Whether you’re a single-concept franchisee diversifying for the first time or a franchise industry veteran looking to add another brand to your multi-concept portfolio, diversification is not only a smart investment strategy, it’s a recommended one.
When it comes to the foodservice industry, the restaurant landscape has become increasingly overcrowded. Prior to the COVID-19 pandemic, the limited service restaurant segment was growing at an average 3.8 percent per year since 2015, according to research by IBISWorld. While this trajectory has most certainly shifted, foodservice franchisees still face fierce competition. As the economy recovers and they become ready to invest again, franchisees in this segment should be looking at alternative concepts that allow them to continue expanding their portfolios while potentially softening the blow of major economic disruptions. One way to do so is to venture outside of foodservice and develop emerging concepts to broaden a book of business, which can potentially minimize risks and maximize opportunities.
Navigating the Congested Foodservice Industry
Today, restaurant franchises make up more than half of the foodservice industry and have become increasingly crowded in the last few years. Due to competition within the industry, the trend has surfaced for aspiring or existing multi-unit franchisees to segue into new concepts as a strategy to combat this saturated segment.
When diversifying for the first time, most existing restaurant franchisees will traditionally start by staying in the same industry and adding another restaurant brand to their portfolio that won’t cannibalize their other concept(s). However, as franchisees continue to expand their portfolios and develop additional units in different subcategories, many eventually hit a roadblock and struggle to find opportunities that are a fit for them.
Diversifying Opportunities for an Investment Advantage
While some franchisees start off with non-competing food concepts to evolve their portfolios, there’s a broader book of opportunities in non-food franchises. Reaching the next level as a multi-unit franchisee requires one to build a portfolio that not only displays a diverse group of brands in the industry they’re currently invested in, but outside of that space all together. Unique franchise concepts, aside from those in the foodservice industry, are noticing a shift as more signed agreements have been made with seasoned professionals primarily experienced in the restaurant business than others.
One brand that’s seen this change in landscape is Sola Salon Studios. Now with more than 500 locations, Sola has become the fastest growing salon studios franchise with its network being comprised of multi-unit owners, as well as franchise groups with much of their investments in restaurant brands such as Panera Bread, McDonald’s, Taco Bell, Pizza Hut and more. Restaurant operators, like myself, are attracted to the simplicity of Sola’s model when compared to the complexities of today’s foodservice concepts. At the heart of Sola is a compelling real estate model combined with high-level support. Each Sola location features 20-40 boutique, move-in-ready salon studios all under one roof where beauty professionals can individually operate their own businesses without the risk and overhead of traditional salon ownership. This is one example of many that multi-unit franchisees can tap into.
Owners and operators with an array of concepts have capitalized on the investment strategy of diversifying to gain more market share in a desired territory and increase the potential for a greater profit. As small business owners invest in their brands and compound the return on investment by acquiring diversified units, they are ultimately minimizing the risk that can occur from a fluctuating economy, which is now clearer than ever. During unprecedented times like we’re facing now, there’s not one industry that hasn’t been impacted, but how a brand comes out of this differs. Having a diverse portfolio gives entrepreneurs more flexibility as they work out a recovery plan.
Opportunity for a New Passion
A perk of being an entrepreneur in the franchising industry is having the ability to invest in a brand that fascinates or speaks to you. For instance, many owners and operators of restaurant concepts tend to be “foodies” either by nature, going into the business, or as a result of being part of the industry. Exploring investment options that are different than the traditional investment portfolio will not only give franchisees the opportunity to step outside their comfort zone, but also invest in a passion they may not have otherwise given much attention to.
Over the years, my partners and I have developed a passion for empowering and supporting aspiring business owners fulfill their dreams of being in business for themselves, but not by themselves. Sola is a concept all franchisees can relate to as their business model helps other entrepreneurs achieve their dreams with a structure in place to help alleviate some of the pressure of running their own business.
Franchisees seeking to grow their unit count are encouraged to step outside their comfort zone and traditional mindset of what a successful franchise model looks like. Not only will this help embellish a portfolio but will allow for an increase in market share availability rather than competing solely in a saturated market.
Mitch Cohen has 37+ years of experience operating top-performing restaurant concepts like Jersey Mike’s Subs, Dunkin’, Baskin-Robbins and Nathan’s Famous Hot Dogs. He is a founding partner of PerforMax Franchisee Advisors and has been a longstanding pillar in the franchising community, serving on the International Franchise Association’s Board of Directors since 2016. In March, he expanded his portfolio outside of food for the first time and is developing six Sola Salon Studios in New York.