Get A Clue

Extra! Extra!

Top news story of the year: Shake-up among the big guys.

Last year, pedestals were knocked down, crowns were tarnished, and Achilles' heels were bared. A surprising chain of events proved that no one in franchising is invincible.

It's certainly no shock to hear people in the franchise industry buzzing about saturation, grumbling franchisees and increased competition affecting profits. The shock is that people were buzzing about McDonald's. "Reality has had an effect on McDonald's, which has had to deal with a very competitive fast-food market and has stumbled in some of its advertising and marketing approaches," says Erik Wulff, a partner with Washington, DC, law firm Hogan & Hartson.

The promotion that proved even McDonald's can slip up was the infamous Campaign 55, offering Big Macs and other sandwiches for 55 cents. "It was not well-received," says Wulff. "And I think McDonald's ended up being deeply embarrassed by it." Meanwhile, pressure from a renewed Burger King and a vigorous Wendy's added salt to the wound.

Now under a new management team, McDonald's seems prepared to rethink advertising and marketing strategies and meet future challenges. "I suspect that, notwithstanding the challenges McDonald's faces, it still has a long line of prospective franchisees outside its doors," says Wulff.

Boston Chicken may not be as fortunate. The company that took franchising, Wall Street and the public by storm was publicly plucked last year, with reports that the company's 15 area franchisees lost a total of $356 million in three years. Meanwhile, the franchisor downscaled its aggressive 300-stores-per-year expansion plan and subsequently announced it would close 50 restaurants in 1997 and will likely buy back all its franchises. "The fact is you've got a concept with very high food costs that requires a lot of space but at a price point that is not much higher than fast food," says Wulff.

On the bright side, Wulff sees PepsiCo's decision to spin off Pizza Hut, Taco Bell and KFC under the moniker Tricon Global Restaurants Inc. as a healthy move, as it relieves the restaurants from the constraints of being part of a larger organization.

Wulff believes there are lessons to be learned by prospective franchisees as well as veteran franchisors. "The fast-food industry is extremely competitive, and you have to rely on a fine-tuned, workable concept in order to get a good return on your investment," he says. "You can get swept up in the story [of a big franchise], but at the end of the day, it's all about buyer beware."

Contact Sources

Francorp, 20200 Governors Dr., Olympia Fields, IL 60461, (708) 481-2900

Hogan & Hartson, (202) 637-5665

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This article was originally published in the January 1998 print edition of Entrepreneur with the headline: Get A Clue.

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