From the January 1999 issue of Entrepreneur

Like any great awards show, this year's Franchise 500® was full of well-earned victories, as well as a few surprises. Kudos to the brothers at Yogen Früz, this year's breakthrough winners at No. 1, proving that truly entrepreneurial franchisors can not only compete with the McDonald's Corp.s of the world, but can even surpass the grandfathers of franchising.

And while not all the news was so dramatic, we did come away with a good impression of what's going on in franchising--what's hot, what's not, and what trends are making a surprise comeback.

Bringing Up Baby

There's a common gag that pops up occasionally in TV shows and movies: The moment a couple finds out they're expecting a baby, they put their names on a three-year waiting list for the most prestigious preschool in their city. While this scenario is probably a bit extreme for most families, many parents and grandparents are showing great concern for early childhood learning even before the wee ones start kindergarten--and are willing to shell out big bucks for supplemental education.

So what types of educational services did we determine are sweeping the nation? "Anything having to do with the child's exposure to other children," says Jerry Wilkerson, president of Franchise Recruiters Ltd., a Chicago-based franchise executive management search firm. "[Also,] anything having to do with pre-learning or trying to help someone who's having a learning problem. Those are the things that are going to continue to grow in America."

For toddlers, this means trips to fitness/play centers like Gymboree, where little ones are tricked into learning things like social skills while participating in fun activities. As they get a little older, children can learn computer skills at franchises like Computertots and Futurekids. And if they're having trouble with the three R's, there are always after-school tutoring centers that provide programs to help them catch up.

What's On The Menu?

Our research tells us that to be successful, franchise restaurateurs must strike a delicate balance between too much and too little on menus this year. You'll see more smoothie stores adding complementary foods like bagels and sandwiches to increase sales in the off-season (Jamba Juice has added soup) and, conversely, food concepts like Smash International adding smoothies to their menus. Smaller dessert franchises are also adding more to their menus, as we've also seen in the past with ice cream stores adding frozen yogurt and frozen coffee drinks to their offerings.

What's the not-so-new contender in the frozen dessert market? Custard. Big in Wisconsin and Minnesota, frozen custard has loyal fans: One Web site, http://www.custard.execpc.com/cgi/index , lists the custard du jour for Milwaukee custard shops.

The custard revolution is being led by Culver's Frozen Custard, with 59 franchised locations in five states. Each day, the franchises offer a "Flavor of the Day" from their selection of more than 130 flavors, including caramel pecan and raspberry cordial. Rita's Water Ice is also jumping on this trend as fast as it did with Italian ices by adding custard to its summer menu.

We've found the secret to rounding out a specialized menu is not to go overboard. "The market will be more discriminating [about providing] better quality and better service. It's [not] just a matter of having a wider variety of products," says Don Boroian, chairman of Francorp, an Olympia Fields, Illinois-based franchise consulting firm. Case in point? Boroian contends that one of the reasons Boston Market recently filed for bankruptcy is that the company diversified its menu to the point where it confused both employees and customers. "Trying to add more things can sometimes screw up your menu, screw up your labor costs, render you unprofitable, and confuse the public as to what your image is," adds Boroian.

Coffee Talk

And with what do customers want to wash all this chow down? Need you ask? We found that once again, coffee is the prime beverage choice everywhere from doughnut stores and smoothie chains to specialty coffee bars. But lest you despair, we've found there's still room in the industry alongside the ubiquitous Starbucks chain. Franchises like Gloria Jean's, The Second Cup and The Coffee Beanery are still pouring strong brews for anti-Starbucks denizens (think: big, corporate monolith, bad; small, neighborhood coffee bar, good) and those rare few who don't have a Starbucks nearby. "Since Starbucks isn't franchising, it's not into the saturation that a franchise company might be engaged in because Starbucks is limited by the capital it has available," says Boroian. "So what's happening is, these smaller chains are starting to open competing units to fill the gaps between the Starbucks locations, and they're undercutting their prices."

