Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Franchisees Use Co-Branding to Double Revenue
Transcript
- Lucas: You know that moment when you walk into a gas station and you see a KFC and a Taco Bell sharing the same counter? That's not just a convenience play. That's a specific financial strategy called co-branding, and franchisees are using it to squeeze dramatically more revenue out of the same four walls. Luna: Right — and it's not just limited to quick service. I've seen co-branding in fitness, in auto repair, even in hotel lobbies. But the economics are really different depending on the pairing. Lucas: Absolutely. So today let's drill into one specific model that's been gaining traction: a franchisee who operates both a burger brand and an ice cream brand under one roof. Think of a dual-branded unit where the burger line runs lunch and dinner, and the ice cream counter picks up the afternoon and evening dessert crowd. Luna: And presumably they share the same dining area, the same parking lot, the same manager. That's where the leverage comes from. Lucas: Exactly. Let me give you a concrete case. A franchisee I spoke with runs a co-branded unit in a travel plaza off Interstate 95. The burger brand was doing about $800,000 annually on its own. They added the ice cream brand — which cost about $150,000 in additional equipment and build-out — and within 12 months, the combined location was doing $1.4 million. That's a 75 percent bump in revenue for a roughly 20 percent increase in capital investment. Luna: So the incremental return on that extra capital is massive. But what about the operating side? Are they running two separate crews? Lucas: Great question. The most efficient model is what's called 'shared labor with dedicated stations.' You have one general manager, one shift supervisor. The crew members are cross-trained, so a burger line worker can step over to the ice cream counter when the afternoon rush hits. The franchisee told me they run about 60 percent of the labor hours as shared, and 40 percent dedicated to one brand or the other. That alone cut their total labor cost by about 12 percent compared to running two standalone units. Luna: And the lease — that's a big piece. You're negotiating for one space instead of two. Did they renegotiate the lease or just subdivide? Lucas: They renegotiated entirely. The original lease was for 2,800 square feet at $22 per square foot. When they added the ice cream concept, they expanded to 3,400 square feet — knocked out a wall into an adjacent retail space that had been vacant. The landlord was happy to fill that vacancy, so they got the additional 600 square feet at $16 per square foot. So their effective rent per square foot actually dropped from $22 to about $20.50. That's a real advantage. Luna: So now you've got lower rent per square foot, lower labor cost per dollar of revenue, and a much higher revenue base. What's the catch? Lucas: The catch is complexity — and brand conflict. Each brand has its own operations manual, its own supply chain, its own training requirements. The franchisee told me that the first three months were chaotic because the ice cream brand's distributor delivered on a different schedule than the burger brand's distributor. They had two different trucks showing up at different times, and the back storage room wasn't laid out for both. Luna: That sounds like a classic execution risk. And what about the royalty structure? Do you pay two separate royalties on the combined revenue? Lucas: You do. In this case, the burger brand's royalty is 4.5 percent of its sales, and the ice cream brand is 5 percent of its sales. But the franchisee negotiated a blended cap with both franchisors — a maximum total royalty of 5 percent of combined sales. So if the ice cream brand's sales spike, the royalty doesn't blow past that ceiling. That was a critical term in the agreement. Luna: And I assume both franchisors had to sign off. That's not a given. Some franchisors prohibit co-branding because they don't want their brand diluted or associated with a lower-quality partner. Lucas: You're right. And that's actually one of the biggest barriers. Before you even get to lease negotiations, you need both franchisors to approve the co-branding arrangement in writing. In this case, the burger brand had a formal co-branding program. The ice cream brand didn't, but they made an exception because the location was in a high-traffic travel plaza. So there's a selection bias — the franchisees who succeed with co-branding tend to be the ones who pick brands with compatible cultures and franchisors who are open to it. Luna: Let's talk about the customer side. Does the co-branded unit actually attract new customers, or is it just the same customers spending more? Lucas: Both. The franchisee shared some data from their loyalty program. About 30 percent of the ice cream sales went to customers who had come in for burgers and then added a dessert. That's incremental spend from the same customer. But about 20 percent of ice cream sales came from people who walked in specifically for ice cream — many of them families with kids who might not have stopped otherwise. So you're expanding the addressable customer base. Luna: That's interesting. So the ice cream brand actually becomes a customer acquisition tool for the burger brand, and vice versa. There's a cross-promotional effect. Lucas: Precisely. And the franchisee leaned into that. They ran a promotion where if you bought a burger combo, you got a dollar off an ice cream cone. That promotion alone lifted combined sales by 8 percent during the month it ran. The cost was minimal — a printed coupon at the register — and the margin on ice cream is very high. The ice cream brand's food cost was about 22 percent versus the burger brand's 30 percent. So that incremental dollar of ice cream sales drops almost 78 cents to the bottom line. Luna: High margin, low incremental cost. That's the dream in retail. But I want to go back to the operational complexity. You mentioned two different