Special Report | March 2014 | By Daniel P. Smith

The Future of Franchising

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Fast food brands change franchising model to succeed in economic climate.
Corner Bakery is preparing for aggressive growth through experienced, multiunit franchisees.
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“We’re going to partner with the right people and invest in their success off the bat, so the right culture is in place to help Pie Five and its partners thrive,” Gier says.

Though McAlister’s Deli has more stores today than it had when Frank Paci arrived as CEO three years ago, rising from about 300 to 325 stores, the company claims fewer franchisees. Paci says a number of existing franchisees purchased underperforming units from other franchisees with an eye on improving performance and advancing development.

In the next five years, McAlister’s looks to open about 25–40 units annually, a goal that would bring McAlister’s total unit count toward 500. Paci says existing franchisees will drive most of that development, though bringing new franchisees into the system, specifically ones with multiunit operational experience, will remain a priority.

“Ideally, we want to hedge our bets on franchisees who are proven operators,” he says. “As we see it, development in our system is a privilege, not a right.”

Jameson foresees many quick-service chains employing the same strategic philosophy, fueling growth with experienced operators, particularly those already in the system. In an intriguing turn, Jameson has also noticed some concepts introducing the idea of franchising to strong general managers at corporate-owned stores as an additional path to propel growth.

“And in both cases, this makes sense because these are the folks who live and breathe the brand. The track record is there,” Jameson says.

In addition to the hefty focus on proven franchisees, companies are also driving growth with corporate-owned stores, content to put franchising on the bench in an effort to maximize their own profitability. Meanwhile, a robust investor appetite for high-growth concepts, particularly compelling fast-casual brands, is pushing fresh capital into the market.

“A lot of fast-casual concepts, which are driving the industry’s growth right now, have unit-level economics and an easier path to raise capital than in past years, and that’s changing the appeal and need for franchising,” Lombardi says.

At Modmarket, for instance, Pigliacampo views franchising as a funding mechanism his upstart concept doesn’t presently need.

“We like our ROI from a company perspective, and if we can get the cash to build new units, that’s a good deal for us,” he says. “We’re growing at a pace not constrained by capital, but by operations.”

In discussing franchising’s potential, Pigliacampo and his Modmarket colleagues analyzed restaurant brands they respected, marveling at the infrastructure each developed to support franchise operations.

“Our thinking was that if we’re going to invest mounds of money in anything, we might as well do that in company-owned stores where the ROI is greater for us,” he says.

Other concepts already in the franchising game, however, champion the benefits of using corporate-store growth as just one piece of the puzzle, alongside franchised units from proven operators.

Though Corner Bakery has activated aggressive franchise development plans, the company, which didn’t begin franchising until 2007, looks to achieve a 50/50 split between franchised and company-owned stores. With a $2.3 million AUV, Price says, Corner Bakery leadership agrees that pairing new company-owned stores with franchised operations is a shrewd use of capital.

“We feel that a 50/50 split is a good mix for us,” Price says. “With company-owned stores, our franchise partners see we have skin in the game and are committed to driving the bottom line. And by having franchised units, we’re able to accelerate our growth horizon.”

Continuing to build or operate corporate-owned stores also signals to franchisees—both current and prospective—that headquarters has confidence in the brand, a sentiment that can spark added investment and development.

“Company-owned stores help us stay aligned with our franchisees. We see the same things on the P&L that they see,” McAlister’s Paci says.

Today, in fact, McAlister’s has more corporate-owned units than when Paci arrived three years ago. That includes the corporate repurchase of 13 languishing franchised units just last year. Corporate-owned stores now account for about 15 percent of McAlister’s total unit tally, a number Paci looks to maintain.

“When we bought back some poor performers, it was a positive message to others in our system that we’re doing something to improve the brand and put it on a better track, and, whether you’re talking corporate-owned stores or franchised locations, that’s the clearest path to future growth,” Paci says.

In the years ahead, Lombardi predicts, some emerging brands now committed to running company-owned stores will begin pursuing franchising as their individual circumstances evolve. Perhaps the concepts discover they cannot grow as quickly as they had hoped through internal means, new investors enter the fray eager to push strategic growth, or concepts feel their processes and systems have reached a point where they can now incorporate franchisees.

“Circumstances change strategy, which changes the appeal of franchising,” Lombardi says. “Franchising will not go away, but it will experience some repositioning from time to time.”

Though Pigliacampo does not see a day where a single entrepreneur will run one Modmarket store, he acknowledges Modmarket’s franchising potential. More than likely, however, Modmarket would follow the lead of its fast-casual brethren: continuing to open and operate company stores while partnering with experienced multiunit franchisees to develop a given market.

“As you scale, different opportunities present themselves, and we understand certain partners will be attracted to one another,” Pigliacampo says. “We’re not opposed to franchising somewhere down the line, but that’s not where we’re at now. And if we ever pull the trigger on franchising, it will be in a very strategic, thoughtful way.”

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