Franchise Country

Whispers in the Halls

My colleagues have spoken to me in confidence, and I'm not going to sugar-coat it for you. Anyone who buys a franchise to operate in this country must be prepared to engage in hand-to-hand combat with the competition. Franchising is so popular in the United States that we have placed a discount haircutter and a 99-cent cheesburger place on virtually every corner.

An annual franchise study published by Franchise Recruiters Ltd., a Chicago-based executive search firm, indicates that "expensive market share battles persist in regional and national segments and will inevitably cause strain on net unit system growth." The competition on the block is so strident, the pros in the franchise industry are looking to international markets for real system growth. Frankly, the buzz is that those who can open the doors to China and other Asian countries will experience a fabulous rebirth of their concepts. It's now a very small world indeed, and the perception among franchisors is that the really good grazing seems to lie in distant lands. However, don't be discouraged if you don't speak Cantonese--there are still ways you can make money on our soil.

What would you think if I told you frozen yogurt is a really hot concept? Today, you might choke at this advice, but had I written this story in 1998, you may have dipped into this philosophy. Just four years ago, the franchise pundits were extolling the virtues of owning a yogurt store such as TCBY or Yogen Fr�z Worldwide. These concepts had grown for years, so much so that Yogen Fr�z named as the number-one franchise in Entrepreneur's Franchise 500� for 1999. But today, frozen yogurt franchises are on the decline in this country. For example, in 1998, TCBY was reported to have 2,696 units nationwide, and Yogen Fr�z 2,089 domestic franchises. In 2002, TCBY's figures dropped to 1,631 franchises, while Yogen Fr�z downsized to 1,687 franchises.

So how can you tell whether a franchise will have long-term success? The common consensus about earning a good income over the next 15 years revolves around a single irrefutable fact: A tremendous number of baby boomers are going to require support, comfort and fulfillment in their golden years. According to the U.S. Census Bureau, the country will continue to see an increase in the population of 55- to 70-year-olds. If you can find a concept that meets their needs, you may find yourself in the right place at the right time.

Another phenomenon taking place is the rise of the fast-casual dining segment. Years ago, places like McDonald's and Burger King were considered to be fast-service hamburger joints. Now my peers are referring to these outlets as "discount" fast food. In the new void between discount food and casual restaurants such as TGI Fridays, a breed of quick-service restaurants is evolving. Why are customers lured to these concepts? There's no tipping, the food is fast and fresh, and the atmosphere is trendy and fun. These concepts include Qdoba Mexican Grill and Moe's Southwest Grill, which, in essence, offer Tex- Mex food like burritos for less money than a full-service restaurant. However, this early success is already subject to attack, as new competition will come from Baja Fresh, which was acquired last June by Wendy's International. According to Cheryl Mullin, a franchise attorney in Dallas: "This is the essence of competition. When the new kids strike upon something exciting, the big boys will step in and give it a run."

My road-trip observations back up my review of franchised convenience store growth, or lack thereof-this segment is essentially flat. Hotel chains also seem to be struggling as a result of oversaturation. Pamela Mills, who's in charge of the franchise law section of Chicago-based Baker and McKenzie, believes the future of franchising will come from those offering innovative takes on the service industry. "We'll see an insurgence of greater corporate outsourcing of traditional in-house functions, as well as structure coming to such emerging industries as black mold abatement." This emerging trend in outsourcing corporate functions is exemplified by new franchisor HR First Contact, which has four locations that provide pre-employment screening services, including drug testing and background testing, for its corporate clients.

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This article was originally published in the June 2003 print edition of Entrepreneur with the headline: Franchise Country.

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