supply chains. How did they solve that? Lucas: They eventually consolidated to a single broadline distributor that could handle both brands. But it took about six months of negotiation. The burger brand's approved distributor list was limited to three companies. The ice cream brand's list was different. They found one distributor that was on both lists — a regional player — and then had to get both franchisors to approve using that distributor as the primary. The ice cream brand was flexible, but the burger brand took a while because they wanted to ensure quality standards. So that was a six-month headache. Luna: And in the meantime, they were managing two deliveries? That's a lot of extra work for a franchisee who's probably already stretched. Lucas: Exactly. And that's the hidden cost of co-branding — management time. The franchisee told me he spent an extra 10 to 15 hours a week during the first six months just coordinating vendors, training staff, and resolving conflicts. That's time he wasn't spending on other units. So you really need to be a strong operator to make co-branding work. Luna: So who is the ideal candidate for this strategy? Is it a single-unit owner looking to grow, or a multi-unit operator? Lucas: Everything I've seen suggests it's best for established franchisees who already run three to five units and have a strong general manager bench. The reason is that the co-branded unit requires more oversight, and you need a GM you trust to handle the daily complexity while you focus on the strategic side. A first-time franchisee would probably struggle. Luna: That makes sense. And the numbers have to pencil out. I did some quick math — if the incremental build-out cost is $150,000 and the incremental revenue is $600,000, assuming a 15 percent store-level margin, that's $90,000 in additional profit. Return on that $150,000 investment is 60 percent. That's hard to beat. Lucas: It is, and that's why we're seeing more franchisees explore co-branding. But you have to factor in the risk that the partnership doesn't work. If the ice cream brand underperforms, you're stuck with extra equipment and a lease that's larger than you need. There's no easy exit. Luna: Right. And the franchise agreement likely has a non-compete clause that prevents you from just switching to a different ice cream brand. So you're locked in. Lucas: Good point. The non-compete in this case was five years for the ice cream brand within a ten-mile radius. So if the partnership sours, you can't just swap in a different frozen yogurt concept. You'd have to either buy out the agreement or sell the whole unit. Luna: That's a significant constraint. So co-branding is not a light decision. It's a strategic move that requires careful due diligence on both brands, the franchisors' policies, and your own operational capacity. Lucas: Absolutely. And I think the most successful co-branded units are the ones where the franchisee treats it as a new business model, not just an extension of an existing one. They invest in the training, they negotiate the lease aggressively, and they build the operational systems from scratch. Luna: It's a lot like starting over in a way, even if you already know one of the brands. Lucas: Exactly. And if you're thinking about it, the best first step is to talk to a franchisee who's already done it. Most are happy to share the real numbers — the good and the bad. Luna: And if these conversations have moved your work forward in some small way, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, it really does make a difference. We keep the show ad-free, and listener support is a big part of that. So thank you if you've ever chipped in. Luna: Alright, back to co-branding. One more angle I want to explore — what about the real estate strategy beyond travel plazas? Are franchisees doing co-branding in standalone locations? Lucas: They are, but the economics are different. In a standalone location, you're not benefiting from the captive audience of a travel plaza. So the co-branding has to generate its own traffic. I've seen successful examples where a coffee shop and a sandwich brand share a space in a suburban strip mall. The coffee drives morning traffic, the sandwich drives lunch. But the rent is typically higher per square foot, and you don't have the 24-hour traffic pattern. Luna: So the travel plaza is really the sweet spot because you've got built-in foot traffic from the gas station and the highway. That reduces the risk. Lucas: Exactly. And the travel plaza landlord often sees co-branding as an amenity that increases fuel sales. So they may offer rent concessions or contribute to build-out costs. In the case I mentioned, the landlord covered 20 percent of the ice cream equipment cost because they wanted the enhanced food offering. Luna: That's a landlord putting skin in the game. That changes the risk profile significantly. Lucas: It does. And it's a reminder that co-branding isn't just about the franchisee and the franchisors — the landlord is a key stakeholder. If you can get the landlord to contribute, the unit economics become even more attractive. Luna: So for a franchisee considering this, the checklist is: get both franchisors' approval, find a landlord who's willing to play ball, negotiate a blended royalty cap, and be prepared for six months of operational chaos. Lucas: That's a solid summary. And I'd add: have a strong GM in place before you start. The co-branded unit will demand more management attention than a standard unit, at least in the first year. If you don't have that bench strength, the complexity will eat into the margin. Luna: Good advice. And I think the key takeaway is that co-branding can be a powerful growth tool, but it's not a shortcut. It's a deliberate strategy that requires preparation and execution. Lucas: Exactly. And when it's done right, the numbers speak for themselves — higher revenue, lower costs per dollar, and a stronger competitive position in the market. It's worth exploring if you're a multi-unit operator looking for your next move.