to better suit those business models.
In our practice, we have already discussed and assisted our clients with implementing a multi-tiered approach. One of our clients, Chinese Mirch, Inc., a franchisor of Chinese food restaurants influenced by Indian flavors and spices, has begun offering an express restaurant franchise in addition to its full-sized restaurant. We have also discussed expanding another client’s frozen-yogurt retail business through mobile trucks and stand-alone kiosks. Although there are some concerns about diluting the value of the brand by offering smaller outlets, this approach is enabling brands to make themselves available to more candidates in a tighter economic environment.