Restaurant brands and their franchisees are ready to resume growth.
Still, as an uncertain economy lingers and difficult lending terms continue, companies are getting proactive by directly funding expansion, slimming down costs with smaller prototypes, shoring up unit economics to provide better margins and working with operators with more accessible capital or cash from other restaurant operations.
Several executives spoke with Nation’s Restaurant News on their expansion plans and strategies for 2012 and beyond.
Bill Spae, chief development officer, Cici’s Pizza
System size: 584 units
Growth targets: 30 openings this year, agreements for 100 more
Source for optimism: Internal funding programs
Big banks aren’t lending, smaller community banks have restrictions, and the Small Business Administration has become more complicated and bureaucratic. That is why we chose to step out and provide other incentives for our internal franchisees and external candidates, to give them a leg up on developing new stores. We added in a $5 million fund called the Franchisee Investment Program.
We’re selective about who we fund, but for the multiunit developers than can build five to 10 restaurants, we’ll become a non-voting minority partner with a $100,000 investment per unit. They invest another $125,000 with us, and all of a sudden their need for cash is reduced to another $150,000 to $175,000, and a bank will loan them that. If they’re successful and pay off our investment, we’ll roll it over into another store for them. It’s a different approach, but it provides us an opportunity to find franchisees sitting on the fence and push them off to the right side.
We also started the Cici’s Patriot Program, because veterans are highly trained, organized and disciplined, and they make great partners for us. The opportunity is for no franchisee fee on an honorably discharged veteran’s first store, a 50-percent reduction in royalties the first year, and the requirement that they hire at least one veteran as a manager.
Mike Hislop, chief executive, Corner Bakery Café
System size: 130 units
Growth targets: 75 openings in next two years
Source for optimism: Sharing corporate managers and know-how
One thing our franchisees love is that we’re growing company stores as well. We’ll build 10 this year, and they’ll build about 20. We’ll be about 50-percent franchised while doubling the size of the system within the next few years. When you get each of your franchisees to open one or two locations per year after that, it becomes easier to grow quickly. It sounds like explosive growth, but it’s really just aggressive, but controlled.
We’re supporting franchisees with our people by giving them one of our corporate area directors or general managers, so then the new franchisee has somebody who knows how to open our restaurants and get catering business going, or who knows how to handle a busy lunch. We need to get our people developed, and there are a ton of our corporate managers excited to relocate and work with franchisees, because then they can become partners with them and grow their careers.
Lending is coming back a little bit, but the people we’re bringing in usually have the wherewithal to build a few of these units anyways. But we go in and stand side by side with the franchise group when they meet with their lenders. It then becomes easier for them to lend to us.
Brent Alvord, president, Lenny’s Sub Shop
System size: 150 units
Growth targets: 10 openings this year, 20 next year, 30 to 40 every year following
Source for optimism: Internal referral program, franchise lending brokers
We extended a $10,000 cash reward to anybody who referred a franchisee who opens a store this year. We offered it to our internal people, our Facebook fans and all 120,000 members of our rewards card program. The biggest source of good leads typically is our customers in our restaurants, because they’re avid fans who love our food and talk to us when they’re thinking about buying a business.
People who have good credit and decent assets are bankable. We’ve had success with Boefly, which is like lendingtree.com for the franchising space. It introduces some of our franchisees to banks that we never would have known to call. I had a tough sell for a candidate in Omaha, Neb., and they got 13 banks looking at her, with seven contacting her verbally.
When the underlying confidence is there, people are more willing to do something out of the box with their investments. The return for an investor in our system, not counting the owner-operators, is 28 percent in our top 50 stores. If you can make 28 percent in this investment, rather than get burned in the stock market, that could be intriguing.
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Martin O’Dowd, president, Hurricane Grill & Wings
System size: 45 units
Growth targets: 15 openings this year, 30 openings next year, more than 300 units under commitment
Source for optimism: Growing average unit volumes, recruiting high-net-worth franchisees
On top of the 233 locations under commitment we signed last year, this year we inked [development deals for] an additional 81 units. We’ve seen lending loosen up for the mega companies; the Wells Fargo types are in at the highest levels I’ve seen in a couple years. But that hasn’t filtered down to companies with fewer than 100 units, at least not from an institutional standpoint.
We focused on supply chain management and contracting directly with our chicken and produce producers. We developed some labor efficiencies and got a point and a half in margin. We also mitigated any erosions from food costs going up by taking a 3-percent price increase going into 2012.
We’re attending the primary trade shows to gain brand exposure, we’ve doubled average unit volumes in the past three years and focused on return on investment, which makes us interesting to high-level investors rather than single-unit mom-and-pop operators.
Mike Liautaud, founder and president, Milio’s Sandwiches
System size: 40 units
Growth targets: 200 locations under commitment for the next five years
Source for optimism: Private placements, stricter cash flow management
I really have a positive outlook on how things are going in the next few years. In the last six months, our average unit volumes have grown, consumers are coming back and business customers are coming back with catering orders. Banks are opening up a bit, but there are more hoops to jump through than before. They’re looking for more experience in restaurant operations, they want more money down, and they require more paperwork.
One of the things I did to go after was a private placement. I went out to people with high net worth, whose investments in the stock market weren’t making any money, and said, “If you can get two units built for this price, we’ll manage it for you and take a management fee.” I also engaged a sales group, Franchise Dynamics, who put a plan together to recruit people who have their capital, can access it and understand the return on investment.
I took a reprieve from franchise growth the previous three years — why recruit money when it’s not out there? But I grew as a manager. I weeded out all my stores that weren’t profitable, tightened up our performance by teaching our employees more about having excellent customer service, and renegotiated our contracts with all of our vendors and landlords.
Marty Ferrill, chief operating officer, Philly Pretzel Factory
System size: 122 units
Growth targets: 25 openings this year, agreements for 25 more
Source for optimism: Small-footprint kiosk prototype
Our normal investment for a full bakery is typically $250,000 to $275,000 all in, and we were running into some challenges financing that. So we shrunk everything, from our ovens to our mixers, and made the footprint smaller, from about 1,400 square feet into a kiosk as small as 300 to 400 square feet. It’s a dramatic decrease in rent and build-out costs; people are now looking at a total investment of $125,000 including the franchise fee.
We’ll open a combination of kiosk and full bakeries this year. Kiosks are a lot faster to get open. It can get built in a few weeks after franchisees are finished with site selection and permitting.
Most people may not need to go to the bank at all for it, which is the kind of investor we’re looking for. Lending is still tight. We get more qualified leads than ever, but they have a hard time getting the financing, where four years ago they would have been no-brainers.
Jason Chodash, president, Tossed
System size: six units
Growth targets: Six openings in 2012, agreements for 69 more
Source for optimism: Capitalizing on consumer trends
We believe the trend is coming right to where we are: healthful salads, we’re totally customizable, and everything is made right in front of you. Some of our customers come in for lunch five days a week. We’re also protected against the veto vote, because our sandwiches, wraps and soups can accommodate anyone who doesn’t want salad.
We have extremely flexible footprints, from 500 to 2,000 square feet, and we’re a noncook environment. That makes great opportunities for nontraditional locations like food courts, airports and college campuses. It fits with our franchise strategy, which is geared toward self-funded groups. When they can act as their own bank, it makes growth a lot easier.
Editor's Note: A previous version of this story has been updated to clarify that Tossed has six openings planned for 2012.