Marketing advice

Is two better than one?

Co-branding - a way for struggling franchisees to increase their turnover? Sherrards's Manzoor Ishani explains

 

In the current economic climate, franchisors are looking at ways to increase the turnover of their franchisees. I have been approached by a franchisor seeking advice about an offer he has received from someone who is in a similar (but not the same) line of business as him, but whose business is not as successful.

The offer is not to buy out my franchisor client, nor to merge their two businesses. The idea put forward is that they do some sort of a joint venture whereby my client's franchisees and their franchisees would each sell the other's products and services under their respective brands. My client advises me that it looks good on paper with the two brands side-by-side feeding off each other's customers. What my client wanted to know was, what were the advantages and disadvantages?

What he is talking about is a co-branding operation, and there are indeed advantages, but he should give full and careful consideration to some of the pitfalls of a co-branding operation.

The reasons for co-branding are, in many cases, obvious. Where prime locations are scarce, it makes sense for two or more companies whose brands are compatible and whose products complement each other as in hamburgers and ice cream, to share space which might otherwise prove to be too large for only one concept. In these circumstances, failure to co-brand may also mean that the opportunity to sell their products from a particular location may be lost. A co-branding arrangement may also serve a franchise well in that it would enable the franchisee to make efficient and profitable use of surplus space.

One advantage that is sometimes overlooked, is that by choosing a co-branding partner carefully, the operator of a business may also benefit from increased revenue. This is one of the arguments which has been advanced for locating sub-post offices or pharmacies in convenience stores but the often cited example of national lotteries outlets in retail trading premises is more akin to the granting of concessions than co-branding (there is definitely a distinction between the two and it needs to be made). Furthermore, it may help a business to become more competitive by offering a wider range of goods or services instead of operating under a single brand.

Co-branding is a means by which a single brand business can be developed further. A restaurateur serving only lunch and dinner, wishing to expand to breakfast, may find it more sensible to form an alliance with an established breakfast operation (rather than develop its own menu and promote its own brand), thereby benefiting from the experience of brand recognition from its co-branding partner.

There are also legal and operational issues to be considered. Regard has to be had, of course, to ensuring that one's intellectual property is protected and one's own-brand is not cannibalised or its reputation eroded. The contractual issues may be quite complicated, depending on how many brands are to be the subject of a co-branding operation, whether they have a common owner or separate owners and whether the trading outlet is franchised or company owned.

The rules of how a co-branding operation is to run need to be agreed between the parties. Some of the most obvious issues that spring to mind are

  • Hours of operation
  • Storage areas
  • Product preparation and packaging areas
  • Whether the premises should be divided into exclusive retail areas for each brand
  • Rules relating to the serving of customers and the taking of payment
  • Insurance issues;
  • Accounting and reporting procedures, particularly where separate licence fees are to be paid by the operator of the business to different owners of the brands
  • Advertising, marketing and promotion of the business.

As with most things, the more complex the business, the more complicated will be the issues surrounding termination. Consideration needs to be given to what happens in the event that a co-branding venture has to cease for whatever reason. What, for example, is to happen if a franchisee is in breach of one agreement relating to one of the brands but not the other, or if a franchisee wishes to sell his business and his purchaser is acceptable to one brand-owner but not to another, and so on. Nor is co-branding restricted to a retail operation. It can apply to a mobile retail or service business also.

It seems that co-branding will become more commonplace in the future. If properly executed, a co-branding operation can be a powerful marketing force, benefiting not only the owner-operator of the trading unit and the owners of the brands involved, but also the consumer.

Manzoor Ishani is a senior solicitor consultant with Sherrards (Solicitors), a commercial practice advising franchisors and franchisees in the UK and internationally.