The Advantages Mean Franchisees Don't Want to Stop with Just One
By: Ripley Hotch | 1,616 Reads | 11 Shares
Multi-unit, multi-brand, co-branding, area development--you've seen these defined, and they are distinct entities. Most multi-unit franchisees start with a few, and quickly grow one brand, then add another, and often enter into an area franchise agreement.
A surprising number say that they didn't plan to do it; they just followed the opportunity. And all agree that the opportunities are still out there. And the economic argument can be compelling. "It's just too difficult now to run a single unit and make a living," says Jon McGrath of Black Angus Burgers, Inc., a company he formed to develop the two area franchises for Back Yard Burgers in South Carolina and Florida. "With pressure on P&Ls, I see a lot of franchisees growing, and I'm seeing the multi-unit franchisor grow from 10 to 50 unit," he says.
Seattle's Dennis Waldron is still in the early stages, but he's by no means an amateur. For 10 years he was president of Cinnabon, where he introduced franchises and grew the chain to 400 units. After Cinnabon was sold, "I looked at a number of opportunities and finally settled on being a franchisee," he says. Waldron set out to be a multi-unit franchisee.
"I love the franchise business format, and decided I wanted to franchise something in the northwest," he says. His final choice: Ruby's Diner, a 35+-unit restaurant franchise based in San Diego that has been in business for 20 years but just started franchising a few years ago.
"My experience is building companies," Waldron says. "Growing multiple units is what I do and what I wanted to bring to the state of Washington. At Cinnabon we had 200 franchised units, and 25 franchisees. Some had just one unit, and that was probably all they should have had. It's such a gigantic step to go from one to even two, much less six or more."
Every multiple-unit operator will say the same thing: One store is a different animal from any number more than one. Multiple units require an organization that can handle payroll, real estate, accounting, human resources, and operations management centrally. "You can't do it all yourself," says Waldron. One of his first hires was a director of operations--"it was the smartest thing I did." Waldron thinks his market area will hold at least six units, perhaps up to 12, "so we're building a base for that kind of growth."
Waldron's focus is still on one brand, but many multi-unit franchisees branch out into a number of different brands. These franchisees are often specialists in real estate who find themselves in franchising almost by accident. That's what happened to Tom Larson, whose Larson Companies operates about 10 hotels and 10 restaurants under the Holiday Inn, Holiday Inn Express, Best Western, Days Inn, Microtel Inn, Microtel Inn & Suites, and TGI Friday's brands.
"Our principal business is real estate development," Larson says. "We acquired our first franchise at a sheriff's sale. We thought that the acquisition was a real estate opportunity first and a lodging or operating opportunity second. But it didn't take us long to realize that the biggest opportunity in the deal was to successfully operate the business as a lodging facility, and that success would give us real estate success. So we acquired several hotels at discounted prices, like a lot of people did in the late '80s and early '90s."
Larson's base is Eau Claire, Wis., and he wanted to keep his real estate and franchise holdings in an area he knew. So when locations opened up, but there was already an existing franchise for a brand he wanted, he kept the location and sought out a different brand to put there.
"Say we are familiar with a market in La Crosse, Wis.," he says. "It's familiar to us, we know and like the demographic profile of the area, and we have an opportunity to develop an all-suites limited service hotel. Let's say that we've got several Hampton Inn franchises, but there are already two Hampton Inns in La Crosse. At the same time we know that market, and we have an ideal site, and so we still want to do it. So what other brand that would thrive at that location and that market? Maybe it's Holiday Inn Express. So do you want to develop that market with a brand that is available, or do you want to pass on it and do a market you might not like as well for a Hampton Inn?"
"That's how you can end up with more brands than you might have originally expected or planned. You need to sit down and say: What's my priority; what's the greater opportunity? Is it in a great location with an unfamiliar brand? Or a good market that doesn't have a Hampton Inn?" It's a real-life example, and Larson decided to go with the Holiday Inn Express.
McGrath's reasons for signing an area agreement with Back Yard Burgers was similar, but had to do with the kind of product offered rather than just geography. McGrath had started his career with Tricon, which franchises Taco Bell, Pizza Hut, KFC, and A&W. When he decided to become a franchisee, he grew pretty quickly, and now has seven KFCs, 30 Taco Bells, and 22 Pizza Huts. But he wanted to add a burger, didn't consider A&W to be a viable option in his area, and liked the quality of Back Yard Burgers. "In the markets that I had Tricon brands, basically my growth opportunities were extremely limited," he says. The plan is to have 40 Back Yard Burgers in the two areas in the next 10 years.
