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Avoid these pitfalls and grow

An IPO may not be in the cards any time soon, but if you’ve set your sights on growth through unit expansion you’re facing a whole new set of challenges than simply having a great concept and executing it well. Whether taking the leap to open a second unit or cutting the ribbon on your 100th, the road to growth is rarely without a few sinkholes. Many of the challenges are company and/or concept specific, and how you navigate them depends greatly on the depth of your resources.

Many of the challenges are company and/or concept specific, and how you navigate them depends greatly on the depth of your resources. But the view from 10,000 feet up shows a handful of common hurdles that virtually every growing restaurant company encounters. Here are some of the ones you’ll encounter while building your empire.

Clone yourself—or find a good staff
Independent operators are so hands on that suddenly straddling two or more units is tougher than most expect it to be. “When you go from one to two stores, that’s a 100 percent increase in what you and your company are called upon to do,” says Dennis Lombardi, executive vice president of WD Partners, a consulting and engineering firm in Dublin, Ohio. “When you go from 50 to 51 stores, it’s a 2 percent increase.”

Richard and Paulette Schnipke, who for 32 years have operated the Red Pig Inn in Ottawa, Ohio, figured opening a second unit 25 miles away would be easy. But they wound up living in a hotel near the new restaurant for three months. “We were veterans, as were the chef and managers who came over with us, but the 85 employees we’d hired at the new place weren’t,” Paulette says. “We had to be there every shift; that’s something we never anticipated.”

Early on, lack of financing to bring on the right help can be a challenge. It was for The Melting Pot, says Robert Johnston, president of the 117-unit Tampa-based chain. “You end up making compromises that can hurt you,” says Johnston, who with two brothers purchased the then five-unit fondue concept in 1985. “We couldn’t afford to bring people with the right skill sets to the table and as a result we made a lot of mistakes. Eventually, we began to tool up from a personnel standpoint for smarter growth.”

The first departments added were operations-related. One was a team of franchise business consultants, who work in the field to help franchisees improve operations and profitability. The other was a corporate training director. A third department, added more recently, was marketing. “We used to outsource everything to an agency, but we now offer a high level of in-house marketing support to our franchisees. We get greater control and can be much more responsive,” says Johnston.

Let the systems be the driver
Adding units means creating replicatable systems for everything from hiring and training, to customer service, food prep and presentation, food safety, maintenance, pricing, marketing and communications. Tight systems—written down, communicated and trained for—help ensure consistent operations from unit to unit.

If franchising strong systems are especially critical. “There are franchisors out there that started without even having an operations manual, or with a very weak one,” Karen Spencer, president of franchise consultants Fran Systems, based in Marietta, Georgia. “They might have pretty good operating systems, but that’ll get them just so far.”

Ron Berger, CEO of Figaro’s Italian Pizza, a Salem, Oregon-based chain with 114 franchised stores, says growing a chain means changing your role. “Ray Kroc used to say that he wasn’t in the hamburger business, he was in the business of developing systems that enable other people to make money selling hamburgers. We’re a creator of systems and of tools, including a great operations manual that franchisees need to maximize their [ROI].”

Start working the supply chain
Opening units five states away means ensuring that the products you specify for your menu are standardized. Make sure your distributor’s reach is broad enough.

When Gary Hoyle established a new franchise company to take Peach’s, a Florida breakfast and lunch concept, national under the name Rise & Dine Restaurants, menu standardization was one of the first tasks he undertook. “Even though there were multiple units, they weren’t set up for future growth,” Hoyle says. “We recreated the order guide and brought in branded products that we knew we could get whether we were in Seattle or Miami.”

In some cases, signature products dictate where the growth path leads. For Hurricane Grill and Wings, that product is all-natural, fresh chicken wings. The Stuart, Florida-based chain began franchising last summer and so far has 14 units operating. “Supply chain issues have a big impact on where we can grow,” says Jim Plante, vice president of franchising and development. “It’s going to be tough for us to get into some markets because we have to be able to source fresh chicken that meets our all-natural specifications. Wings are about 55 percent of our sales, so securing the supply chain and knowing where the products are coming from is critical.”

