It seems like it’s no longer enough to have a hot brand. With hundreds of concepts competing for the 3,985 new franchised restaurants expected to be built this year, according to the International Franchise Association, many franchisors are sweetening their deals by offering extra services.
What most cutting-edge franchise services have in common is that they cut the cost of opening a store. Says consultant Mark Siebert of iFranchise Group, “It’s a lot easier to improve performance by starting on the investment side than on the revenue side.” Here’s a peek at programs around the country:
Cash off the barrelhead
Much as cities and counties discount taxes to attract new companies, some chains are slashing royalties and franchise fees. A big franchisor like Dunkin’ Donuts of Canton, Massachusetts, targets incentives to 40 developing markets. It cuts royalty rates for a franchisee’s first three years and rewards existing operators who recruit new ones into the system. If a newcomer commits to at least six units, the finder can earn as much as $50,000.
“It gives the franchisees flexibility on their P&L statements as they learn the nuances of a new market,” says Grant Benson, vice president of franchising and market planning. “They want to know that if it’s tougher to control food costs than they expected, the weekly service fees are going to be affordable.”
When Daniel Sibley became director of construction for Dickey’s Barbecue Pit of Dallas, Texas, the average restaurant covered 3,000 square feet and cost $500,000 to open. But now new restaurants take up 1,800 square feet, with a minimum investment of $136,000. Says Sibley, “A lot of people can write a check for this and have no debt to service.”
The trick is to bring all operations closer together. Sibley tore down walls between dining areas and replaced them with rope barriers. He nixed another wall between the kitchen and the serving line and substituted off-the-shelf equipment for custom designs. A manager can run a slimmed-down restaurant with three workers instead of five.
Of the 45 Checkers that franchisees planned to open in 2010, half were conversions of existing buildings. That’s due largely to chief development officer Lynnette McKee in Tampa, Florida. “Every time a restaurant wants to open, I talk about the conversion opportunity,” she says, “and I show them before and after pictures.”
The benefits: Opening in 90 to 120 days versus six to nine months and getting 1,600 square feet with seating for less than the cost of building an 800 square-foot double-drive-thru. The biggest challenge, she warns, is to remove distinctive bits of architecture, like a Pizza Hut roof. “You want them to forget what that building used to be.”
In Largo, Florida, Ker’s WingHouse steers new franchisees clear of costly “A” real estate locations. A cross between Wingstop and Hooter’s, the concept appeals most heavily to males from 25 to 44, who aren’t big patrons of lifestyle centers.
“We look for a second generation restaurant site, with good ingress and egress off a main highway,” says franchising director Chris Adkins, “not tourist destination spots like an Applebee’s or Chili’s. At a destination spot like that, you can pay $2 to $3 million to purchase a building outright. We can get these locations for $800,000 to $1.5 million.”
Kicking up kiosks
It costs at least $250,000 to build out a Red Mango storefront. A quarter of last year’s 67 franchise openings and this year’s planned 100 are small-format units, ranging from 600 down to 150 square feet in locales as different as Loyola College in Baltimore and Dallas/Fort Worth International Airport. Red Mango also stations the units inside other concepts, like the New York soup-and-sandwich chain Hale and Hearty. A fully equipped kiosk runs under $100,000.
“It doesn’t hurt that our operating model is so simple,” says Jim Notarnicola, director of nontraditional development. “There’s no cooking or holding equipment. We’re wrapping the design around three or more yogurt machines.”
In Little Rock, Arkansas, an investor group had the money to build five Newk’s Express Cafés. What it didn’t have was any restaurant experience. With help from sales firm Franchise Dynamics, Newk’s recruited a veteran of Chili’s and Outback. He became operating partner, owning 10 percent of the franchise.
Since then, the Jackson, Mississippi, fast-casual chain has made two similar matches, says Stephen Hinkis, vice president of franchise operations. “If we like the investor group, and they have a sincere interest in running Newk’s, we try to partner them up with an operator who has experience.”
Training by TV
How can a franchisee save cash and carbon at the same time? Edible Arrangements of Wallingford, Connecticut, moved its training online. Touchscreen monitors at its fruit-and-juice stores offer a comprehensive menu of video programs, plus a weekly program of company news. The tab for the system, dubbed nXstep: $2,000. Says COO Karman Farid, “You’ll make your money back eliminating one training trip for a manager.”
An enticing business opportunity is clearly the primary motivator for franchisees. It’s incumbent upon a franchisor to develop such a model and regularly look for opportunities to improve that model. Improving the business model should not be seen as a focus on investment or sales; a franchisor should be consistently raising the bar to drive sales and reduce costs. Smart franchisors take a holistic approach to helping franchisees deliver a solid bottom line. Sound, successful franchisees make for a prosperous franchisor.
The franchisor is charged with brand leadership and management. Driving profitable sales for franchisees is crucial to these responsibilities. Franchisors also have the opportunity to champion driving costs out of the business, but only if they don’t impact the guest experience. In a system that is almost exclusively franchised, collaboration on the top line and the bottom line leads to success.