Having multiple units and brands is "like a stock portfolio--it's a way to spread your risk," McGrath says. "It's unlikely all three brands would be down in the same year." Once you've figured out how to run multiple units, he says, adding more isn't that difficult--which is one reason he's adding more: "I've found that the larger number you have, the easier it actually gets. You can afford better leaders, better systems, and then, of course, your G&A per store unit drops."
That is not to say that adding another brand is easy. "Switching brands, getting into a new one is the most difficult. You have to become an expert in an entirely new restaurant system. You have a new group of individuals, a completely separate group to work with."
Joe Cody's problem was similar: He had eight TGI Friday's, and felt he was running out of good opportunities, so he signed an area agreement to open 11 Old Chicago pizza restaurants in the upper Midwest. He had spent a lot of time in the restaurant business, and had a choice of expanding his own concept or picking up a franchise. "My strength is in management and finance," he says, "and I could be more creative doing that than inventing recipes."
He ended up not only with TGI Friday's, but Arby's, Wendy's, Taco John's, and Blimpies, as well as a couple of independent family restaurants.
"Every market is a little different," Cody says. And there are some real advantages in having multiple brands: "We get to interact with people in the other franchises. Nobody knows everything so what one franchise is strong at others might not be. You're not giving away trade secrets, but general practices."
Ted Nyquist has gone the next step, becoming an area developer for both Fantastic Sams and Money Mailer. His background was in corporations (he holds a Ph.D. in chemistry)--Dow Chemical and Standard Oil. He was interested in having his own business, so he started with a Fantastic Sams franchise in Chicago in 1980.
Then, says Nyquist, "they introduced the area development agreement, and I expanded in Chicago and am still with it. Then somebody in Fantastic Sams introduced me to Money Mailer in 1985 when they were getting into area development."
Nyquist is both a franchisee and an area developer, which means he represents the franchisor to franchisees that he recruits. "We try to identify candidates who would join us, and select them, and then train them. We're in some ways a university." He operates four Fantastic Sams salons and 20 Money Mailer zones; he's responsible for about 75 Fantastic Sams and 220 Money Mailer zones in the Chicago area with 33 franchise owners in the two.
You would think that with the kind of experience multiple unit operators have, they would be telling the franchisor what to do. In fact, however, they have some very particular expectations about what they want from the franchisor.
First and foremost on their list is for the franchisor to manage, advance, and protect the brand. McGrath has a favorite example: Dairy Queen under an earlier ownership. "You can destroy a brand," he says. "They would let DQ sell barbecue in Texas, for example. There was no strong franchisor insisting on consistency. They became a regional brand and in essence collapsed."
Waldron agrees: "From the franchisor, you expect the brand, that's the No. 1 reason you're buying the franchise. So you expect that to be managed very closely and strongly."
Secondly, he says, "You're buying the support systems. So you expect those to be in place: operations, training, marketing, design, accounting. You expect those to be maintained and continually improved and be accessible. Even though Ruby's has been around 20 years, they're just getting their feet wet with franchising. They've been working very hard to build those support systems that can be accessible to a guy like me. Our best franchisees at Cinnabon, the ones who did the best in growth, sales, and profits were the ones who did everything exactly the way we did at company stores. And that did not go unnoticed by me. And I'm attempting to do that with Ruby's. I'm talking to someone there every day."
"We normally have fairly good communication with the franchisor," says Cody. "Any worthwhile franchisor will have good field people to make sure that we as well as everyone else is adhering to the franchise concept. We have different types of quarterly meetings on marketing. Now with the Internet we're well connected. We get email every day from them."
Even though Nyquist trains franchisees and does for them what a franchisor would do, he still considers it important to have contact with the franchisor.
"They give me the brand name and operating system; I'm a franchisee of theirs," he says. "They give me strategy and direction. They give us training also. We have a fair amount of contact, and we sit on boards and committees."
"I personally am looking for great marketing support," says McGrath. "That includes bringing out good products and having the marketing support to grow the business. I expect them to responsibly manage the brand over time. I do not look to them for operational expertise or any financial advice. I like to use them as a second set of eyes, go out in the field, take a look at our restaurants, look at the operations, mystery shopping, etc."
He also likes for the franchisors to share best practices, what's really working for them--just as Joe Cody does.
The advantages of multiple units and multiple brands are clearly compelling. There are drawbacks, but the advantages outweigh them. And it looks as though the sky's the limit. As McGrath says, "I've tried to retire twice and it didn't work. So I hesitate to put any limits on it. I thought when I got my first 13 restaurants I was finished. Then 50 was my stretch goal, and now I've reached that. I will expand where it makes sense, and grow smart."
Published: August 15th, 2003
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