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Category: Franchise Issues

Franchisees Feeling the Squeeze of Value Menus

Franchisees Feeling the Squeeze of Value Menus

In a world where a lot of major expenses like housing,  medical, and education are growing at a much faster rate than typical inflation, it’s no surprise to learn that consumers are increasingly gravitating towards eating out less and using value menus when they do. It’s also no surprise that franchisors are pushing those value menus more than ever, in an effort to keep the sales numbers up and the juicy royalties flowing.  Unfortunately, that means a lot of franchisees are caught in the middle and fighting to stay afloat.

Subway is just one off many franchises forcing the squeeze onto their loyal franchisees. In this LA Times piece, one frustrated franchisee says he spends more than $4 to produce every $4.99 footlong. Add in the fact that Americans are drinking less soda and using more debit and credit cards to pay (creating additional transaction fees), and you’ve got a recipe for franchisee misery.

When you buy into a franchise, you’re stuck with what they give you. If they decide their California-based franchisees need to honor the same deals as their Midwestern franchisees (in spite of vastly different costs of living), you could find yourself struggling to make ends meet. When you’re talking about investing hundreds of thousands of dollars and many hours of your time, you need to know the company you’re partnering with is looking out for you.

How Can You Protect Yourself?

If you already own a franchise in a system that treats its franchisees poorly, you might just be out of luck until you’re able to sever ties. However, if you’ve decided you want to open a burger franchise or get into pizza franchising, there are things you can do to protect yourself.

  • Ask the franchisor how they respond to the challenges of operating in areas with vastly different costs of living. Do locations in places like Hillsboro, Illinois charge the same prices as locations in places like New York City, Los Angeles, and Washington, DC?
  • Find out ahead of time what the rules are on promotions. Do you  have to opt into all of them? When price cuts are required, do they subsidize it or reduce royalties in any way?
  • Make sure your contract doesn’t make it excessively difficult to change brands. Look at the terms offered by a variety of brands in your desired niche. Leave yourself a reasonable out.
  • Get your own lawyer to read through the paperwork. Franchisors have teams of lawyers writing contracts heavily slanted in their favor. The least you can do is get someone to help look out for your interests.
  • Remember that terms are negotiable.  You may not have much power as one single-location franchisee of a large and established company, but if you join a smaller system, especially in a new regional market, you may have a little more pull.

In general, don’t let yourself be swayed by brand names. Talk to other franchisees and attend conferences. Opening a franchise of any type is a huge investment, and no matter what they say, franchisors are looking out for the brand first. That doesn’t mean they can’t be wonderful partners, but it does mean you need to look out for yourself. Nobody else will.

Big Chains Out, Small Franchises In

Big Chains Out, Small Franchises In

One only needs to look at the recent United Airlines controversy (or worse, the Shea Moisture blowback) to see how quickly social media can drag down a large brand when something goes wrong. Even though we’re living in a time where major corporations thrive, there’s something to be said for the smaller ones – especially if you’re about to invest your life savings.

When you invest in a large chain, it only takes one bad incident at another location to see your franchisor’s name dragged through the mud. Your fate is tied to theirs, so their PR problems are your PR problems. If their CEO is insensitive in his or her responses, it makes you look bad.

Still, it’s great to have a partner, and that’s what franchising gives you. You don’t have to reinvent the wheel, or find suppliers, or negotiate bulk discounts, or figure out what makes a good location. You have help every step of the way, and that’s hugely desirable for a lot of people. So what’s the answer? Do you accept the help and take the risk of some huge fiasco hurting your business over something you had nothing to do with? Or do you go it alone and forgo all that help?

There’s actually another option. Smaller franchises can be a fantastic compromise. If you pick a company that has at least 5-10 existing locations, you’ll still know you’re getting involved with a company that knows what they’re doing. However, there are fewer other locations to cause problems – and even if something happens, it’s highly unlikely it would be big enough to warrant national news coverage.

Smaller franchises can be great from a customer standpoint, too. Many people love the polished look and feel of franchised restaurants, but they still like to try new things. As a result, they may be more likely to pick a nearby Pizza Factory pizza franchise over yet another Pizza Hut when it comes time to choose a place for dinner.

Small franchises can also be great for new franchisees since they’re better able to give you the time and attention you’ll no doubt need as a new business owner. It’s very easy to get lost in the shuffle when you’re dealing with a large multinational franchisor that primarily deals with multi-unit owners.

So how about it? Would you consider a smaller franchise? If so, here are a few to get you started in your search:

Unhealthy Sales for Unhealthy Food

Unhealthy Sales for Unhealthy Food

For as long as I can remember, I’ve heard people say, “Man, I wish I could have gotten in on a McDonald’s franchise.” In most places, it’s been pretty much impossible to open a new one since all the good spots have been taken for a long time now – and the best locations don’t come up for sale every day. These days, though, I’m guessing you hear a lot less about people wishing they could have gotten in early with McDonald’s. They recently posted their worst sales decline in 10 years.

As consumers become more and more health conscious, they move towards slightly more expensive, slightly better quality food. Chains like Chipotle and Shake Shack have been doing well, while McDonald’s, often the poster restaurant for American obesity, is seeing declines. In a time when more people are going gluten-free, vegetarian, and vegan, McDonald’s doesn’t even offer a veggie burger (in spite of large online petitions requesting that they do so). Even Burger King has a veggie burger.

