Franchising | December 2017 | By Jessie Szalay

Why Fast Casuals are Turning to Franchising

Initially reluctant fast casual restaurant brands are finding the upside to franchising.
American Grilled Cheese Kitchen
Nate Pollak says franchising gave his concept, American Grilled Cheese Kitchen, runway to grow. American Grilled Cheese Kitchen / Noah Smith Rogue
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Four years ago, André Vener, Hagop Giragossian, and Quasim Riaz made a pact: They were never going to franchise their gourmet sausage and hot dog brand. During Dog Haus's first three years in operation, everyone from business moguls and consultants to rabid fans approached them about the possibility of franchising. Eventually, the cofounders agreed to attend a meeting; they would listen to what the consultant had to say, but they were, under no circumstances, franchising.

Eight hours later, on the drive back from the meeting, the three looked at each other and agreed, "We're a franchise."

Vener laughs as he recounts this story; so much has changed since then. The Dog Haus team not only threw their pact out the window, but they also became an early adopter of franchising in the fast casual 2.0 space. They now have more than 30 stores (mostly franchised units) and are on track to open 60 more in the U.S. in 2018. They plan to grow to 300 locations in 19 states over the next six years.

"We have a unique concept: the better sausage or hot dog. No one else was out there doing dogs, so we needed to strike while the iron was hot and grow more quickly," Vener says. "Next year we're doubling in size. You can't do that if you're company-owned unless you take out major loans."

Not all fast casuals have such a clear-cut reason to franchise. But the initial hesitation the Dog Haus founders expressed illustrates a relatively common perception among fast casuals that pride themselves on quality: Franchising isn't for them. These limited-service brands often associate franchising with diluted product quality, brand identity, and customer engagement. Additionally, the franchise system supply chains can be more difficult to manage than a network of company-owned stores, says Lynette McKee, CEO of McKeeCo Services, a franchising and development advisory firm.

But some fast casuals are realizing it doesn't have to be that way. For fast casual American Grilled Cheese Kitchen, the impetus to franchise began when the owners recognized that the brand already had the systems in place to maintain product quality.

When it opened in 2010, American Grilled Cheese Kitchen was hyper-local, says cofounder and CEO Nate Pollak. Not only were many ingredients sourced from nearby California farms, but they were also prepared in a commissary kitchen before being brought to the two other stores in San Francisco. It was a slow process that raised issues of food safety and consistency during transportation. So the brand opted to develop relationships with suppliers who would prepare the smoked bacon, brined chicken, and other signature ingredients and ship them to the stores.

"We've honed the business model to be suitable for this," Pollak says. "We've been operating for seven years in the toughest restaurant market in the country. ... We have made it here; our restaurant is hyper-profitable. A few years ago, I thought if we can do this profit here, imagine [what] we could do in other markets."

This July, American Grilled Cheese Kitchen announced its franchising program. The brand is in talks with interested parties and plans to expand to other urban markets and, potentially, the suburbs.

Supply chain scaling is another integral—but potentially challenging—element to successful franchising, McKee says, and research is key to doing it right. The Dog Haus cofounders looked to successful franchises to learn about consistency, then found vendors able to provide hormone-free, antibiotic-free, and nitrite-free meats. It's also possible to do it affordably, Vener says.

"With the right vendors, it scales. You need to make the investment initially to know that once you are opening your 20th store or your 50th store, the price becomes the same as if you had just opened a couple stores with lesser quality ingredients," he says.

Building the vendor relationships and supply chain is only part of the challenge, McKee says. Regular communication with franchisees is also essential. Operators need to understand the importance of using the established supply chain. Sometimes franchisees think they can find the same ingredient for less money, which can negatively impact the quality and taste of the product, McKee says.

Tech advancements are bolstering the lines of communication. Franchisors can see when things happen in real time and provide support when necessary; they can also glean insights from their operators. McKee says regular communication can help maintain accountability and thus make the brand more competitive.

"We can learn from franchisees," Vener says. "They've been doing this for many years. We have some franchisees that own stores [with other brands] in all 50 states. They have this wealth of knowledge to help our team go into new territories."

That knowledge might lead to new LTO or philanthropic partnership. Sometimes a franchisee's idea won't fit with a brand's goals or identity, but it's always worth hearing.

"When you bring diversity and experience to the board room, psychologists have found that you get better results," Pollak says. "So if I can bring that diversity through franchisees, I strongly believe we will build a better company."