Monthly Archives: October 2015

Franchises Affected in Restaurant Sourcing Revolution

Bowl of tomato soupA new report from National Restaurant News reports that the biggest issue, the biggest change, and the biggest challenge for franchise (and other) restaurants is not the minimum wage or the joint employer definition. Instead, it’s a consumer-driven revolution taking place across the nation.

Americans are starting to care about the ingredients in their food to a much greater degree. In fact, they care so much about sourcing that their demands for change can’t be ignored.

  • Clean Eating is a trend focusing on fresh, unprocessed foods without lots of added salt, fat, and sugar. That doesn’t describe that popular bacon double cheeseburger, but it is an emerging trend with an increasing number of devotees. Nutritionists point out that some natural foods, such as red meats, may not offer the nutritional benefits of other natural foods, like broccoli.
  • Sustainable sourcing asks franchisees to make sure they buy ingredients that are raised in eco-friendly and socially responsible ways. Some of the issues here include the amount of fertilizer and pesticides used, the treatment of farm workers, and the way farming methods affect soil.
  • No antibiotics in the meat used in restaurants is a high priority for many. People are unsure about the safety of meat raised with antibiotics, but the biggest issue is the possibility that eating such meat can make the problem of antibiotic-resistant bacteria more serious. Improper use of antibiotics by humans has already led to many resistant strains of diseases. Farmers feed antibiotics to their animals because it causes them to gain weight faster, so they’re ready for the market sooner.
  • No GMOs, or genetically modified organisms, is one of the most controversial demands. While the U.S. government does not believe that GMOs are dangerous, many European countries ban them. Some consumers consider this evidence that GMOs are still not proven safe, no matter what the U.S. government says.
  • Gluten-free diets allow no wheat, which can be challenging not only for breads and pizza crusts and baked desserts, but also for sauces, soups, and even salad dressings. People with celiac disease must avoid gluten, but many more Americans avoid gluten because they believe that doing so helps with weight loss or because they feel that they are sensitive to gluten in other ways.

While some franchises have gone along with all these demands whole-heartedly, it’s not always that simple. People who remember the oat bran craze may wonder whether gluten sensitivity will vanish just as quickly as oat bran mania did. Consumers care about ethical and sustainable sourcing, but most don’t care enough to pay for higher costs. And the popularity of Clean Eating hasn’t made a big difference in the ration of salad sales to french fry sales — more people talk the talk than walk the walk, and consumers seem to prefer to be a bit indulgent right along with being a more healthy eater.

If you’re thinking about investing in a restaurant franchise, though, it’s a good plan to ask where the company is on these changes. They may not all be embraced by all restaurants, but they probably shouldn’t be ignored.

A Healthy Franchise System

winnerWouldn’t it be great if you could tell for sure which franchise business opportunity would be a winner, and which would not — before you made an investment? A new study might help make that a reality.

FranchiseGrade conducted a study of seven years of data from 243 franchises, and was able to distinguish the characteristics that make the difference between healthy franchises and franchises that don’t see the kind of growth and opportunity for success that the researchers defined as healthy.

For the years studied, 2008 to 2014, franchise locations as a whole saw overall growth of 13.7%, a nice increase over the course of the recession. Within the random sample the researchers studied, about two thirds of the franchise businesses showed healthy growth and one third did not.

The characteristics they found might not be the ones you would predict. For example, company-owned locations were present in healthy franchise systems. The authors of the report figure there are two reason for this. First, the fact that the corporation is able to own and run some stores is a sign of financial stability.

Second, the company-owned stores can be used to test concepts and run experiments. The franchisor can try out products or marketing ideas in settings they can control, work out the kinks, and then roll the new ideas out to franchisees with confidence.

Higher turnover rates might seem like a negative, but that’s not the case. Turnovers in healthy franchise systems turned out to be transfers or sales of franchises, while less healthy systems were more likely to have terminations or non-renewals. Both successful and unsuccessful closings show up in turnover rates, with a happy franchisee retiring from many profitable years in the business having the same effect on the math as an unhappy franchisee giving up on a failing enterprise.

Turnover rates can’t be used to distinguish between healthy and unhealthy franchise systems, according to this study.

One characteristic that showed up in unhealthy franchise systems was franchises which were sold, but which never opened. SBNO (sold but not opened) franchises should be considered a red flag when you’re researching a franchise, researchers determined.

A large number of franchisees who make the investment but give up before opening their shops and making a profit could, the researchers realized, mean that selling franchises is the main revenue stream and focus for that company. You want to work with companies that make most of their money from royalties paid by successful franchises. Companies with that focus will support their franchisees over the long run.

Healthy franchise systems, the study found, were more likely to provide a good return on investment for franchisees, and more likely to show steady growth over time.

The researchers concluded that more detailed Item19 disclosures in the Franchise Disclosure Document could make it easier for franchisees to distinguish between healthy franchise systems that offered a good investment and those that might be more difficult to succeed with. However, the success of an individual franchise is never guaranteed, and always relies on the individual franchisee.