Two other trends we predict you'll want to watch for: caffeine-lovers who proudly flaunt their Dunkin' Donuts coffee cups while thumbing their noses at $3 lattes, and juice bars, whose number of franchised units exploded by almost 60 percent this year.

Grandparents' Day

Our research indicates that seniors are still on the forefront of the most-desired-customer list. The U.S. Census Bureau estimates the population of those 65 and older will skyrocket from 33.9 million in 1996 to 70 million in 2030, an astounding 106 percent increase. We see countless opportunities for franchises this year that cater to seniors' needs, from in-home medical care and house-bound senior check-in services to nutrition supplements and home-meal replacement for the health-conscious and those with dietary restrictions. "Franchising is going to get a big piece of [senior medical services] because they can roll it out on a national basis and help develop state laws that are aligned with federal laws more quickly than any individual or organization within one state," says Wilkerson.

Opportunity Knocks...

And unfortunately so does someone else. While death may seem a bit macabre as a springboard for a business opportunity, approximately 2.3 million Americans died in 1996. With the number of seniors increasing dramatically, we've found mortality seems to be on many franchisors' minds. Customers can purchase funeral merchandise directly through ConsumerCasket USA Inc. instead of paying the notoriously inflated prices most funeral homes charge. Autopsy/Post Services Franchise Inc., which started selling franchises in December to some of its 2,800 applicants, performs both forensic autopsies (when the cause of death has legal implications) and private autopsies (when the family questions the cause of death) for a fee, as most hospitals don't offer the procedure routinely. The lesson to be learned? Next time you think a concept can't be franchised, think again.

Feed the Need

Franchising is an interesting industry because while we track current trends, those trends are just a reflection of everything else going on around us. Heard any complaints about the nation's education policies? Then it should be no surprise to learn we've found franchised learning centers popping up on every subject. Boomers getting older at a time when health insurance companies are less than prepared? Again, no one's startled that this independent generation will want to stay at home in their later years, and home care will prove a less expensive option than long-term hospital care.

"Remember, franchising is not the cutting edge of anything," says Boroian. "It's the second wave. Industries start and develop. When they look to expand, they look at their constraints--which are lack of capital, lack of qualified staff and the need to move more rapidly. Franchising meets all three of those [needs]." In addition to watching current franchising trends, don't neglect those offhand comments of family members, neighbors and acquaintances. When they lament about the lack of a nearby company to service their exacting needs, you just may hit on the next century's most popular franchise trend.

For more on the hottest trends for 1999, see "Pulse", "Hot Stuff" and "Buzz"

Super Market

If you knew there was a billion- dollar market that you weren't reaching, smart business sense would tell you to move in. And that's just what major franchisors are doing with minority franchisee programs.

"You're seeing the larger and more economically sound franchisors going into [minority] communities and working with community groups, local financial institutions and business organizations to find people for [local] franchises," says Jerry Wilkerson, president of Franchise Recruiters Ltd., a Chicago-based franchise executive management search firm.

These actions, says Richard-Abraham Rugnao of the U.S. Hispanic Chamber of Commerce (USHCC), result in good customer service from the corporate level. "As the Hispanic market continues to grow, companies are seeking Hispanic franchisees for neighborhoods with a large Hispanic community," says Rugnao. "Ultimately, this shows sensitivity to the needs of that community."

Here are some of the programs we've seen of late:

  • Burger King Corp. signed a "Memorandum of Understanding" with the U.S. Department of Commerce's Minority Business Development Agency to combine their efforts in finding qualified minority franchisees.
  • Churchs Chicken signed an agreement with The Branch Companies, an African-American-owned franchise development firm, to open 10 restaurants over the next five years in the Houston area.
  • Sterling Optical joined forces with the Neighborhood Franchise Program, an organization designed to lure franchisors to underserved inner-city neighborhoods in New York City, to open a store in Harlem.
  • Southland Corp. is working with U.S. Hispanic Chambers of Commerce to identify potential Hispanic franchisees for its 7-Eleven chain.
  • Blimpie International Inc. has developed an Urban Expansion Initiative to place franchises in Empowerment Zones and Enterprise Communities, with plans to waive initial franchise fees for 200 franchisees and reduce franchise fees for another 300.

