Location Is Everything to Franchise Hopefuls
Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
What can go wrong when franchises are located the old-fashioned way -- by intuition?
Eight years ago, Mark Dukes, now 36, thought he'd found the perfect location for his second Steak-Out franchise -- right in the middle of the University of Tennessee in Knoxville.
"We were on what they call the strip, surrounded by 30,000 students," he says. "We specialize in the delivery of hot steaks, burgers and chicken, and students love delivery -- when they're in town. But they go out of town for football games and home for vacation breaks. We hired students for our staff, and each year at Christmas, we had no employees."
The store also had no parking. While other stores in the 68-unit Steak-Out chain, headquartered in Norcross, Ga., average 20% in takeout sales, Mr. Dukes' were only 5%. "Steak-Out was a new company then," Mr. Dukes says, "and everyone thought a store on campus had it made. The sales potential was so astronomical, you didn't need parking."
Of course, everyone was wrong. When Mr. Dukes moved his failing franchise last fall to a freestanding building with a big parking lot, his sales went up 100%. "We're still delivering chicken sandwiches and loaded baked potatoes to the students -- they don't care where we're located -- but now we're also serving families. Students spent $7 or $8, while family orders average $30, and the best thing is, families get paychecks every week. By the end of each semester, even our best student customers don't have enough money left to pay us."
Premises Made And Broken
At least Steak-Out stopped with one poor location. Ritter's Frozen Custard in Carmel, Ind., had several. Ritter's was founded in 1990 by John Ritter, a longtime motion-picture animator who developed his own recipe for premium ice cream so thick that a milkshake made with it can be served upside down. He also designed a cool building -- round and white with walk-up windows and a pointed blue roof.
Customers loved his made-on-premises custard and begged to buy franchises. The first franchisee also loved Ritter's design and built his own round building on the outskirts of Indianapolis, where it could be admired without distractions. "It was out in the middle of nowhere," says Saul Lemke, chief executive officer of the 50-unit chain. Nevertheless, people drove there and lined up by the hundreds to buy frozen custard. But when other franchisees also located their nifty round buildings in remote areas just outside smaller Indiana towns, "they struggled mightily," Mr. Lemke says. "A bad location is one mistake you can't fix."
Today, no franchisee should have to suffer from that mistake, thanks to the burgeoning $9-billion a-year geographic-information-systems (GIS) software industry. GIS, which layers census and consumer-trend data upon every street and byway in the country, can help franchisers pinpoint exactly where future units should be located to ensure success.
Down to a Science
Companies such as Urban Science, an international demographics firm in Detroit, make computer models of a franchise system's best customer, then sift through hundreds of demographic variables to find where those people live.
Charles Drummond, business-development manager for Urban Science, says company employees even spend days in parking lots, jotting down license-plate numbers to track customers' home ZIP Codes to help determine where to locate a chain's next store.
Such research is so specialized and so expensive -- national chains can pay from $5,000 to more than $100,000 for Urban Science's services -- that franchiser clients consider it a competitive advantage and don't want their names published, Mr. Drummond says. Tanner Shultz, 38, business-development manager for Aprilia USA Inc., of Woodstock, Ga., says his company (which isn't a franchise) budgeted more than $60,000 to have Urban Science help set up a national dealer network for its Italian motorcycle and scooter lines. "In our experience," Mr. Shultz says, "intuition will get you pretty close, but we want data to tell us exactly where a dealer should be and where he should spend his ad money."
Frequent $10 Tans?
Instead of hiring demographers, some franchisers, such as Planet Beach, a 100-unit tanning outfit in New Orleans, purchase GIS software, so it can tweak demographic data itself. Planet Beach's director of real estate, Tim Normand, 37, says his company paid $14,000 to $18,000 to ESRI, a demographic-solutions company in Redlands, Calif., for business-analyst software to help it zero in on its target market -- females aged 16 to 50 with enough income to afford frequent $10 tans.
Demographics, it seems, has something for everyone, even prospective franchisees left to find locations on their own. Stephen Benner, 48, director of strategic accounts for ESRI, says that for a few hundred dollars, they can buy reports for any ZIP Code in the country that will analyze population characteristics, income levels, lifestyle trends and even traffic patterns within about a mile of potential sites. Or they can spend a little more and hire one of ESRI's 1,100 partner companies to do the analysis.
Franchisee-consulting company FranchiseHelp in Elmsford, N.Y., refers its clients to Carl Carlsson, 60, managing director of Prime Sites USA in Clearwater, Fla. Mr. Carlsson once worked with McDonald's and Pizza Hut and now works mostly with big hotel chains to find locations in such faraway places as Bulgaria and China. But for a fee of $2,500 to $3,000, plus travel, food and lodging, he'll go anywhere in the world to help franchisees evaluate whether locations they've found on their own, or those proposed by their franchisers, really are ideal.
A Deal Killer
"I work the demographics," Mr. Carlsson says, "but I also go to the community and study traffic patterns and zoning. The worst location is one that a motorist sees but can't get to, because of heavy traffic or divided roadways. I don't play God," he adds, "but I do look at the [profit-and-loss] sheets of other franchisees in similar sites, and I can kill deals. Just recently, I told a fast-food franchisee not to go through with a plan for stores in Texas and Kentucky."
Do demographics really work in locating franchises? Just ask Steve Aguilar, 54, Ritter's newest franchisee. By now, Ritter's has given up on intuition and, Mr. Aguilar says, provided him with very specific criteria for his location. "They said to look for a high-traffic area with at least 40,000 cars a day, 50,000 people living within a two-mile radius, and retail locations nearby. I drove around Indianapolis until I found this site. We've been open just a month, and we're already their top-selling location."
Copyright Â© 2003 Dow Jones & Company, Inc. All Rights Reserved