It’s especially puzzling that McDonald’s is missing the mark because many of their foreign locations offer the kind of health-conscious and upmarket items you can’t buy here in the US. Many countries enjoy vegetarian options, and French locations even offer macarons and tea in china. For more details on the collapse of McDonald’s demand, check out this article over at The Economist.

What does all of this mean for franchisees? Well for one, it means McDonald’s franchisees probably aren’t too happy right now. More importantly, it means that as investors and business owners, we need to think about food trends. If you’re considering a burger franchise, you need to make sure they’re adapting to the changing food landscape. Is it all greasy burgers? Or do they offer high-end extras like quality veggie burgers, shakes, unique sides, and perhaps even burger customization? Don’t discount the impact of specialty diets, either. That’s still an area where you can do great business. Because these choosy eaters don’t have good options everywhere they go, they become very loyal to the places that give them something reasonable to eat.

What do you think about the changing food landscape? Have you factored this into your decisions? Or are you styuck in a franchise system that doesn’t respond to the changing needs of consumers? Let us know in the comments!

Restaurant Franchises & Fast Food Villainy

Restaurant Franchises & Fast Food Villainy

In this era of obesity, a lot of us may question our decision to open a fast food franchise. Are we doing something bad for our community? Should we feel guilty? A compelling argument could be made for both sides, but ultimately, we have to remember that we’re all humans with free will. Nobody is forcing anyone to eat fast food, and many patrons eat fast food responsibly – as part of a mostly healthy diet with the occasional indulgence.

But what can you do if you want to do a little more to help your guests stay healthy? I’ve gotten this question a lot from potential franchisees in the last year or two. It really does seem like people are becoming more aware of health, if not actually becoming more healthy. I’ve collected my best tips below. We’ll use the Steak N Shake restaurant franchise as our example.

  • Know your menu. I’ve yet to encounter a fast food restaurant that didn’t have some healthy options on the menu. In the case of Steak N Shake, a simple steakburger is a relatively healthy option, and the chili is even better (slightly higher calories but great fiber content). Perhaps one of the best options is the Apple Pecan Grilled Chicken Salad. Believe me, salads aren’t always the healthiest choice since many restaurant salads are actually much higher in calories that other “junky” options.  Applesauce, mandarin oranges, cottage cheese, baked beans, chicken soup or vegetable soup are also great choices (but avoid the soups and beans if you’re watching your sodium).
  • Use suggestive selling. Teach your waitstaff to upsell customers on healthy items, but also make sure they don’t do it in a way that’s insulting. Some customers of size might misinterpret a suggestion of orange slices if the server isn’t sensitive. Suggestive selling is especially useful when it comes to kids, as many parents are happy to order their kids a healthy selection if they’re aware of it.
  • Train your waitstaff or cashiers to be aware of healthy options. If you don’t bring it up first, you can’t count on your staff to know which options are best for customers on different diets. While you’re at it, make sure they know what’s gluten-free (if anything), what’s vegetarian, what’s vegan (if anything), and what’s low-calorie, low-fat, or low-carb.

Any other ideas for helping your guests make healthy choices in your fast food establishment? Feel free to leave them in the comments!

What Kind of Territory Protection Do You Look For?

What Kind of Territory Protection Do You Look For?

I recently came across this thread on Blue Mau Mau and it made me think – how far is far enough, when it comes to a second location of your chosen franchise chain? If you’ve ever really looked around a big city, you’ve no doubt  noticed that some stores appear on nearly every block. In NYC, you’ll find a Starbucks and Duane Reade if you walk more than a couple blocks in almost any direction. In a lot of areas, Subway restaurants are nearly as common as gas stations. Clearly, some types of stores don’t need very big separation areas, especially in major cities.

The challenge, though, is in creating a rule that is fair to franchisees but mindful of the local market. Giving someone 5 miles of protected area in the middle of NYC is just too much in most cases. On the other hand, 5 miles in a rural area is nothing, especially if it’s the kind of business you only need one of in a small area.

In the thread I mentioned above, the problem was with a UPS store. Clearly, that’s a case where a little more separation would help franchisees greatly. Most people don’t use UPS on a regular basis like they might use a fast food franchise, and those that do often arrange for pickup rather than going though a UPS store.

Regardless of the rules set out by your franchisor, though, it’s important to consider what could happen if a direct competitor opened up nearby. If you own a Marathon filling station and a BP opens across the road, it’s going to cut into your business. The same can be said for UPS Stores and other postal service/delivery service companies. These types of businesses are especially vulnerable to competition, as they’re fairly homogenous and price sensitive.

Think of it this way – if a person loves Schlotzsky’s deli subs, they’re probably not going to be swayed by a new Subway opening across the road with slightly cheaper subs. They might try it now and then, but ultimately, people will tend to favor what tastes best to them. It gives you a differentiating factor over potential competitors (as long as your territory is at least somewhat protected and your location is good). With shipping, there’s very little way to differentiate yourself from competitors. Ultimately, most people will go where it’s cheapest, assuming they ship often enough to know. Otherwise, factors like easy parking and good traffic flow will come into play. If it’s harder to get in and out of your store, people will avoid it. Good service can help a little, but most people go with what’s cheapest and easiest when the product (shipment) is essentially the same.

What do you think? Is territory the most important factor for you? Would you invest in a franchise like UPS Stores? Let us know why or why not in the comments!