The Heat Is On

We were surprised this year to find that five tanning franchises had sent us material for the Franchise 500® (although only Fabutan made it into the top 500). We thought tans had gone the way of pet rocks, what with all the negative publicity about health risks. Tanning industry experts say, however, the major study used to combat the claims of the safety of tanning was flawed, and periodic tanning can actually help reduce the risk of sunburn, the major cause of skin cancer. Who's right? Scientists are sure to speak up again, but for now, it's up to consumers to decide whether pale is still in or if it's back to the beach-bronzed look.

Next Round

The world of franchise litigation and regulation continued to be a tug-of-war last year with the reversal of the landmark Meineke suit and the formation of the National Franchise Council (NFC). However, the Small Business Franchise Act of 1998, introduced in Congress last September, may shine a new light on the struggle.

The Bursar v. Meineke case, which originally garnered $600 million in damages for a class of Meineke Discount Muffler Shops dealers when Meineke misappropriated advertising funds, was reversed by the Fourth Circuit Court of Appeals last August. The appellate court found the plaintiffs didn't constitute a proper class, and a franchisor can't be held responsible as a fiduciary institute for franchisees. The plaintiffs plan to take the case to the Supreme Court.

While this decision might appear to favor the franchisor--the plaintiffs claim it sets a precedent against franchisees suing as a class--some see it as only a reiteration of standard franchise law practice. "The appellate court has reaffirmed a long-standing theme in franchise cases," says franchise attorney Andrew Selden of the Minneapolis firm Briggs and Morgan P.A. "A class action is an inappropriate device in most cases for claims seeking recovery for monetary damages." But this isn't necessarily bad news for the plaintiffs: Selden says they can go back to trial court, reprove the case as individual litigants, and set up an offensive collateral stophole, where dealers not involved in the initial case can use its decision and only have to prove individual damages.

Another 1998 franchising issue was the formation of the NFC. Funded by about 25 large franchisors, the NFC has preliminary approval from the Federal Trade Commission (FTC) to create a franchise mediation program for franchisors with minor FTC Franchise Rule violations. The idea that, as Selden puts it, "the foxes [are] appointing themselves the guardian of the henhouse," will be proved or disproved when the first mediation occurs. "If a franchisee suffers significant losses and the NFC's response [to the franchisor] is a symbolic slap on the wrist, then it would be fair to conclude the foxes are in charge," says Selden. "If the NFC [tells] the franchisor, `You sinned,' then you can have some confidence the group is serious."

So are franchisors leading the game? Last year, Rep. Howard Coble (R-NC), along with nine co-sponsors, introduced the Small Business Franchise Act of 1998 (H.R. 4841) with the purpose of "[promoting] fair and equitable franchise agreements, [establishing] uniform standards of conduct in franchise relationships and [creating] uniform private federal remedies for violations of franchise law." Rep. Coble plans to reintroduce the bill this month, but Selden says only time will tell whether the bill may be seen as a victory for franchisees pushing for equality in regulation. "The real test of the legislation will come next session when it's reintroduced and we'll see whether it gets buried in committee or whether it's something that goes to a hearing," says Selden. "Then you'll have a sense that Congress is willing to explore the question."

Contact Sources

Autopsy/Post Services Franchise Inc., http://www.1800autopsy.com

Francorp Franchise Consultants, (800) FRANCHISE

Andrew Seldon, (612) 334-8485, seland@briggs.com

Jerry Wilkerson, c/o Franchise Recruiters Ltd., 3500 Innsbruck, Linconshire CC, Crete, IL 60417, (708) 757-5595

U.S. Hispanic Chamber of Commerce, 1019 19th St. N.W., #200, Washington, DC 20036, (202) 842-1212