Franchising | November 2010 | By Sam Oches
The Dirty Work
Some might say that the last three years have not been very, well, accommodating for the quick-service industry. With lenders and customers alike pulling their dollars off the table, the industry has been left to make due with the circumstances and struggle to stay afloat until the economic environment warms.
Although the recession created a fair share of hand wringing in quick-serve c-suites, the franchisees have been dealt the biggest blow; they’re the ones tasked with keeping the brand’s operational gears turning, and the slowing dollars, for them, means a slowing livelihood.
QSR spoke with five multiunit franchisees to find out where to find financing, how to compose a strong team of employees, how to comply with legal regulations, how to cut back on unnecessary spending, how to juggle the many responsibilities of being a multiunit franchisee, and how to expand in a down economy.
One of the biggest hurdles multiunit franchisees undoubtedly ran into face-first during the recession was financing. With dollars harder to come across, franchisees were left to either scramble for loans or stall expansion altogether.
Frank Bonanno, president of Las Vegas–based Fifth Avenue Restaurant Group, a franchise company that includes 11 Häagen-Dazs, 10 Nathan’s Famous, and three Johnny Rockets units, says financing new restaurants in the recession has taken a healthy dose of creativity.
“What we’ve done is we’ve used some of our own capital, but of course, you can never have enough to keep building,” Bonanno says. “We’ve done some traditional financing through banks, but not a whole lot. We’ve done some lending with companies that specialize in restaurant lending. But the biggest opportunity that we’ve found is using private-equity funds.”
Bonanno says the private sector is a good place to turn to for financing because “private people still have capital available.” For Fifth Avenue Restaurant Group, he says he utilized the company’s various business relationships to open several restaurants during the recession.
One multiunit franchisee with a 43-unit network of Moe’s Southwest Grill, Popeyes, Checkers, Rally’s, and Subway stores says financing today is difficult mostly if franchisees expect to get prerecession types of deals.
“There were deals that could have been had with no money down—very high levels of leverage, very low interest rates, and very loose covenants,” says Aziz Hashim, president and CEO of National Restaurant Development Inc. “That kind of financing is not available today and may not come back for a long time.”
Hashim says his company has had luck getting financing from regional banks because they’ve fared better through the recession. What it takes to get the financing, he says, is a strong, proven business model.
“Banks have to lend money—that’s their business model,” Hashim says. “The thing now is that they’re being very careful about who they lend it to, and those decisions are based on the underlying balance sheets and how strong the corporation is. If you have a healthy balance sheet, you can still get financing today.”
The success of a multiunit franchise hinges on the people surrounding the franchisee. Or so says Todd Bertagnole, a Casper, Wyoming–based franchisee of Subway and TCBY.
“Multiunit ownership is about great people,” he says. “You’ve got to have a good management structure in place, and you’ve got to have great people.”
Bertagnole owns eight Subway and two TCBY units in Wyoming, and is the first to admit that the growth of his company relies not on his brains and brawn alone. The fight for success, he says, means a franchisee’s ego must be checked at the door.
“For the most part, people like to surround themselves with people who are equal or less than them in skill sets,” he says. “That’s not necessarily the best thing. You should surround yourself with the best people, period. I like to have people smarter than me. I like to have people managing my stores that can do everything I can.”
Roz Mallet is the president and CEO of PhaseNext Hospitality, a franchise company that includes Smashburger, Corner Bakery, Buffalo Wild Wings, and Zao Noodle Bar in its portfolio. She agrees that a strong team of employees and store managers is important for a franchise company to grow, especially one with more than one brand.
“It’s not simple to do more than one brand, so we have to hire quality management, and we frankly have been committed to hiring very experienced managers so that we can rely on them,” says Mallet, whose company is focusing on nontraditional locations like military bases and airports.
“Too often in airports, we don’t see where there’s a commitment to the labor side and having managers for each brand. A lot of the multibrand operators don’t do that as much to try to save labor dollars. But we are committed to doing everything in our power to have managers that learn the brand and can execute the brand.”
The restaurant industry has long been at the mercy of legislative motions, but the last few years especially have thrown legal curveballs at operators, from health care reform to the menu-labeling mandate. Keeping apprised of all the mandates and complying with them in the stores is a responsibility that falls on the franchisee.
Hashim says legal regulations are usually things that his franchisors help move him through, but he says it is not something to turn a blind eye toward. He believes multiunit franchisees have the responsibility of using the democratic system to voice their opinion on matters that affect them.
“More and more I’m of the opinion that we need to do a lot at the local level as individual business people, especially multiunit franchisees, because we have some size—I have 1,000 employees,” Hashim says. “We can meet with individual legislators and congress people in our districts where our restaurants are located, and we can hammer them from this side.”