“By the time you get to 30 or 50 units you need much more structured and efficient supply lines,” consultant Lombardi adds. “And as your purchasing power increases you can do a lot more negotiating on price, drop costs and product standardization. Many operators just getting into the growth mode don’t do enough homework on what reasonable expectations are in this regard. As such, they can’t negotiate effectively and that can really hurt their economics.”

Get real about real estate
While everyone agrees that having a good location makes things easier, many companies don’t really understand exactly what a good location is. The first mistake is to go site shopping without detailed information about your customer dynamics, says Bill McClave, managing partner at Birchwood Resultants, a real estate modeling firm with offices in Kansas and Texas. “Once you have a few units operating, look carefully at your most successful ones and quantify who the customers are and where they’re coming from,” he says. “Where people come from and how far they travel tells you what you have to have in the trade area to support each restaurant. Then analyze the residential base, work base and retail base surrounding those stores and the demand structure generated by each. Without such insight, the risk of locating in areas too thin to generate sufficient sales increases dramatically.”

With site modeling information in hand, McClave adds, operators can make fairly accurate revenue projections and screen out low-volume sites. That makes both bankers and potential franchisees happy. “We find that real estate is about 70 percent of the success outcome for new restaurant units,” he says.

Careful modeling can tell you not just what’s needed in terms of real estate, but also what you don’t need. Hurricane Grill and Wings, for example, started out testing a range of unit sizes and found that regardless of square footage, volumes tended to be consistent. “With that knowledge in hand, we tailored our processes and the size of our buildings accordingly to boost our unit economics,” Plante says. “We now go into small, in-line spaces, which are the most abundant and affordable spaces available. We control great rental rates for the volumes we’re doing—roughly 3 to 6 percent of sales compared to the 8 to 14 percent common in the industry.”

Build your brand at every turn
Local customers may know and love you, but when you step outside of familiar territory, you’re back to new-kid-on-the-block status. Strong, consistent branding can help ensure quick acceptance and shorten the window from opening to profitability.

In many instances, companies discover that despite the success of their original brand it may need a major overhaul to make it a viable growth concept. Hoyle felt re-branding was needed when he purchased the Peach’s restaurants. The concept was a local institution, but not well defined. “I wanted to make it crystal clear what segment we’re in, so the first thing I did from a branding standpoint was to change the name to Rise & Dine Restaurants. We then upgraded the decor package and gave the menu a complete redesign.”

When Berger and partners bought Figaro’s Italian Pizza six years ago, the chain had 70 stores and a strong presence in Washington and Oregon. He set out to take it around the globe with new branding that could better support expansion through franchising. Step one was to hire an agency with branding expertise to analyze Figaro’s brand as well as those of competitors and to determine a new direction. “That process took three to four months,” Berger says. “It took us from focusing on “we bake, or you bake” messaging to the idea that Figaro’s delivers flavors that sing. We now focus everything we do not just on a feature, but on quality, unique flavors, unique experience.” Figaro’s then hired a second agency with expertise in design to bring the new brand to life with designs for store prototypes, packaging, merchandising materials and advertising.

While store design and advertising are the most visible components of branding, those brands with the greatest power go far beyond that, says Marsha Lindsay, CEO of Lindsay, Stone & Briggs, a Madison, Wisconsin-based agency that specializes in branding. “Brand strategy,” she says, “should be applied at all levels of an organization, from product development to customer service to marketing. It should… infiltrate the culture of the organization.”

The process begins with shaping your brand promise—clearly defined, simply stated positioning that every customer should know or feel when they visit and that guides every employee in their interactions with guests. All other aspects of the brand strategy then flow from and connect back to that promise, Lindsay says.

Berger says that making the investment to work with an agency means giving up some control. “You see companies who commission an agency to do the research and make recommendations and then ignore the recommendations because they didn’t jibe with what the CEO or marketing VP was thinking.”

Engineer your space for the long haul
Closely tied to branding is prototyping. From a guest standpoint, prototyping means every time they enter one of your company’s units, they experience a consistent look and feel. But from a business standpoint, prototyping has a direct impact on productivity and profits.

“If you’re at just a couple of stores, your prototype is probably the last store built,” Lombardi says. “But as you move into multiple units, it gets very important to fine tune the overall size, layout, back-of-the-house design and, if applicable, the drive-through system. You need to know what the choke points are and streamline processes via spaces specifically engineered to meet your business model.

