Send in the Clones
According to a recent NPD press release, there were 617,505 restaurants in operation in the United States in spring 2013, an increase of 0.5% over the previous year. The chain restaurant count rose 1.3% while independent restaurant locations declined 0.2%. At about the same time, ADP reported the economy added 200,000 jobs between June and July 2013 and 10% of all new jobs were created by franchisees in the restaurant industry.
What is franchising, and why is it so important to job growth? There are actually two forms of franchising: Product/Trade Name Franchising and Business Format Franchising. The former is most often used between manufacturers and wholesalers (soft-drink bottlers) or retailers (automobile dealerships). The latter is what we most traditionally associate with the type of business operated by McDonald’s, Applebee’s, Subway, Ruth’s Chris, and hundreds of other concepts.
At its most basic level, the franchisor allows other companies to use its brand name and its business model in exchange for financial compensation, usually an initial franchising fee and ongoing monthly royalties that are based on gross revenue. A franchise disclosure document (FDD) is required by the Federal Trade Commission and spells out in great detail the exact parameters and restrictions under which the franchisee will operate, as well as the ongoing obligations of the franchisor. Each restaurant within the system is essentially a clone of the prototype developed by the franchisor.
Like most opportunities in business, franchising has pros and cons for both franchisor and franchisee:
For the franchisor, it allows for more rapid growth than might be possible otherwise and enables the executive team to focus on business development instead of human resources, leasing, sourcing and purchasing, and all of the other day-to-day functions that require significant time and personnel. One of the downsides is the loss of control over the same day-to-day operations, opening the brand to exposure and censure based on the actions of a reckless or incompetent franchisee. Recent YouTube videos of restaurant employees behaving badly have been the talk of social media.
Franchisees benefit from the turnkey approach to the business, with most of the decisions regarding décor, menu, employee uniforms, signage, and real estate requirements already made for them. Instant name-recognition and a proven business model are major attractions for would-be restaurateurs. The flip side of the arrangement is a lack of flexibility in innovation and creativity as well as the potential for negative publicity if the franchisor or other franchisees generate adverse coverage.
We at Chain Store Guide are well aware of the value of both franchisors and franchisees to our customers. Our current Chain Restaurant Operators Plus database includes more than 1,000 franchisors that have at least one location franchised to another operation. Vendors and suppliers who get in front of these companies have the potential to be added to the list of approved providers, expanding their business exponentially. The database also includes more than 3,100 franchisees in the U.S. and Canada. Having access to contact information for these businesses allows our customers to present their case to multiple entities that are all looking for the same products and services.
If you would like to see the database in action, please call 800-927-7272 and schedule your free demonstration.