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Top Trends in Franchising

The credit crisis that began in 2007 is driving many of the developing trends in the franchise industry. Franchisors are refranchising, providing financial incentives and funding support to franchisees and pivoting toward multi-unit franchisess, all at least partly in response to credit access issues.

Refranchising

Burger KingOne of the top trends in franchising is the sale of company-owned stores to franchisees or "refranchising," a strategy that more and more franchsiors are expanding or completing. This "capital-light" or "asset-light" strategy has been around for a long time but the still frozen credit markets certainly contribute to its newfound appeal. Franchisors employing this strategy will typically off-load underperforming units to large, multi-unit operators while maintaining a small and manageable core of company-owned units that are usually near their headquarters and used primarily for test market and training purposes. Franchisors sell off company-owned units for a variety of reasons, but most often they want to become less capital intensive, experience less cash flow volatility, reduce debt and/or rejuvinate subpar units.

The list of franchise companies beginning, accelerating or completing their refranchising programs includes many nationally recognized brands. Among these brands are Applebee's Neighborhood Bar & Grill and IHOP (DineEquity Inc (NYSE: DIN)), Denny's (Nasdaq: DENN), Taco Bell, KFC and Pizza Hut (YUM! Brands (NYSE: YUM)), Arby's and Sizzler (Roark Capital), Jamba Juice (Nasdaq: JMBA), and Burger King (NYSE: BKW).

Expect this trend to continue and accelerate unless the the capital markets return to their pre-2007 levels or franchisors begin to feel as if their hands are slipping off the steering wheel.

Incentives for Veterans

A growing number of franchises are offering incentives to veterans to own a franchise. According to the IFA, which has ramped up its VetFran program significantly over the past year, 534 of their members provide some form of incentive to veterans, including franchise fee and royalty discounts, waiver of franchise fees and financing. In the last year alone, 154 IFA members have started to offer veteran incentives.

The IFA reported in September that, "[t]hrough anecdotal reports, we know at least 15,000 veterans have started careers in franchising since 2011, including 4,200 new franchise business owners. We suspect the actual industry numbers are significantly higher."

On November 12, the IFA is scheduled to release a One-Year Anniversary Report outlining the franchise industry's progress in its veterans initiatives, including Operation Enduring Freedom, which was launched last Veteran's Day to hire as team members and recruit as franchise owners 75,000 veterans and military spouses and 5,000 wounded warriors by 2014.

Franchisor Funding Support & Franchisee Incentives

With the franchise lending still facing challenges as recently underscored by a 2 percent year-over-year drop in the IFA/Boefly Franchise Lending Index, many franchisors are beginning to take steps to provide or guarantee funding for prospective and existing franchisees. For example, on October 10, Hurricane Grill & Wings, a Florida-based full service restaurant with 48 locations in the U.S., announced that it secured $10 million in funding from Mount Pleasant Capital that's intended to provide new and existing qualified franchisees with up to 75 percent of the funds necessary to open a new unit. See my "Fall Franchise Update" for other examples of franchisor funding support.

In addition, Forbes magazine reported early last month that many franchise chains are offering franchisee discounts to attract enough new owners to keep their franchise growth plans on track. The deals noted by Forbes include:

  • Papa John's will waive the $25,000 franchise fee and all royalties for the first 18 months of operation if a franchisee signs up in the coming year
  • Dunkin' Donuts offers reduced royalty payments for three years plus $10,000 in marketing fund credits if a franchisee signs up in 2012
  • Fazoli's reduces the franchise fee by $10,000 and waives the first $20,000 in royalties

MaacoOther franchise brands offering incentives include Maaco, which has a multi-store owners (MSO) program under which its $30,000 franchise fee is halved for a second unit, reduced by two thirds for a third unit and cut to $5,000 per unit for any additional units. Another MSO incentive is a tiered royalty reduction for the first three years of multi-unit operation of from 9 percent to 2% in year 1, 4% in year 2 and 5% in year 3.

Muti-Unit Ownership

Franchisors, especially well established brands, are increasingly leaning toward prospective and existing franchisees who have the financial wherewithal to invest in multiple units. An article posted on nasdaq.com on October 2 says that "multi-unit franchising is, without question, the biggest growth trend in today's franchise industry." In addition, according to FranData, a franchise industry information and analysis service, about 50% of all franchisees are multi-unit owners.

None of this should come as no surprise as the credit crisis is far from over. Moreover, it's a lot easier from the franchisor's perspective to work with fewer franchisees. In addition, the risk of underperformance is somewhat hedged as a multi-unit operator can shift or share resources among units and likely has more working capital to get through tough times.

High Profile Professional Athletes Transitioning to Franchises

Maybe they know something the rest of us don't. Or, more likely, maybe they have more capital and greater access and appeal to franchisors' top brass. Whatever the case, a lot of professional athletes are getting on the franchise bandwagon. And in a big way. You won't read about very many single-unit deals with marquee players and, unless it's the grand opening, don't expect to be sharing a booth with the likes of Peyton Manning, who recently inked a partnership with Papa John's (Nasdaq: PZZA) to operate 21 restaurants in the Denver area or Troy Aikman, who in partnership with Dunkin' Donuts (NYSE: DNKN) and the Jerry Jones family, closed a deal in March to open 50 stores in the Dallas area.

According to the International Franchise Association (IFA), the largest and most well known franchise trade group, of the 50 or so agreements between sports stars and franchisors that they began tracking over the past two years, almost 70 percent were entered into in the last three to five years. In addition, the Professional Athlete Franchising Initiative (PAFI), which has a strategic alliance with the IFA, currently has approximately 150 athletes participating in its educational events and activities.

Among the better known athletes who have expanded their investments into franchising are:

  • Shaquille O'Neal (Auntie Anne's)
  • Steve Nash (Liquid Nutrition)
  • Keyshawn Johnson (Panera Bread)
  • Jamal Mashbun (Papa John's and Outback Steakhouse)
  • Venus Williams (Jamba Juice)
  • Junior Bridgeman (Wendy's and Chili's)
  • Drew Brees (Jimmy John's)
  • Jared Jeffries (ZIPS Dry Cleaners
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