Article

From single-unit success to multiunit growth

The decision to develop a multiunit franchise may give an owner more control.

September 29, 2008

Soon after Penn Station East Coast Subs founder Jeff Osterfeld opened his first restaurant, in Cincinnati, he decided to add another location.

Business was picking up, and it felt like the right time to grow, said Penn Station president Craig Dunaway. But he quickly discovered that with his attention focused on the new store, the first one suffered.

So, Osterfeld returned to his original restaurant to retrain the staff, thinking he left the second in a good position to thrive on its own, without his constant supervision. He was wrong.

"Just like the first suffered without him behind the counter, so did the second," Dunaway said. "So he bounced back and forth thinking there must be a better way to do it. And that's when he decided franchising was the answer."

Like many fast casual operators in the early stages of their business development, Osterfeld had to decide between two models of growth — single or multiunit franchising.

Osterfeld focused on single-unit franchising based on his experience. His theory was simple — if you could put an owner as close to the counter as possible, that owner is going to care much more about taking care of the customer than an hourly employee.

Osterfeld's theory succeeded, and Penn Station began to expand. But as profits rolled in, franchisees wanted to open more stores, forcing Osterfeld to modify his philosophy and enter the world of multiunit franchising.

More stores give more control

Historically, restaurant brands chose to go the single-unit route, said Brian Darr, managing director of Chicago-based restaurant research firm Datassential Research.

"There were a lot of people who had that mom-and-pop mentality — they wanted just one because they wanted their family involved, and once you start expanding you have to hire and train other people," Darr said.

Additionally, when an owner takes on more than two units, he becomes less hands on. The more units an owner has, the more time he spends checking up on each one to ensure they are all run satisfactorily, Darr said.

Although it flies in the face of Osterfeld's original concept, multiunit franchising actually gives the franchisor more control, Dunaway said. Penn Station has 188 franchised units divided between 60 franchisees, with two of the franchisees each owning 17 units.

Single-unit owners who have no intention of opening additional locations, however, are more difficult to control and prone to operate more independently.

"If someone who wants to open additional stores isn't adhering to our policy, we can refuse them that opportunity until they comply," Dunaway said. "But a single-unit operator may refuse. And (if) it's not an egregious violation of the contract, we're not likely to revoke their franchise agreement. Basically, we're trying to avoid a situation where the tail is wagging the dog."

Area managers provide more accountability

Kelly Harris, co-owner of Jacksonville, Fla.-based Times Grill, also subscribes to the multiunit strategy. Times Grill operates eight locations and is in the process of awarding its first franchises.

Before he founded Times Grill, Harris worked for Firehouse Subs and during his tenure helped it grow from two units to 260.

story continues below...

Free Special Publication Downloads Download informative guides, special reports, case studies and white papers for free.

Multiunit owners responsible for overseeing an entire region operate as field managers, he said. They can keep a closer tab on franchisees in their own backyards as opposed to the original franchisor headquartered in a remote city.

"Without these regional developers, the only way we can know what's going on at a location is by going out there once a month for an inspection," Harris said. "With someone overseeing one area, they can see when things are going awry. It gives us a stronger level of accountability."