Franchising | May 2011 | By Jan Fletcher

Leveraging Franchisee Diversity

Minority franchisees bring new opportunities to the table for quick serves, but the hurdles they face require creativity on the part of the franchisor.

Quick serves could be poised to step up their franchising efforts as soon as the credit market thaws and while available real estate remains cheap. Some experts say that minority-franchisee recruitment will be a particular area of focus, as franchisors pursue the value minorities bring to customer relations, new product innovation, and new markets.

Miriam Brewer, director of education and diversity for the International Franchise Association in Washington, D.C., says brands with diverse leadership and franchisees will be more innovative. “When you surround yourself with individuals that come from diverse backgrounds, you get the best of everything,” she says. “The idea that great minds think alike is so old.”

Brewer says some franchises put their diversity efforts on hold when the economy took a dive. “They wanted to make sure [their existing franchisees] could stay afloat,” she says. Still, minority representation has increased remarkably in the franchising industry, tripling since 2000, says Rob Bond, president of Oakland, California–based World Franchising Network. “The consensus is that today, minorities account for well in excess of 15 percent [of all franchisees],” he says.

But Bond says, “virtually no one can buy any franchise” amid credit markets that are still emerging from a deep freeze. With sales at existing franchises still struggling to pick up again, royalties are down and hurting franchisors.

For minority franchisees, this is just one of the many hurdles they face in fulfilling their dream of becoming a franchise business owner.

“[Franchisors are] not aggressively going after minorities, because [minorities] need financing more than other folks, and that’s especially so for African-Americans,” says Bond, who is also the founder of the National Minority Franchising Initiative, a forum to address the under-representation of minorities in the U.S. franchising community.

In fact, financing is one of the biggest challenges preventing minorities from entering the franchise industry, experts say. But capital is not impossible for them to acquire.

One strategy for obtaining financing is to work with local economic development agencies to take advantage of incentives. “[Those agencies] can talk about this tract of land being developed in three years, or a year,” Brewer says. As incentives are often tied to locating a business in an economically distressed area, aspiring minority franchisees should become “quite friendly with the economic development office,” she says.

But interested minorities are late to the world of quick-serve franchising, says Gerry Fernandez, president of the Multicultural Foodservice & Hospitality Alliance, based in Providence, Rhode Island. That is because many of the A sites have already been taken, only leaving locations that may not be as profitable as those first colonized.  

“The [sales] volume is half of what it could be due to the neighborhood [demographics],” Fernandez says of units built in economically distressed areas. “Margins are smaller. Access to a quality workforce is lacking, and a number have gone out of business.”

Al Daniels, an African-American and military veteran, is a Domino’s franchisee with restaurants in Georgia and Florida and plans to have 10 franchised locations by the end of 2011. “I am in the process of purchasing the sixth one, with three other stores in the purchasing system,” he says. “There’s always obstacles with financing. But Domino’s again stepped up to the plate and helped me procure sources for financing. The company was instrumental.”

Domino’s Delivering the Dream program launched in 2006. Domino’s Pizza offers qualifying franchisees loans of up to $250,000 per store through GE Franchise Finance, offering a 10-year payback in most cases for existing locations. Franchisees have a seven-year payback for new stores.

Diversity is good for business, Daniels says. As an African-American, he says, he can better serve that demographic because he has insight into customer issues that may not be as easily understood by whites. “I may not be able to identify with some of the overall market per se. It would be a challenge for me to go overseas and open up a business over there,” he says. “But it’s the same over here. The owner’s identity is supporting the business.”

No one is a more enthusiastic evangelist than Fernandez in pushing the benefits that minorities bring to quick-serve operations. But understanding how a minority fits into the franchise system is important for franchisors, if they want to truly take advantage of what minorities can bring to the table.

Framing the issue in the context of “you owe minorities a chance,” for example, is a mistake, Fernandez says. “Store operators from within those communities know better how to successfully operate those businesses, find talent, and understand cultural norms,” he says.

