The Franchise Growth Guru by iFranchise Group

STATE OF FRANCHISING

the FRANCHISE GROWTH

GURU MARK SIEBERT, A 25-YEAR VETERAN OF THE FRANCHISE BUSINESS AND FOUNDER AND CHIEF EXEC OF THE IFRANCHISE GROUP, TALKS ABOUT THE STATE OF FRANCHISING TODAY.

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2011 EDITION RESTAURANT FRANCHISING

RESTAURANT FRANCHISING 2011 EDITION

STATE OF FRANCHISING

ou might say Mark Siebert knows franchising. As a franchise consultant for more than 25 years, he has worked with hundreds of franchisors, from start-up operations to corporate giants, and in 1998 he founded the iFranchise Group, an organization dedicated to developing long-term relationships with successful franchisor clientele. His recommendations for strategic planning have been instrumental in the growth and success of numerous national franchisors. Although his work is by no means restricted to the restaurant industry, he has nonetheless assisted a number of foodservice brands, and Restaurant Franchising called on him—just about sunrise Las Vegas time, as a matter of fact—to share his thoughts about the state of franchising today. Let’s start with the elephant in the room. How do you see the economy affecting growing franchisees and franchisors?

Are there any trends on the horizon that you see affecting growth in the next twelve months?

It’s a mixed bag right now. In some respects, for franchisors, this is a really good economy—especially for franchisors who can sell franchises to people who don’t necessarily have experience. They have a combination of factors that all work in their favor. So a franchisor looking for an inexperienced operator, say a sandwich shop or something like that, can get by without experience. They’ve got a huge pool of prospective franchisees that are out there, the long-term unemployed that are looking to find something as an alternative. They’ve got a ready supply of locations and just one of the best opportunities in the real estate market in many, many years. And they’ve got ready availability of employees that they’ve not had for some time. So, on the labor side, on the real estate side, and on the number of prospective franchisees, the signs are all very positive. The one negative, of course, continues to be credit. The credit market is 1000 percent better than it was in early 2009, but it’s not where it was in 2006 and 2007. So, credit continues to be an issue, and when it comes to franchising, some of the national credit suppliers that used to be active are not active in this market anymore, so you’ve got a lot more of this moving to SPA loans and local banks. It’s sort of a mixed market right now. For the right location and the right concept, it’s a really good time to be growing. We expect that the credit markets are going to continue to start loosening up, and if they continue to loosen up, it’s going to become an even better market.

We’re seeing the early stages of some interest in franchising in the Middle Eastern and Mediterranean-type cuisines, which we expect is going to get more legs in the coming years. Obviously, the gourmet hamburger space has been very hot. We think that’s got a couple of years left to run—it’s not going to last forever, but we think there’s a little bit more room to go on that one. I think a healthier kind of food continues to be of interest as well.

Imagine yourself in the position of an owner on the franchisee side, if you’re going to be smart about growing, how should you be positioning yourself right now? Right now, if you can get credit, you’re getting pretty good terms, so I think the key, probably as it is always, is making sure that you’ve got a concept that is relevant in today’s marketplace. On the consumer side, there is somewhat of a new reality out there, and you’ve got to make sure that the concept that you’re going to be growing with, or concepts that you are going to growing with, are the ones that are the most relevant. 36

2011 EDITION RESTAURANT FRANCHISING

Franchisee and franchisor relationships can be contentious, and sometimes they seem to be better than others. On the whole, how well do you see franchisors and franchisees getting along in the restaurant industry? I don’t know that there’s been a radical change in that. I think that in a well run franchise system, the franchise relations are a priority; the franchisees and franchisors have mutual respect, and in those kinds of systems, the relations are good. They may not always see eye-to-eye, but the communication is open and honest, and everybody’s opinion is listened to and valued and taken into consideration before decisions are made. Not every restaurant franchisor has the same value of franchise relations that those who observe best practices do, or if they do value franchise relations, some just don’t know how to properly implement good franchisee relations. We’re actually in the process of becoming the master licensee for the Franchise Relationship Institute, which is an Australiabased company that specializes in promoting and fostering good franchisee relationships. We think there’s a real need out there in the marketplace to do that and bring that in. In fact, we’re rolling this out in September of this year; we’re going to be rolling out a program to help foster better franchise relationships in the restaurant marketplace.