“If you’re at 30 stores and growing or franchising, you can’t afford to have an inefficient kitchen,” he adds. “Consider that a $100-million restaurant chain with a 30 percent labor cost spends $30 million in labor a year. We know that going from a non-engineered to an engineered kitchen can have a 1 to 2 percent impact on labor costs from increased productivity. Using the conservative 1 percent savings estimate, that’s $300,000 a year. As the system grows, these become bigger dollars and ignoring them is like ignoring small leaks in the boat.”      

GROWTH STAGES

Smart staffing

Small

  • Well before expanding, prepare employees in existing operations to keep the “mother ship” sailing smoothly.
  • Groom good employees for key positions in subsequent units and use expansion as a way to provide career paths.
  • Have a Plan B. If someone hired for a key position doesn’t work out in the new place, map out who will step in.
  • Hire more than you need and allow ample time for pre-opening training.

Medium

  • Formalize a strategic plan for growth, including details on how fast and where you want to grow. Use that plan to define staffing needs.
  • Get an administrative assistant, even if part-time, to handle clerical and organizational functions.
  • Weight personnel build-up toward operations. You’ll need good people in the field to support store openings and ensure consistency.
  • Add a dedicated new-store opener to systematize policies and procedures and work in the field.
  • If gearing up to franchise, start recruiting franchise sales specialists and area developers with the expertise to select franchisees likely to succeed.
  • Make training a corporate function with a dedicated staff.

Large

  • Add in-house expertise in human resources, purchasing and distribution.
  • Add a real estate and construction pro to manage the site-selection and build-out processes.
  • Bring on culinary and/or R&D expertise to ensure the menu stays fresh and competitive.
  • Bring marketing and PR functions in-house for strong, consistent brand messaging.
  • Add IT expertise to ensure uniformity of reporting systems and to develop system-wide electronic communications tools.

Distribution evolution

Small

  • Multiple distributors—usually a broadliner supplemented by product category specialists.
  • Strong relationship and interaction with a DSR, who probably stops in weekly to consult and perhaps even to take your order.
  • Distributor’s inventory drives product selection and regular haggling over price is typical.
  • Occasional trips to Costco or Sam’s Club to fill in and save a few bucks on certain items.
  • Frequent deliveries of perishable products and/or “hot shot” service to cover for ordering errors and omissions.
  • Higher-margin “street account” pricing to compensate for the relatively heavy service and low volume your business represents to the distributor.

Medium

  • Greater reliance on a primary broadline distributor to increase efficiency.
  • Distributor’s ability to bring in proprietary items may become important.
  • Delivery radius for long-term growth must be considered. Can they service you in the farthest reaches of your growth plan?
  • Menus, product specifications and order guides are standardized to ensure consistency and pricing controls from unit to unit.
  • Supply issues may impact geographic expansion. If there’s no local supplier of mission-critical fresh products, for instance, you can’t go there.
  • Distributor sales rep is replaced by a multi-unit account rep, in-person contact is much less frequent and online ordering and inventory management are standard.
  • Delivery frequency decreases as better purchasing and inventory management systems are established.
  • Pricing structure begins to reflect your growing volume leverage, moving to a fixed mark-up over the distributor’s cost.

Large

  • National distribution capabilities are important, whether through a single national company or a cooperative network of independent regional distributors.
  • If you pass the 100-unit mark you might move from a broadline to a systems distributor, which specializes in efficient and cost-effective handling of large chain business.
  • Product sourcing and pricing negotiations now take place at the manufacturer level; the distributor simply delivers at the prices you’ve negotiated with suppliers.
  • Cost-plus pricing structure is typical.

Site selection

Small

  • Opportunistic—what’s available, what looks good.
  • Concept and operations adjusted to fit the space.

Medium

  • Prototype development and testing begins.
  • Specific ideal location metrics identified, real estate modeling process begins.
  • Site selection guidelines and support developed for franchisees.
  • Stronger focus on securing high-quality real estate.
  • Sites and footprint adjusted to fit the concept.

Large

  • Sophisticated real estate modeling systems established and rigorously adhered to.
  • Significant internal resources dedicated to real estate management.
  • Prototype specifications closely followed.

Why rebrand for growth?

