May 2009 Franchising World
What will recent economic events mean in the long term? AlphaGraphics senior direct of franchise development posed that and other questions to several franchise leaders: Tasti D-Lite Chairman and CEO James H. Amos, CFE; The Dwyer Group President and COO Mike Bidwell, CFE; Edible Arrangements President and CEO Tariq Farid; Management 2000 Founder & President Bob Gappa, CFE; and Dunkin’ Brands Vice Pres. of Franchising Lynette McKee, CFE.
By Art Coley, CFE
Most franchise executives know too well the pains of recent events with the economy. For many brands across the country management teams are realizing reduced leads for development, challenges with financing, franchisees struggling at the unit level, royalty revenues down, accounts receivables climbing, and layoffs possibly required. With so much to juggle right now, the thought of what the current economic climate could mean three to five years down the road isn’t even on the radar. So we thought we would look into it for you.
What are your initial thoughts on the state of the current economic events in relation to franchising?
Farid: Franchising has always prided itself with growth in a downturn economy. I don’t think we can say that this time. Everyone has to pause and focus within. If addressed properly, this downturn could be very beneficial. Things will turn around. The question is who will still be standing and have a better system ready to explode with growth?
McKee: The challenges today are working in favor for new franchisees coming in. It’s because management teams must be more disciplined than ever. Challenges that may have been ignored in the past can’t go on being ignored. If leadership has not been paying attention to details of unit economics, they better start now.
Bidwell: Unlike any other time in history, the marketplace continues to change at an ever increasing pace. We have to be mindful of that. The brand has to continue to evolve to stay relevant in the end customer’s eyes. The market place is efficient and dynamic. And that means it can be cruel and painful. For those brands that have not been staying relevant and evolving, they may either be gone or under different ownership in the near future.
Amos: Changes are happening in a rapid fashion and many benefits are coming out of that. Stronger labor pool, prime locations, merger and acquisition opportunities, better qualified candidates, just to name a few. But this is key for all brands—if you want to be one of the segment or industry leaders with your brand, it’s what you do right now that will make that happen. Brands that sit back and wait it out won’t be the ones leading when the economy turns. Now is the time to be brutally honest with yourself, management team, and your concept.
Gappa: We are comfortable when things are fine. Fine usually means cash flow is good. Today, many companies are in trauma and a lot of that is around cash. Trauma can be good. It should get you to focus on the driving force of your business … finding and keeping customers. I’m not talking about franchisees. They are not your customers. They are your strategic partners implementing your strategy and systems to find and create loyal customers. If the brand leaders are so focused on revenue and profit that they’ve forgotten where it comes from, that’s trouble. Is your culture customer centric? Are your metrics customer centric? Whether you’re a small franchise or a Fortune 100 company, it’s the end customer that ultimately decides your success.
Everyone knows that even the most qualified candidates and successful brands are finding it hard to tap funding for growth. Analysts have stated that the average American household lost 18-20 percent of their wealth in 2008. What are your thoughts regarding financing?
Bidwell: Cash isn’t sitting around in savings accounts. It’s in homes, 401(k) accounts, stocks. And that’s all dropped significantly. I believe we will see fewer new brands start because the start-up franchisor can’t tap that home equity as their seed money and the bank doesn’t want the risk. For unit growth, franchisors are going to have to look at financing. At Dwyer Group, we already offer financing for our new franchisees so this is less of a problem for us. We’re also seeing a spike in people that we normally wouldn’t get. There is a group out there getting severance packages. This group of professionals has cash and income for the next few months putting them in a better position to start a business. It’s temporary, but very real right now.
McKee: Financing is just tough right now. No way around it. However, the brands with a lower investment and good unit economics have a real opportunity to grow. That’s because there are many high-net worth individuals looking at these brands. This is due to the fact that they have expanded their search including this lower investment range. And because they have more capital, they can get the deal done. The small and home office concepts for the white collar professional group might be one of the best growth spaces in franchising today.
Amos: It’s important to first understand that this situation is different from other slow downs. The rules have totally changed and continue to change. Lenders are no longer just looking at the franchisee for the loan; they are looking at everything related to that one unit making it. They are scrutinizing franchisor financials, experience of management, strategic plans, ability to deliver results, and so much more that was rarely looked at months ago. They want the franchisor with more skin in the game. Granting guarantees to lenders is something more executives are going to have to look into. Also, we’re already seeing more qualified candidates moving downstream to lower investments. They can make a bigger equity injection. They should also be able to get open sooner.
What is the right management team and planning for the future? What would you recommend to franchise executives?
