Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Top Franchisees Use Store-Within-a-Store Partnerships
Transcript
- Lucas: If these conversations have moved your work forward in some small way, the way these stay ad-free is listener support — we'll come back to that in a second. But first, I want to talk about a franchise expansion strategy that doesn't require a second build-out, a second lease, or even a second kitchen. Luna: You're talking about the store within a store model. I've seen it work really well for some franchisees — and totally flop for others. Lucas: Right, and that's exactly why I wanted to dig into it. There's a smoothie franchise operator in suburban Minneapolis — I'll call him Mark, not his real name — who put a kiosk inside a Target about eighteen months ago. He told me the kiosk added about one hundred forty thousand dollars in annual revenue, with virtually no incremental overhead. His main store is a stand-alone about three miles away. Luna: One forty is not nothing. What's the rent structure on something like that? I assume you're not paying a full market lease. Lucas: No, it's a percentage rent deal in his case. He pays eight percent of gross sales to Target, with a monthly minimum of twelve hundred dollars. So if he has a slow month, his rent is capped at twelve hundred. If he kills it, Target gets a cut. But his build-out costs were under thirty thousand dollars — compared to the three hundred fifty thousand he spent on his stand-alone store. Luna: That's a dramatic difference. And I imagine the staffing model is lighter too. Lucas: Exactly. He runs the kiosk with one full-time person and a part-timer. The kiosk is only open during Target's store hours, so no early morning prep or late-night clean-up. He cross-trains people from his main store to cover shifts, so he hasn't had to hire anyone new. The labor efficiency is where a lot of the margin gain comes from. Luna: If today was actually useful to you, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. And Lucas, I think the key question is: does this kind of partnership cannibalize your existing business? Three miles away, you'd think some of those smoothie buyers might have driven to his stand-alone. Lucas: That's the question I asked him. He said he checked his stand-alone sales for the six months before and after the kiosk opened — there was actually a slight uptick. His theory? The kiosk acts as a billboard. People try the smoothie at Target, then when they want a full-size or a custom order, they drive to the stand-alone. So there's a halo effect, not a cannibalization one. Luna: Interesting. I've seen the opposite happen with a coffee franchise in Dallas. They placed a kiosk inside a Walmart, and their nearby drive-through location dropped about twelve percent in the first quarter. The difference might be product complexity. Smoothies are pretty standard; coffee drinkers have more specific preferences. Lucas: That's a really good point. The smoother the product, the easier it is to replicate in a small footprint. A smoothie kiosk can serve the exact same menu as the stand-alone. But a coffee shop with pour-overs and specialty lattes? You can't do that with a kiosk. So franchisees need to think about operational fit first. Luna: What about the franchisor's stance? I assume most franchise agreements restrict where you can open. How did Mark get permission to put a kiosk inside Target? Lucas: He had to get a waiver. His franchisor's standard agreement gives them right of first refusal on any new location within a certain radius. But Mark framed the kiosk as an experiment — limited hours, limited menu, no signage outside the store. The franchisor eventually agreed, partly because they see the model as a potential growth vehicle for the whole system. They're now developing a formal kiosk program for other franchisees. Luna: So first-mover advantage for him. But what about lease negotiation? Eight percent of gross seems reasonable, but I've heard of big-box retailers asking for fifteen to twenty percent for these arrangements, especially if the host store is high-traffic. Lucas: You're right. The range I've seen is five to fifteen percent, depending on the host retailer and the location. Mark got eight percent because he had a relationship with the Target district manager — he'd been a vendor at a local farmers market they sponsored. That's the wild card: store within a store deals are often relationship-driven. There's no standard lease form. Luna: So if you're a franchisee with no existing connection to a big-box retailer, how do you even start the conversation? Lucas: You cold-call the real estate department. Or better, you find out who the local store manager is and ask for a meeting. Bring a one-page proposal showing your sales data, your insurance, your food safety certifications. Big-box retailers have a vendor onboarding process — you need to be ready for that. Mark said his application took about four months from first call to opening day. Luna: Four months is fast. A typical stand-alone franchise build-out takes six to twelve months. So the time to cash flow is another advantage. Lucas: A huge one. And the risk is lower because you're not signing a ten-year lease. Most store within a store agreements are one to three years, with renewal options. If it doesn't work, you walk away with minimal sunk cost. Mark told me his break-even was about eight months. Luna: What about the operational downsides? You mentioned