 

Franchise Decision: Big or Small?

orange_size_comparison_by_foreverzerodragon-d41jsxsThere are franchises with thousands of locations, and there are franchises with just a few dozen… or a mere handful.

Jan-Pro cleaning service, for example, has 11,000 units. Domino’s Pizza has 11,285. 7-11 has 51,000.

Parking lot painters We Do lines, on the other hand, have 11.

Which is right for you?

Here are the points to consider as you make your decision:

  • Small franchises may be newer. Do you want to get in on the ground floor? You could have opportunities for growth and influence that later franchisees won’t have, and you might have more flexibility. On the other hand, you could also be buying into a system that hasn’t yet matured.
  • Big franchises have more turnover. While it makes sense that a large system would be less risky, the biggest franchise corporations actually have a lot of turnover. This is logical, since they have more units to turn over, but it might make it harder to develop connections.
  • Small franchises might be more personally connected. The corporate office probably can’t really think about 2,034 franchisees as individuals, but a franchisor with 36 franchisees probably can. On the other hand, very large franchises are likely to have a team looking after the franchisees, so it may be the middle-sized franchisors who provide the least personal touch.
  • Big franchises are usually more streamlined and professional in their operations than small franchises. They have to be, just to keep track of everything going on at the corporate level. If you decided to go into franchising because you got tired of corporate life, you my be dismayed to find that your new small business has quite a bit of the feel of corporate life.
  • Small franchises are easier to get into. The largest franchises often have many, many applicants to choose from, so they don’t offer as many opportunities for new franchisees. Big franchises also are usually much more expensive to join. You may need a large investment and an aggressive approach to find a place in the bigger franchises.
  • Bigger franchises are more likely to have strong franchisee organizations and communities. A small franchise with a few locations in the same region doesn’t have enough players to get conferences and meetings going — and the franchisees may feel more like direct competitors. Large franchises often have exciting events for franchisees, and strong leadership within their organizations.
  • Smaller franchises may offer more freedom to franchisees, whether they’re new or have been around for decades. Flexibility is easier for smaller, more agile companies. The bigger a company becomes, the more uniform it has to be in order to keep things on track.
  • Bigger companies have more name recognition and more momentum for marketing. Being the new kid on the block has some benefits — novelty can be exciting for consumers — but at the end of the day, fame certainly has its perks. Especially when you first open, having a well-known brand it a huge advantage.
  • Small companies are often simpler, with straightforward business models that have very small learning curves.
  • Bigger companies probably know the answers to all your questions, and their training will probably be more intense

There are pluses and minuses to both — and what’s a minus to you might be a plus to someone else.

Franchisee, Can Software Get You in Trouble?

Web design over blue background, vector illustration.

Web design over blue background, vector illustration.

Franchisees pay for many items of value when they invest in a franchise business opportunity. Often that includes specialized software. Proprietary software can be a big investment for a small business, and automating many of the tasks of a business can save significant amounts of money. Software can also sometimes create problems.

For example, some franchises use time clock software to track worker schedules. Time clock software is a popular type of software for businesses that have complex scheduling, such as restaurants and retail stores. Such software may work like a spreadsheet, making sure that there are workers in the shop all the time, with more at busy times and fewer a slow times. It may help ensure that workers don’t come in early or leave late, and may be designed to avoid unexpected overtime. The most sophisticated software of this type not only schedules workers, but also alerts the business when labor costs are becoming a higher percentage of the revenue than is desirable.

Obviously, this is very useful, but some legal advisers suggest that it could also lead franchisees unwittingly into a joint employer situation. If a franchisor checks labor costs as a KPI and has access to time clock software, it could be construed as the franchisor having a hand in day to day worker scheduling, even though the franchisee makes all scheduling decisions.

Another example might be the websites many franchisors offer their franchisees. Of course, it’s great to have a website — all businesses need websites. But franchisee’s websites often are just pages on a central website. Visitors click through to their local franchisee’s page, and see information about that franchise.

Sometimes, however, franchisees don’t make the effort to keep their pages up, or they don’t have the skills to do it themselves and they don’t want to make the investment to have it done. When some franchisees don’t keep up their pages, it can make neighboring franchises look less appealing to visitors who check out several locations. On the other hand, if they can’t opt out and they don’t want to figure out how to keep up, those slacker franchisees may feel just as frustrated with the website as the other franchisees feel with them.

One more example is the enterprise-level software that tracks everything from sales to marketing, and lets the corporate office track franchise performance in real time. This kind of software is often presented as a way to track KPIs without disturbing or interfering with the franchisee.

But that might mean that you don’t realize the central office is following your every move. Would you do things differently if you knew about the oversight? Maybe not, but it’s unnerving to know that someone else had access to your data all along, without your realizing it.

When you look into franchise business opportunities, don’t space out during the discussion of the software. It can be a blessing — and usually is — but it can also be a challenge. If you see any concerns, be sure to discuss them with your franchisor, and also with the current franchisees you interview.