Of course, game-changing legislative moves like health care reform and the labeling mandate are not something that a franchisee can easily change. For regulations that are unavoidable, Hashim recommends franchisees keep one step ahead of the game.
“We can definitely put a number on the cost of health care, we can estimate right now,” he says. “We know how our [profit and loss statement] is going to change as a result of that legislation. If we know that now, then our decisions regarding how much we spend on building a store and what our unit economics should be changes. So I may take a little bit less risk now, because I know that a marginal unit is not something that will be able to absorb these new costs.”
It’s no secret that through the recession, operators have been forced to tighten their belts and cut down on costs. Streamlining effectively, however, takes some finesse.
“You’ve got to start looking at things that were luxuries—maybe a rug service or a laundry service, things like that,” Bertagnole says. “Things that you considered luxuries at the time, you cut. You take your trash from being picked up three days a week to two days a week. Instead of polishing your floors twice a month, you do it once a month. You can’t be exorbitant in these times.”
Jay Tortorice, president of Beaumont, Texas–based Jen-Tex Deli’s Inc., a 14-store Jason’s Deli franchise, says keeping costs low is crucial. But when streamlining, he says, franchise owners must leave certain things off the chopping block.
“Obviously, cutting back on portions or quality is the very last thing any restaurateur should do,” Tortorice says. “That is the cardinal sin in our business, to reduce food quality or portions.
“On the staffing side, obviously there’s the same concern, and that is hiring the right amount of staff to take care of the customers you have coming through the door,” he says. “Once you start pinching there, then it’s going to hurt service.”
Bertagnole says trimming the fat has a lot to do with reducing the waste in food and labor.
“Where we used to be able to say, ‘Oh, you’re a point off on your food costs, that’s OK,’ now that’s not acceptable. Now you better be within a half a point,” he says. “With labor, maybe you’d allow a few extra hours. You don’t anymore.”
When Tortorice—whose father, Joe Tortorice Jr., is the founder and CEO of Jason’s Deli—became a franchisee, he and his business partner were entrenched in the operations of their store. Now that he oversees 14 stores in Texas, Mississippi, Alabama, Tennessee, Kentucky, Ohio, and Indiana, Tortorice says his to-do list changes every day.
“I’ve got to constantly keep my priorities in line in my role as the company president,” Tortorice says. “If I find myself delving too far down into tasks, then I’m really misallocating my time. What I’ve got to keep first and foremost in my mind is positioning our company to take advantage of opportunities when they come about.”
For Tortorice, this means he has to “wear a lot of hats”—site selection, lease negotiation, construction coordination, legal, human resources, and financing all fall under his watch. When the company starts to lose money, he says, that means it’s time to hire more staff to take over some of the responsibility.
Mallet shares the administrative responsibility of PhaseNext Hospitality with Amy O’Neil, her chief operating officer who was once the senior vice president of operations for Caribou Coffee, where Mallet served as CEO. While O’Neil handles most of the in-store operational details, Mallet says she has to keep her eye on a lot of the big-picture elements of quick service, like real estate, franchisor relations, and financing.
Being able to hand over the control of a lot of the details to O’Neil, Mallet says, is crucial to their brands’ success.
“You can’t build a franchisee business singularly,” Mallet says. “One person can’t do it, not more than one restaurant, anyway. You have to have someone you can rely on who shares your values and your perspective and you both understand what the strategy is. You have to agree on where you’re taking the business.”
For many, the idea of growth during the recession has been nothing more than a faded hope. The economic fallout slammed the door on many strategic growth goals, stalling quick-serve expansion.
Although his company put the brakes on expansion during the recession, Bertagnole says adding stores is what being a franchisee is all about.
“The purpose of franchising is to be able to duplicate yourself,” he says. “If you’re not a multiunit owner, you’re not taking advantage of the system that you paid for. You’re not taking advantage of the opportunity to multiply yourself.”
But expansion does not happen simply by having a successful concept. Mallet says a multiunit franchisee must have a development strategy, must build at a pace that maintains operational efficiency, and must have the right money and people that can back a new location up.
“Those are very, very important,” she says. “We can’t go open someplace until we’re absolutely sure that we have the financial backing and that we would be able to find the quality team that would execute the way we need them to.”
Mallet says businesses that grew for growth’s sake were partly to blame for the recession. PhaseNext plans to learn from those mistakes. “Brands got in the habit of opening restaurants just because they could,” Mallet says. “We don’t want to do that. We want to grow intentionally and have a long-term positive impact on our business. We have to say ‘no’ sometimes.”
Bertagnole says a franchisee who is interested in opening more stores must ask a number of questions before jumping head first into it: “Is my first store taken care of? Do I have good management in place? Can I walk away from this store for a month and not notice it? How am I financially? Can I pay for the majority of this?” he says. “It’s a juggling act. There’s no set of rules for it.”
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