limited hours, but there's also the fact that you're a guest in someone else's store. You can't control the music, the temperature, the cleanliness of the shared area. Lucas: That's the biggest hidden risk. Mark said his kiosk is near the customer service desk, which is a high-traffic area, but it's also where people return items — sometimes loudly. He's had customers complain about the noise. And he can't put up his own signage beyond what Target allows. His brand presence is limited to a small menu board and the cups themselves. Luna: So the brand-building benefit is weaker than a stand-alone. But if you're already established in the area, maybe it doesn't matter. His stand-alone is three miles away, so people who see the kiosk might already know the brand. Lucas: Exactly. That's why I think this model works best for franchisees who already have a flagship location nearby. It's a satellite, not a standalone brand builder. If you're opening your very first unit as a store within a store, you're going to struggle with brand awareness and customer trust. Luna: Let's talk numbers more broadly. What's a realistic revenue range for a kiosk like this? Mark's doing one forty, but what about a food franchise, or a service-based franchise? Lucas: I've seen data from a few franchise systems that have formalized the model. For quick-service food, kiosks typically generate sixty to eighty percent of a stand-alone unit's revenue, but with forty to fifty percent of the overhead. So the margin profile can actually be better. For service franchises — like a phone repair or a nail salon — the revenue is more variable because the service takes longer. A phone repair kiosk might do thirty to fifty thousand a year. Luna: And the host retailer's category matters too. A smoothie kiosk in a grocery store might do better than in a department store, because grocery shoppers are already thinking about food. Lucas: Absolutely. The best host retailers for food franchises are grocery stores, home improvement stores, and mass merchants like Target and Walmart. For service franchises, you want retailers with high dwell time — places where people are already waiting, like a car dealership service center or a big-box electronics store. Luna: I've also seen franchisees partner with each other. Two franchisees — one with a smoothie brand, one with a pretzel brand — sharing a kiosk inside a Costco. They split the rent and the staffing. Lucas: That's clever. Co-tenancy can make the economics work for both. And the host retailer gets a more compelling offer for customers. But it adds complexity — you now have two franchisors, two supply chains, two sets of brand standards in one tiny space. Luna: Mark's case seems almost ideal. But what about the failure stories? I want to hear a concrete one. Lucas: Sure. There's a frozen yogurt franchisee in Phoenix who put a kiosk inside a Bed Bath & Beyond — before the chain's troubles. He was paying twelve percent of gross, which was already high. But the bigger problem was foot traffic: the store was in a dying strip mall, and the kiosk only did about twenty thousand in annual sales. He closed after nine months. His mistake was trusting the host retailer's traffic projections without verifying them himself. Luna: So due diligence on the host store's foot traffic is critical. What metrics should a franchisee look at? Lucas: You want to see the host store's annual sales per square foot, their customer count, and their average transaction value. If they won't share that data, that's a red flag. Also, visit the store at different times and days. Count the people walking past your proposed kiosk location. Mark did that for a week before signing. Luna: And what about the regulatory side? Health department permits, business licenses — does the host store's permit cover you? Lucas: In most cases, you need your own permits. The host store's health inspection doesn't cover your kiosk. Mark had to get a separate food service permit from the city. And his insurance had to name Target as an additional insured. Those are standard requirements, but they add cost and time. Luna: So the checklist for a franchisee considering this model: check franchise agreement for restrictions, build a relationship with the host retailer, verify foot traffic, negotiate percentage rent with a reasonable minimum, plan for separate permits and insurance, and have a backup plan if the kiosk doesn't work. Lucas: That's a solid framework. I'd add one more: think about exit. What happens if the host retailer goes bankrupt or remodels the store? Your lease probably has a clause that lets them terminate with thirty days' notice. So you need to be able to pull out your equipment quickly and not lose your shirt. Luna: That's a sobering thought. But for a franchisee like Mark, with a low-cost entry and a fast break-even, the risk-reward is compelling. Lucas: I think we'll see more of these partnerships in the next couple of years. Retailers are looking for ways to fill empty space and drive foot traffic. Franchisees are looking for cheaper ways to expand. The store within a store model sits right at that intersection. Luna: As long as you do your homework. Speaking of which, if you want a template for the one-page proposal Mark used, we'll put a link in the show notes — though I believe that's a future thing. Lucas: It is. For now, the takeaway: don't overlook the kiosk inside someone else's store. It might be your fastest path to unit number two.