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Jessica covers Australia's technology start-up scene, writing on breaking news and trends in entrepreneurialism, media and marketing. She was previously named Australia's best New IT Journalist for 2011.

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Mix and match sales

Published 02 November 2011 12:03, Updated 03 November 2011 05:03

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Mid-afternoons used to be a drag at Video Ezy in Kew, Victoria. But since franchisee Daryl McCormack opened a Cold Rock Express outlet in his Video Ezy store a fortnight ago, school kids have been lining up out the door each afternoon to buy its ice-cream creations.

“At 3.30pm there’s normally one or two people in the store but on the day we opened, there were 40 school kids,” McCormack says. “The numbers have blown me away. After the first three days we were dollar for dollar with the core business [of video rental].”

Cold Rock Express is a smaller, low-cost franchisee model from ice-cream chain Cold Rock, which is owned by the Franchised Food Co(FFCo). Express franchisees offer a reduced range of ice-cream and mixer flavours and their Cold Rock bench (it’s like a chilled chopping board) where the ice-creams are constructed is 1.2 metres rather than 1.8 metres. The set-up cost has been lowered to about $100,000, from $300,000.

Opening a Cold Rock Express in the Video Ezy outlet is a first trial for the concept. FFCo managing director Stan Gordon plans to open six more Express outlets in Souvlakihut stores before the end of the year.

“We’ve developed a concept where a franchisee can get a second revenue stream,” Gordon says. “[Currently] they’re paying rent, staff and overheads and they’re only selling the one product.”

Opening two brands in the one location is a cost-effective way to expand for franchisors and franchisees, the managing director of franchise consultancy 10 Thousand Feet, Ian Krawitz, says. The franchisor does not need to expend as much energy on franchisee recruitment. And for an existing franchisee, rather than spending $250,000 to $500,000 to become a multi-unit franchise owner, they can start a new brand in their current location at a lower entry cost.

“They can do it through cash flow or in a way that doesn’t over extend them,” Krawitz says. “Co-location enables you to expand as a franchisee ... [but] it lets people take smaller steps.”

To ensure it’s a happy marriage, however, there are some pre-nuptials to sort out. The two franchise offerings must be complementary, otherwise there is a risk they could cannibalise each other. Under FFCo’s agreement with McCormack, he can continue operating the Cold Rock Express so long as his main business is videos. If that changes, the agreement terminates, Gordon says.

Costa Astrinakis, who owns a stake in Souvlakihut along with McCormack and two other shareholders, says having Cold Rock in store will be a “great synergy”.

Krawitz points to the success of Night Owl convenience stores and Caltex service stations that have express versions of Eagle Boys Pizza chains.

“It brings people into the convenience store at a different time to when they normally would,” he says. “It also boosts perceptions of the [store’s] food offering. And once you’re in there getting a pizza, you’re going to want to get drinks, too.”

Krawitz says co-locating ice-cream chain New Zealand Natural and cookie and coffee chain Mrs Fields in single stores has worked, too. “It works nicely because they’re both treat offerings and it fits the brands quite well,” he says.

The success of franchise systems often comes back to brands and clear systems and procedures. Both of these can be at risk in the co-location scenario, Mrs Fields managing director Andrew Benefield says.

“What we’ve been careful to do ... is make sure one franchise system takes responsibility for the overall store and supporting the franchisee,” he says. “They can ask for help from the other system as required. The last thing you want to do is to have two support people going in with conflicting agendas.

“In our co-branded stores, the franchisee has a franchise agreement with one franchise and a supply agreement with the other system. It can work either way. It designates who their key relationship is with.”

Instead of recruiting already established franchisees, Mrs Fields and New Zealand Natural stores are sold as a bundle. The set-up cost for one store is about $250,000. For both, it is about $50,000 more.

“For us it was about finding another way to add more sales and profitability to our franchise system with something that was complementary and took up no more space,” Benefield says.

“The more return on investment we can offer a potential franchisee per unit, the more of them we’re going to be able to sign up.”

A key concern is ensuring the co-locations don’t impinge on customer experience. “You still need to be able to offer one consistent and believable offer to the customers,” he says.

This extends especially to the point of sale. “The customer should not be confused by having to pay two bills,” Souvlakihut’s Astrinakis says.

At Video Ezy, the point-of-sale system is being updated to include Cold Rock products. “That’s important, because our two types of retail have a similar spend of $10 to $12 per customer, which means high volume,” McCormack says. “We need our point of sale worked out.”

Having sales mixed in with the other system does not present a problem for Cold Rock’s head office because it takes its royalty from franchisees on an input basis (per barrels of ice-cream sold to the franchisee) rather than an output basis (per ice-creams sold to customers).

Astrinakis says the success of a co-branded franchise outlet often relies on co-operation at head office level. “The most important thing is to be able to synergise the people behind the scenes as well, to be able to work together,” he says. “The details need to be sorted out among the two franchisors so it’s as simple as possible for the franchisee.”

This should extend to assistance with cross promotion between the two brands, he says.

There is a risk of one franchise falling apart, leaving the other stranded – a recent example of this being the closure of Borders book stores that housed Gloria Jeans coffee shop outlets. “Gloria Jeans did a great job of looking after their franchisees when that fell apart,” Benefield says.

With two sets of franchise customer service guidelines to follow, it does take a franchisee with more managerial experience, Krawitz warns. As well, he says, franchisees should be aware of any restrictions on their lease, “in terms of other business in that precinct”.

However, for commercial real estate landlords, “there’s also value if you’re wanting to have some anchor tenants to get two well-recognised brand names in a smaller space”, Krawitz says.

Although overheads are shared with two brands in the one outlet, some extra costs may be incurred. McCormack had to put sinks and drainage into the Video Ezy store. He also had to pay to train some of his staff in food handling.

The 3.30pm school traffic was a blessing for revenue but also challenged the store layout. “The line-ups for both groups of customers were running into each other,” McCormack says. “After day one we had to change the layout of tables and a couple of [shelves] in the store. We also had to call more staff in.”

The benefits of collaborative franchising are clear to McCormack, however. He owns 12 Video Ezy franchise outlets, including stores in Townsville and Darwin where he thinks the Cold Rock Express model will boom. He is confident the two brands will boost each other. “We’d be surprised if we can’t turn one in three video customers into a Cold Rock customer,” he says. “And with Cold Rock, people are happy to wait while their dessert’s being created, which gives us a chance to catch them as video customers, too.”

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