Franchisors of some quick-service concepts that boast low start-up costs say they are seeing no shortage of applicants for franchises these days as economic uncertainties lead many would-be entrepreneurs to seek alternative careers.
However, a pronounced tightening in financing and increased competition for good franchisees among various industries may make expansion of franchised restaurant chains far harder than in the past, veteran foodservice watchers and insiders say.
Some franchisors are offering unusual incentives, including outright waivers of franchise startup fees, to convince new operators to sign development deals.
“Ultimately, the franchise market has become more competitive within the restaurant industry and outside the industry as potential franchisees look to other, more lucrative opportunities like consumer electronics and mobile-phone stores,” said Darren Tristano, vice president of the Chicago-based foodservice consulting and research firm Technomic Inc. “I definitely see a general slowing of unit expansion in the U.S., and especially with full-service chains.”
Keith Gellman, president of RestaurantChains.net, an online research database, said it shows recently that more franchisors are favoring sales to small franchisees rather than to bigger area developers. He reasons the apparent trend may reflect a tightening of capital financing and the realization among new franchisees that they need to get their feet wet in operations before committing to opening multiple restaurants.
“People don’t stop trying,” Gellman said, estimating that some 900 new restaurants open every week in this country and that four out of five are quick-service operations. “That doesn’t mean they will succeed.”
Several expanding franchise systems that currently number between around 50 and 650 units are offering various incentives aimed at new franchisees who initially can afford just one or two locations. Incentives range from Big Apple Bagels limited-time elimination of its $5,000-per-location franchise fee for its triple-brand Xpress concept to other chains’ offerings of budget-priced building options in different store formats.
Big Apple Bagels has one franchised Xpress unit open in a co-branded Subway sandwich shop in Oswego, Ill. While the 126-unit bagel chain continues to franchise full-sized units that include a large midday sandwich and lunch component, it has decided to develop the smaller Xpress model as its primary expansion vehicle, said Anthony Cervini, director of development for the closely held company, based in Deerfield, Ill.
Because the Xpress units, which feature the company’s Big Apple Bagels, My Favorite Muffin and Brewster’s Coffee brands, are primarily intended to be co-branded with other chains that don’t offer breakfast, Big Apple’s leaders decided to eliminate the initial franchise fee as a concession to operators that had already paid a fee to their initial franchisor, Cervini indicated.
“We will get our return on investment in the long run. We are better off opening the unit with a 10-year franchise agreement,” he explained.
The sales-royalty-only offering has elicited several applications, and Big Apple Bagels is negotiating deals with some of them. Opening costs average $50,000 for the Xpress, versus $300,000 for one of the chain’s full-sized bagel specialty bakery-cafe outlets.
Overall, the quantity of applicants has not declined, Cervini said, but he is needing to “dig a little harder” to find good-quality prospects because capital is harder for franchisees to come by.
“Getting financing for full stores will be tight for a few years,” Cervini predicted. Same-store sales at units open more than a year are in the positive single digits, he said, declining to be more specific.
Taco Del Mar of Seattle has been having good luck helping new franchisees get Small Business Administration financing, as well as bank loans from lenders with whom it has built relationships, said David Welts, the 280-unit chain’s franchise sales manager. Securing financing today may take a little longer than it has previously, he conceded.
“We still welcome the one- to two-unit franchisee,” Welts said. “A lot of companies that are backed by larger equity partners prefer to have people come aboard who commit to five to eight units when they sign on.”
The majority of CiCi’s Pizza franchisees are one- and two-unit owner-operators, said Craig Moore, president of the 630-unit chain, based in Coppell, Texas. To make it more convenient for prospective franchisees to meet with management and complete a required twoday work experience, CiCi’s this year has taken its franchise expositions on the road, instead of requiring applicants to travel to Dallas.
While initial inquiries numbered 10,000 last year and are likely to reach 8,000 this year, Cici’s added only 50 new franchisees last year. “The funnel gets pretty tight at the bottom,” Moore said.
Based in suburban Detroit, the 48-unit Papa Romano’s, 35-unit Mr. Pita and 12-unit Stucchi’s ice cream chains, which industry veteran Casey Askar acquired last year, have seen “an increased interest in franchising from people who have been downsized from their jobs or who expect to be,” said spokes-woman Beverly Lyons.
Askar’s new company, which operates or franchises all but one of the chains’ locations in recession-weary Michigan, says individual or co-branded franchises cost from $180,000 to $250,000 to open. If current franchisees bring in a new franchisee, the franchisor pays them a one-time sponsorship fee or reduces royalties for up to a year, Lyons said.
Maui Wowi, the 400-unit smoothie chain headquartered in Greenwood Village, Colo., also offers a range of investment options, starting from about $75,000 for a mobile cart to $300,000 for a full-size unit, said Mike Edwards, chief operating officer. “This year, people are looking at the lower-cost models,” he said.
An even lower-priced option is to lease a mobile cart from an outside company. “Most of the franchisees who start small go on to bigger units,” Edwards said.
Other new franchise incentives, usually steep discounts in franchises fees if not outright waivers, are available to veterans and minorities through the International Franchise Association’s VetFran and MinorityFran programs.
More than 300 veterans have become franchisees in various industries, including restaurants, in the last six years through Vet-Fran, said Matthew Shay, the IFA’s president.