How will that work? There are a number of different factors that are involved. There’s making sure that you select the right franchisee, and there are profiling tests and things of that nature that allow you to better

understand who your best-practices franchisees are, and make sure that you’re more selective in the process of finding franchisees. There are a lot of different vehicles out there in terms of making sure that you’re got a well functioning franchisee advisory council fostering open and honest communication with your franchisees and transparency in the network through various workshops. There’s a whole series of tools that Franchise Relationship Institute and iFranchise are going to be implementing for U.S. franchisors to allow them to address the franchise relationship issue before it becomes contentious.

Is the restaurant industry any better or worse than other industries that are heavily invested in franchising in terms of how well the franchisor/ franchisee relationships work? I’m not sure that there’s a lot of difference between the restaurant industry and a lot of other industries from the standpoint of the basics of how good relationships should be built. I do think that restaurateurs tend to have higher levels of investment than a number of other kind of franchisees, especially in the service-based businesses. There’s more at stake for them from a financial standpoint. So a restaurateur whose opinion is not being heard and who does not have good communications with the franchisor might have a quarter of a million dollars or half a million dollars or more tied up in a restaurant, whereas in a service-based business, it might be $100,000. So it magnifies—the size of the investment will magnify the problem if there is one.

Is there anything the restaurant industry can learn from other industries in regard to franchising, ways the restaurant industry could seek to improve?

established franchisor versus more of a start-up type of franchise, what you’re really looking at ultimately in any franchise investment is a risk/return scenario. How much risk are you taking, and what is your potential return? So if you’re going to invest in something that is a larger company and has a longer track record, you’re obviously going to be able to quantify your risk more closely. You’re going to be able to take a look at what their track record is, and you’re going to be able to use that to make that judgment. Likewise, you are likely in a larger company to be able to anticipate that you’re going to get a potentially broader spectrum of services from the franchisor. MARK SIEBERT ON … For a smaller concept, you’re going to have a level of HOT CONCEPTS: risk, so you need to be able “ We’re seeing the early to anticipate a greater level stages of some interest in of reward, a greater level of franchising in the Middle return in order to justify the Eastern and Mediterranean- increased size of the risk that you’re taking. So, ultimately, type cuisines. Gourmet the reason why you invest in a burgers have a couple newer concept is because you years left to run.” think it’s going to make some more money.

A WELL-RUN FRANCHISE SYSTEM:

“ The franchise relations are a priority; the franchisees and franchisors have mutual respect.” INVESTING IN A SMALLER CONCEPT:

“ You’re going to have a level of risk, so you need to be able to anticipate a greater level of reward.”

I don’t really think there are segments of franchising that do better in one aspect than another. I think it’s more franchisor-specific. There are franchisors in the restaurant industry that do a great job of franchise relations. There are franchisors in the industry that do a very poor job with franchise relations. And I think that’s true across the spectrum of different aspects of franchising. It tends to be concept-specific and management team–specific, not industryspecific. It’s a matter of how well management executes, and that’s really the big difference.

Let’s talk for a second about a franchisee in the position of looking for a new concept to invest in. Are there any differences between looking at a very large opportunity like a Wendy’s or a McDonald’s, versus a smaller franchisor who is maybe just getting started and only has one or two franchised units? I think there are. When you’re making a decision about a large

Are there any restaurant concepts you’re working with now that you think really have the potential to make some big waves in the industry? Can you reveal any rising stars for us?

The ones that are really hitting it big in the last year for us that I would point out: Newk’s, which sold, I think, 35 or 40 franchises last year, and they’re going to sell 50 this year. First Watch, which is a breakfast concept out of Florida, has been doing very well in their segment. Fuzzy’s Taco is a Texas-based fish taco operation that sold about 100 units their first two years of franchising. Those are the ones that jump out at me.

One final question: how optimistic are you about the next twelve months in franchising? I’m very optimistic, actually. I’m an optimistic guy to begin with, but I see this market being ready to explode as soon as the credit market loosens up, and it’s my personal belief that the people who are in power now know that if they want to stay in power long, they’ve got to continue to work to make the credit markets loosen up if they want the job market to loosen up. I think that if the credit market begins to get a little bit more rational, we’re going to see some franchise concepts that have some top demand doing very well. RF RESTAURANT FRANCHISING 2011 EDITION