24th April 2024

Better business. Better community

Business Industry and Financial

That’s Two to Go Together

Monk Foster stops in about once a week at the newest fast-food spot in his Hyattsville neighborhood. His wife and four children, ages 1 to 7, are often in tow.

“It’s one of the few places we agree on,” Foster said as he stood outside the six-month-old establishment.

That’s because the restaurant is half a KFC and half an A&W — the latest example of co-branding, a trend that’s reshaping the fast-food market.

In Foster’s family, as in so many, the kids exercise veto power when it comes to fast food. To steer such families in its direction, Tricon Global Restaurants Inc. early this month completed the $320 million purchase of quick-service seafood chain Long John Silver’s and A&W All-American Food Restaurants, adding those brands to the others owned by the Kentucky-based company: KFC, Taco Bell and Pizza Hut.

Tricon, which changed its name to Yum Brands Inc. about a week ago, is hardly alone. In the fiercely competitive fast-food business, more and more players are trying to lure customers with two-in-one or even three-in-one restaurants featuring well-known brands. Co-branding has already yielded better sales for Yum Brands, the company said. Other co-branders make the same assertion.

Co-branding is not new, “but it’s been particularly aggressive in the past three to five years,” said Don DeBolt, president of the International Franchise Association in Washington.

It’s not just about capturing market share; it’s about saving the company money. Having one utility system, one parking lot and one cooling and heating unit instead of two or three obviously saves money. So does sharing one staff and one storage area.

Another incentive: the high cost of real estate. If having two brands in one store attracts more customers and boosts sales, the restaurants can afford to pay higher rents for desirable intersections and street-front locations. And in theory, top locations should spur even more sales.

“Efficiency is the name of the game,” said Jim McKenna, president of McKenna Associates Corp., a franchise and retail real estate training firm in Milton, Mass. “It’s the quick-service industry’s version of what every other company is doing.”

But it’s not a slam dunk.

Consider the challenges at Allied Domecq PLC, owner of Dunkin’ Donuts, Baskin-Robbins and, more recently, the Togo’s sandwich chain.

Allied Domecq thought that placed together, the brands would attract drive-time doughnut and coffee lovers in the morning, the working crowd for lunch and ice cream enthusiasts after school, providing a constant stream of traffic throughout the day.

The concept appears to be working — except where it’s not.

Togo’s, for instance, hasn’t been an easy sell to some of the people who already owned a Dunkin’ Donuts or Baskin-Robbins franchise, the company concedes. Scooping ice cream or handling doughnuts is one thing; dealing with fresh produce, meats and dressings to make sandwiches is quite a different level of complexity.

And what about finding one location that draws commuters, workers and neighborhood kids?

“How many sites have all those elements combined?” one industry consultant said. “Not too many.”

The company’s solution is to pick sites suited for the most recognized brand in a region. For instance, in the Northeast, where Dunkin’ Donuts is popular, a site highly visible to morning commuters would be selected even if a Togo’s shares the space, said Mark Richardson, Allied’s vice president of multi-branding.

“We would build the Togo’s awareness,” Richardson said. “As the brands equalize in terms of their awareness and penetration, we find that it’s less sensitive to siting than you might think.”

Arby’s Inc., owned by Triarc Restaurant Group, tried a similar tack. Arby’s relented to requests from various franchisees, pairing up with Mrs. Winners Chicken & Biscuits in Atlanta, Sbarros in Minneapolis and Green Burrito on the West Coast.

Yet the company has chosen not to renew those relationships, said Michael Howe, Arby’s president and chief executive. But it will continue co-branding with the chain it owns: T.J. Cinnamons, opening 20 to 25 of those combos this year, Howe said.

The decision is based on return on investment, Howe said. Adding a Sbarros to an Arby’s can cost up to $300,000. Adding a T.J.’s costs only about $10,000. “Although the sales are smaller, the returns are better,” Howe said.

Dennis Lombardi, executive vice president at Technomic Inc., a Chicago food-service consulting firm, said some are rushing into these arrangements to gain an edge in a business in which rivals constantly undercut one another on price.

“But it’s not a panacea,” Lombardi said. “It won’t make a bad brand or a bad location a good one.”

Even with strong brands, Lombardi said, companies could suffer if they overplay one brand at the expense of another.

“The customer wants to believe it’s two separate restaurants under one roof,” Lombardi said. “If they walk in and see one predominant brand and a second one with just two feet of counter space, the second brand probably will not perform well.”

Wendy’s International Inc. had such concerns in mind seven years ago when it purchased Tim Hortons, a Canadian baked goods and coffee chain.

The two brands have different management teams, billboards and customer queues — a departure from the usual co-branding arrangement — so as not to blur the concepts, said Denny Lynch, a company spokesman.

In its 160 shared restaurants, mostly in Canada, Wendy’s has saved about 25 percent on real estate development costs, Lynch said. But each brand generates the same sales, on average, as its free-standing counterparts, he added.

Yum Brands boasts similar savings. Remodeling an aged KFC store costs about $150,000. For an extra $150,000, the company can add another brand and generate an additional 20 percent to 30 percent in sales, said Chuck Rawley, the company’s chief development officer.

Now the company is shopping around for an appropriate match for Pizza Hut — possibly a pasta or sandwich chain.

Today, about 1,500 of Yum Brands’ 17,000 U.S. restaurants are co-branded. In another five years, the number could reach 5,700 at the very least, the company said.

Why not settle for a food court arrangement where numerous brands offer their fare?

Because franchisees sometimes feel they get a raw deal from the shopping center management, which decides who gets space, how much and where, said Jerry Wilkerson of Franchise Recruiters.

“They don’t give a darn how many brands are in there or if they’re competing,” Wilkerson said. “All they care about is selling floor space.”

Nor do they give the little guy a fighting chance, says Richard J. Sharoff, chief executive of Maggie Moo’s ice cream.

Tired of getting outbid by heavy hitters such as Blockbuster and Starbucks for visible mall locations, Sharoff will soon test at least one co-branding opportunity with Taco John’s in Omaha.

Sharoff acknowledges that sharing a space with a larger, better-known brand could detract from his efforts to build a name for his company, based in Columbia, Md.

“I figure we’re better off being second cousin to Taco John’s than being stuck in the back of a shopping center where no one can see us,” Sharoff said.

Owner Yum Brands Inc. hopes “co-branding” familiar names in a single restaurant will lure more customers to locations like this one at Ager Road and Hamilton Street in Hyattsville. Felicia Sullivan, manager of an A&W/KFC restaurant in Hyattsville, talks with Olu Adepegba, who manages another store. Below, Harlan Dawson, far left, and Dave Eric Twigg and Larry Frederick lunch at the co-branded restaurant.