  • Your spouse or neighbor created your original “brand” in a rush to get something to the printer.
  • You’ve outgrown your brand.
  • You bought the brand but it still reflects the previous owner’s vision, not yours.
  • Your target customer base changes.
  • Your menu and concept change.
  • You’re heading into new territory where a stronger brand is needed.

Common branding mistakes

  • Focusing on the features of the brand, not the benefits.
  • Confusing product positioning with brand positioning. The latter should be based on core values that transcend this year’s menu changes.
  • Failure to do careful competitive branding analysis.
  • Focusing on the functional aspects of the brand and forgetting about the emotional components.
  • Inconsistent use of the brand communication elements because not everyone (i.e., franchisees) was involved or bought into the new branding.
  • Having in-house people instead of objective third-party researchers gather brand development data.
  • Forgetting that customers own the brand and failing to get their insights to give the brand strategy power and authority.
  • Putting execution ahead of strategy—i.e., getting caught up in designing that cool new logo before doing the hard but important work of understanding exactly what it should communicate.

Write an ops manual

Writing an operations manual is a big undertaking, one that should involve the owner, managers and key staffers. Here are some tips from the National Restaurant Association for tackling the job:

  • Use a mini tape recorder to dictate an outline. Carry it around for a week and add content as you go about daily operations. Speak like you’re doing a new-employee orientation, keeping statements simple and direct.
  • Announce the title of each section as you add content about a topic into the recorder—i.e., “Personal Hygiene: All cooks must wear hats or hairnets.”
  • Hire a transcriptionist to get the recording down in electronic and/or hard-copy format.
  • Cut, paste, reword, reorganize, edit and have the document re-typed.
  • Share it with staff members to get input and revise as appropriate.
  • Insert pictures with brief captions to illustrate procedures.
  • Add some fun to spark employees’ interest—i.e., trivia about your restaurant.
  • Develop tests or quizzes for employees to take after reviewing the manual. Ask questions about every section. For example, “Describe our policy for handling customer complaints.”
  • Hire a translator to make the manual bi- or multi-lingual.
  • Have your attorney make sure that all procedures are legal.
  • Make final copies and bind into notebooks with a label and logo. Consultants will write a manual for you. But, you and/or key managers still need to provide lots of input and direction.

Ask to see samples and get multiple bids: Fees can range from a few thousand dollars to tens of thousands.

What to include

Here’s some of what should go in:

  • Concept definition/vision
  • Customer service expectations
  • Training requirements and procedures
  • Uniform requirements
  • House rules and disciplinary procedures
  • Job descriptions
  • Hiring guidelines
  • Sample customer contact scripts
  • Opening, closing and cleaning duties required of specific positions
  • Other general duties and who’s responsible for them
  • Guidelines for handling guest complaints
  • Sample apology letters
  • Recipes and presentation guidelines
  • Food and labor cost guidelines
  • Inventory sheets
  • Dry, refrigerated and frozen storage maps
  • Food safety procedures
  • Crisis management guidelines

Lessons Learned

“We made an acquisition last year as a way to grow and develop co-branding opportunities. The biggest hurdle on that route isn’t legal or financial; it’s integrating the systems and cultures of two organizations into one.” —Ron Berger, Figaro’s Pizza

“Filling key positions with people we’d never worked with for the start-up of our second restaurant was a huge mistake. It almost cost us our first restaurant.” —Sandy D’Amato, chef-owner, Sanford and Coquette Café, Milwaukee

“Expanding to a much larger market and being surrounded by casual-dining chains taught us quickly that we needed to polish our operations to compete and to determine if our concept has franchise potential.” —Paulette Schnipke, Red Pig Inn

“Selling a franchise is like getting married. It’s easier to get into than out of, so it’s smart to take your time and focus on the quality of the people—not the size of the check.” –Gary Hoyle, Rise & Dine Restaurants

“When we started out, finances were tight. If a prospective franchisee wanted to open a restaurant and had the cash to do it, we’d sign them on. We often picked the wrong people for the wrong reasons and ultimately had to close some units to protect the brand.” —Robert Johnston, The Melting Pot

“We started franchising last summer and stopped temporarily to take the focus off of sales so we could fine tune our systems, enhance profitability and make it easy for franchisees to come into our program.” —Jim Plante, Hurricane Grill and Wings

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