Farid: I think it’s going to be a lot of getting back to the basics. Look for people who recognize that each single location makes up who you are. Know what stage you’re in and make sure you have that right talent. Days where executive level positions were handed out because of time with the company, a member of the family, or close friend to the founder are over if you want to survive. Understand what franchisees do on a daily basis. How they open and close the unit. How they mop. Make the connection. Work on the little things to make individual units produce more revenues and profit. If you get this down, development of new locations will take care of itself. If you do a good job with franchisees during this time you will be able to open many new stores later on. Strategic planning can get you into some difficult traps. We started out very simple and never had unrealistic plans. It’s not just planning, it’s doing. It’s not just thinking great, it’s doing great things everyday. Don’t announce big plans without the energy and resources to go after that number.
Gappa: Everything is about results. It’s all about results. Every conversation should be about results. The difference in great companies is discipline and being clear on goals and results. If this is not your management style or culture, you are in trouble. Executives have to ask first, “Are we a world class company?” Too often it’s “Let’s franchise this” and then later on questions might start about being a world class company. Whether you franchise or not is irrelevant. Franchise executives have to be asking the same “world class” questions that any other company executive should be asking. The CEO can only seek one result. When Jack Welch was at GE they bought companies that could be No. 1 or No. 2 in that industry within two years or they sold it. That was his one result he was seeking everyday. Others on the team had supporting results they had to go after. Strategic plans are not just about more sales and profits. It has to be focused on the customer. If you have strategic plans, do they include research on your customers? Are you asking your customers what they need and want? Do you know what they really value about your service or product? That’s where planning starts. It’s not in the boardroom with executives guessing. Your customers will tell you what type of planning you need to do. Start there.
McKee: I’m thinking about the smaller or start-up franchisor which makes up most of IFA membership. I would tell them to go slow to go fast. What I mean is focus on building a solid base of franchisees. Get your strategy together and tight. Understand the plan … success is more than a concept and logo. Be willing to say “no” to candidates and partners that are not a right fit.
Amos: To scale quickly you need to own a space in your industry. Have a niche that you do better than anyone else. You cannot scale and grow on bad unit economics. New owners need to ramp up quickly. Early success is critical. The heart of it working is always in the unit economics. As far as planning for hitting big goals down the road, I can tell you that you won’t get there with just spreadsheets, balance sheets, and “running the numbers.” There is so much more involved. It’s not complicated. Depending on the industry and investment range, it’s extremely difficult to have a system with 500-plus locations. If you’re in a higher investment range with brick and mortar, that number is down closer to 300. Most management teams just don’t realize how great the challenge is to push through. And remember that the faster you want to scale, the more risk you have to be willing to take. It’s easy to overlook that in planning.
Bidwell: Your management team has to have credibility with franchisees. That’s No.1. Without credibility, the franchisee won’t even listen to what you have to say. You cannot influence without credibility. Having said that, the next thing we ask is what’s missing from our leadership team and we work to fill that. The person doesn’t have to be from franchising. Our new VP of marketing has no franchising experience but had the knowledge in key areas that we were missing. That means more to us. Looking for differences, opposite skill sets, and a willingness to have healthy dialogue has always been important for leadership, but will be even more essential moving forward. Regarding planning, know that you’ll never be finished with some things. It’s more of a process than a project. You can make plans but you better be checking constantly to make sure the path you’re on will still get you to where you want to go.
Any final thoughts on what recent economic events will mean for management teams in the long term?
McKee: Not all brands will survive. And the teams that don’t make the right choices and the tough decisions shouldn’t. There is nothing new in that. However, there is opportunity. This is a time that most never experience in their lifetime and certainly not more than once. And for those who keep their head on right and stay focused on what’s important, the next five to seven years could be their best ever.
Bidwell: Franchising fosters the entrepreneurial spirit. That spirit is why franchising, as tough as times are, will lead the way. Management has to make sure to stay relevant. We all have been reminded that things can change overnight. If you have a solid culture and set of values, and you stick to them even in tough times, you’re already far ahead of the others.
Amos: Control what you can control. Be careful about overhead, cash, and advantages of the “upside.” Be aware of opportunities not there a few months ago; higher-quality candidates, real estate, merger/acquisition possibilities. Focus on improving unit efficiencies but don’t lose sight of driving revenue. Most importantly, remember that inaction is the riskiest place to be. Cost-cutting alone is not the single right tool. Approach cost-cutting the wrong way and you will actually delay your system coming out of the downturn. And finally, small business is the one sector that is vital to the solution of recovery both here and internationally. And nobody does small business better than franchises.
Gappa: Know where you are and what you need. Are you having operational challenges or strategic challenges? There is a difference. Results management is focused 18 months out. You should be tracking the changes and results. Long term, a brand cannot exist in the entrepreneurial stage. Entrepreneurial by definition is lack of discipline. It’s spontaneous. Instead, be a professionally-managed company that is run entrepreneurially. Have a world-class business philosophy where companies live and breathe how the customer feels about doing business with your brand. You have to move here or else you’ll be dead.
Farid: What you have today isn’t as important as who you are. Don’t miss the little stuff. Reinvent when needed. Stay fresh. Rethink the brand. Have a robust team. Stay ahead. Have the guts to do what needs to be done.