Research conducted by PhD candidate Owen Wright has been exploring the new phenomena of the use of co-branding in franchising to stimulate and rejuvenate growth in a mature franchising sector. The case study Owen's been looking at is the McDonald’s/McCafe co-branded arrangement, which evolved in Australia.

Why co-brand?

Development trends such as multiple unit franchising, mobile franchising and co-branding, occur because of the sector’s need to find new means of expansion beyond the standard model of franchising.

Franchising in Australia is reaching a stage of saturation and maturity.  The sector has 700 franchise systems operating some 50,000 franchise units for a population of just 20 million people.  This represents a higher concentration of franchising than even the United States and signals the need to find new avenues for growth.

What is co-branding?

Co-branding involves combining two brands to create a single product or offering.  It embraces a collaborative venture to further the interests of two or more organisations in a planned, strategic format.  

Retail co-branding is dominated by businesses that provide convenience benefits to consumers, for example fast food franchises teaming up with service stations (fuel retail) and grocery stores, as demonstrated by McDonald’s and Hungry Jacks with Shell and BP.  Another example is the McDonald’s/McCafe arrangement.

What led McDs to the co-branding arrangement?

McDonald’s enjoyed significant growth through the 1980s and 1990s, however sales and growth stalled over the latter part of the 1990s and early 2000s.

The McCafe concept was adopted in 1999 as a mainstream initiative for McDonald’s and was developed to reinvigorate the McDonald’s brand.

The birth of McCafe

The idea of McCafe started in Melbourne in 1993 as a coffee pot on the counter for peak hour commuters.  This evolved into more sophisticated retail offerings until the development of the first, fully integrated McDonald’s/McCafe was opened in Brisbane at Coorparoo, six years later.

McDonald’s executives recognised McCafe had developed its own brand equity discretely from the McDonald’s master brand. While some attributes of both brands were seen as similar (eg. service delivery components) it was clear separate identities for both brands had been established within the organisation, focused on discrete customer segments.

This is an important part of the co-branding function providing separate values to the respective target audiences but combining the experiences of both brands at the point of exchange.

Benefits of co-branding

A number of themes emerged during the data collection process, which illustrates the reasons why McDonald’s entered into a co-branding arrangement – attracting customers, competitive advantage, reinvigorating brand equity and growth incentives.  These motivations are common in all forms of co-branding.

Attracting customers

Co-branding is designed to increase the frequency of different types of customers, singularly and as a group, and maximise the unit sale price at point-of-purchase. McDonald’s deliberately shifted its positioning using McCafe to provide different attributes to customers, such as a move from processed to fresh food, but also reinforce original attributes such as convenience and price.

Lower costs/increased profit

Combined operations provide extra sales without proportional increases in variable costs such as labour, store maintenance and storage facilities.  Operational savings at franchisor and franchisee levels and higher price-to-asset ratios increase profitability for both franchisor and franchisee.

Market share

The introduction of McCafe at specific sites decreased the effects of competitors.  McDonald’s sales and profitability were becoming difficult to maintain and although the franchising culture within McDonald’s made a significant contribution, competitors were increasingly affecting market share.  

Inhibitors to Co-branding

I identified three inhibitors or barriers to franchise systems that need to be overcome for successful co-branding at an organisational level – systems, culture and legal issues.

Considerably greater investment is required to overcome the cultural and system barriers emanating from the inflexibility of franchising systems. The combination of brands at one retail location can exponentially increase the cost of construction. Legal implications surrounding the franchise agreement and potential litigation can also be barriers to co-branding.

McDonald’s had more control over the cultural aspect as a result of integrating McCafe than a co-branded arrangement with a completely separate company.  In less refined co-branding arrangements with Shell and BP significant conflict exists at retail level between franchisees of the separate systems.

Conclusion

Franchising is a complex, inflexible institution, not well equipped to deal with innovation.  Franchising co-branding faces very high investment costs to implement the cultural change needed to introduce the new format and to cover the property and other system costs of co-managing two branding systems.

This initial case study of McDonald’s/McCafe has provided a starting point for examining incentives for co-branding in franchise organisations but from within one system. As co-branding strategies move from simplistic forms such as promotional and product co-branding to a more complicated form of organisational co-branding within a retail environment it is clear the meaning of the brand is penetrated far more for the organisation.

Links

McDonald's website