Fernandez says quick serves should embrace diversity among franchisees because it’s profitable. “If they purely went with the economic issue, it would be better,” he says, pointing to White Castle, McDonald’s, and Burger King as examples of companies that operate from this perspective. Instead of viewing it as a fairness issue, he says, “think like a capitalist: ‘We need this audience to really help us be successful in these communities.’”

Schlotzsky’s, with more than 350 locations and plans for 300 more by 2015, actively seeks out minority franchisees, says president Kelly Roddy. In addition to offering reduced franchise fees and royalties to lower the cost of entry, the company started offering new minority franchisees a $10,000 check on opening day.

“The current state of capital markets has impacted what anybody here has been able to do,” Roddy says. “The U.S. Small Business Administration requires a lot more cash down.”

“Store operators from within those communities know better how to successfully operate those businesses, find talent, and understand cultural norms.”

Giving the new franchisee $10,000 means they need less cash up front, Roddy says. “It’s a minor investment on our part, and we’ve brought in a good number of new franchisees that have been minorities,” he says. “We’ve gotten some really good franchise partners.”

Schlotzsky’s has benefitted from the pursuit of diversity in other ways, too. A discussion with a franchisee partner who was a native of India inspired Roddy to develop new menu items when he realized how many people in the world eat vegetarian fare. “These are products we should have available,” he says. “It brings a new customer base to us, and those ideas are important.”

Yum! Brands recently established the Yum! Minority Franchisee Lending Program. The goal is “increasing the number of minority franchisees and minority-owned restaurants in our system,” says Rick Maynard, a spokesman for KFC. KFC aims to increase minority ownership by 33 percent by 2016.

Brian Luscomb, a spokesman for Jack in the Box, says more than half of the brand’s 100 franchisees were born in other countries, and a number of them were referred by existing franchisees. The company made the 50 Top Franchises for Minorities list from the National Minority Franchising Initiative in November. That list, in fact, is rife with quick-serve brands; others include Straw Hat Pizza, McDonald’s, Schlotzsky’s, Denny’s, Kahala Brands, Focus Brands, Popeyes Louisiana Kitchen, Church’s Chicken, El Pollo Loco, Little Caesars, Mr. Goodcents Subs & Pastas, Pollo Campero, Rita’s Italian Ice, Charley’s Grilled Subs, and Togo’s.

Jonathan Fornaci, president of Straw Hat Pizza, found a novel approach to strengthening minority franchisee business: Craigslist. The company lets minority franchisees purchase used equipment from online sources like Craigslist instead of forcing them to buy new equipment.

“A brand new pizza oven is more than $25,000, but a used pizza oven is $8,000. A franchisor could require you to buy a brand new oven and give kickbacks to the manufacturer,” he says. “We’re not trying to make money from the franchisees by selling them equipment. We make money off selling pizza.” Fornaci says 30 percent of the company’s 81 restaurants are minority-owned.

In developing programs to help minorities, quick serves should not view them as one group, Fernandez says. Historic events, family values distinctive to a culture, and socio-political realities affecting different minority groups create immense differences that affect business acumen, he says.

He cites a case in point: A foreign-born minority franchisee may have significant cash reserves in his homeland, as well as abundant family connections from which to obtain financing, but an African-American franchisee may be a first-generation entrepreneur in the family, with few, if any, family members able to invest in the business.

Family taught values also affect franchisee success, Fernandez says. “You see a number of Hispanics that have come up through the restaurant business, sweeping the floors, having saved every nickel,” Fernandez says. Focused on grabbing a piece of the American dream, “they put every bit of energy into this.”

“The other element is if you grew up in a black community, and went to a black school, you haven’t really interacted to a general degree with white business owners,” he says. “You have to understand how to navigate the landscape, which was largely created by white males, and there’s a lot of things culturally that don’t fit. Sometimes you don’t get the jokes, but you have to move quickly to understand how corporate culture works and mimic it.”