A Neighborhood Deli Gains National Appeal
Learn how to invest your IRA or 401k into a franchise penalty-free. ($50k min)
Two years ago, George Naddaff was driving through Watertown, Mass., when he spotted a line of customers snaking out the door of a local restaurant. As an entrepreneur and former Boston Chicken franchiser, he pulled over to investigate.
Inside the restaurant, Lo Fat Know Fat, he found a crowd of patrons ordering chicken-meatball wraps, "air-fried" french fries, fruit-filled smoothies and other healthful fare. He was impressed not only by the number of customers and the taste of what he sampled, but also by a store within the restaurant selling vitamins and other supplements.
Over the course of a week, he cased the operation, returning at night and on the weekend to gauge customer traffic. For 10 years Mr. Naddaff, 74 years old, had been searching for something that could match his early success with Boston Chicken -- while avoiding the problems encountered by those who owned it later.
Much of the success of taking a small, local operation and expanding it into a national brand depends on making the right choice to begin with, and then, setting up an expansion plan that suits that choice. For Mr. Naddaff, Lo Fat Know Fat had promise.
The timing for such a restaurant chain was "on the money," Mr. Naddaff says. A rising health-consciousness, in the face of increasing national obesity rates, worked in its favor. Mr. Naddaf also saw affirmation of the concept in moves by fast-food chains to healthier menu options. And, for rapid expansion, you could move quickly because you didn't have to waste time convincing customers of the value of the product.
To check his instincts, he enlisted the help of Perry Lowe, a professor of marketing at Bentley College, a Waltham, Mass., business school, who ran an analysis of the business for four months with his students. They found that the average customer was between 18 and 34 years old, that many customers were traveling five miles to eat at the restaurant, and that many ate there four times a week.
"I was just being careful to make sure it wasn't an illusion," Mr. Naddaff says.
Mr. Naddaff approached the restaurant owners with a deal: He would pay the $150,000 salary of a longtime restaurant executive who would help them strengthen their operation. There was a handshake agreement that Mr. Naddaff would acquire the concept, and create a franchising company at a later date.
Lo Fat Know Fat's owners had no plans for a national brand when they started out. Co-owner Tim Kurtz, a former bodybuilder, and his original partners, his wife Joliana, and Michael Jervais, opened a sports-supplement store in 1996 called Flex Appeal. The store was an immediate success, with first-year sales of $250,000.
Over the next few years, they considered selling prepared foods, such as wraps and smoothies, too, but it wasn't until 1999 when Chris Pappas, a chef who was also a former bodybuilder, joined the team, that they developed their low-fat, high-protein menu. By the second year of operation, revenue from the food side of the business surpassed that of vitamins and supplements.
Mr. Kurtz says representatives from several restaurant companies had approached him about expanding the business, but he liked Mr. Naddaff's enthusiasm, his management colleagues, and his plan to franchise the operation.
The original store in Watertown had been successful for several years among local residents. In 2003, its fourth year selling food as well as supplements, the 2,000-square-foot operation generated $2.5 million in sales with operating income of $600,000. The company opened a second store in Shrewsbury, Mass., in December 2002 with the help of Mr. Naddaff's hired gun, and had sales of $1.5 million and operating income of $300,000, in its first year.
The results were encouraging. Mr. Naddaff and his analysts believed that the success of the second store proved the concept wasn't dependent on a single location. And, because the Shrewsbury store has attracted an older crowd of people, mostly between the ages of 34 and 55, they also believed that the concept of healthy fare had wide demographic appeal.
Moreover, the health-supplement sales would provide an additional edge, Mr. Naddaff adds, bringing in more revenue and effectively lowering overall payroll costs for the operation.
Late last year, Mr. Naddaff recruited two young entrepreneurs and formed KnowFat Franchise Co. In February, the team acquired the rights to the restaurant and supplement-store concept, in exchange for a 20% equity stake in the company for Mr. Kurtz and his three partners.
The group began to seek funding from individual investors in February, and stopped in April when it had raised $3 million, $1 million above its original goal. It also assembled a five-member board of directors made up of three KnowFat Franchise executives, as well as Robert Grayson, a former CEO of a Limited Inc. division, and Greg Horn, a former chief of General Nutrition Cos. Mr. Grayson and Mr. Horn are both investors in the franchise company.
KnowFat is now putting aggressive expansion plans in place. The company intends to sell 24 franchises in its first year, 70 in the second, 130 in the third and 195 in the fourth, for a four-year total of 419 units. On that schedule, by the fifth year of operation the franchise company anticipates it would generate about $31 million in profit on $73 million in revenue for itself, on projected revenue from all the stores of more than $600 million.
Expanding companies, however, can make the mistake of trying to grow too fast, says Jeff Rosenfeld, managing partner of Kessev Finance, a Minneapolis financial-planning company that works with franchisers and franchisees. "The first thing you want to do is dominate your home market, then your regional market, and then a bigger chunk of territory," says Mr. Rosenfeld. "Then you can start dominating the entire country."
Expanding slowly into contiguous markets lets a company figure out whether the concept must be adjusted to regional tastes, and also lets a company leverage existing television and radio marketing that may reach new customers. Franchisees can also take advantage of existing relationships with suppliers and bankers in a region.
First Come, First Served
But Mr. Naddaff and his management team say it's important to gain a dominant position before competitors move in, especially in key markets or regions, which Mr. Naddaff identifies as Florida, California, Texas, Chicago, Denver and the Northeast. "We're going to go after those markets real quick," he says.
The management team expects the company to be in five or six major cities across the country within the first year. To accomplish this, it plans to sell area licenses exclusively to people who already own multiple restaurant businesses -- anywhere from five to 100 stores -- in a particular area.
So far, the company has distributed 42 uniform offering circulars to prospective franchisees who traveled to the company to hear its business pitch. The area developers would have the right to open stores on a predetermined schedule and prepay an amount to help ensure that they will.
"This is the cornerstone of our geographic strategy," says Eric Spitz, president and co-CEO. "We are really looking to grow this concept quickly and get a footprint out there."
The advantages of using area developers are that by selling the rights to multiple units, it is relying on seasoned operators who have a successful track record running restaurants, and it costs the company less on average to sell each franchise.
The company wants to make a big splash in the Boston area, selling 10 to 15 individual franchises to be opened over the next 18 to 24 months. With the nearby restaurants, the company says, it will be able to more easily provide guidance to the operators.
Find the Gym
Local real estate can be a pitfall for new franchise companies. It's crucial to think about where to situate the businesses locally. The KnowFat management team is recommending that franchisees set up restaurants near gyms, office parks and colleges. The company also plans to provide extensive marketing help to franchise owners.
"We tell potential franchisees that the first thing to do is map out all of the gyms," says Gary Jacobus, KnowFat's chief operating officer. "If you locate in the middle of five or six gyms, that's perfect."
Finally, any business concept has to be adjusted before it can be replicated on a franchise basis. In KnowFat's case, the number of menu items has been reduced, but seafood options and a kids' menu have been added, says Mr. Kurtz, who has taken on the role of vice president of nutritional trends in the franchise company. The supplement store has also broadened its offerings to appeal to a broader range of customers.
"Everything we've done so far is making the concept stronger and making it have more mass appeal, while still not alienating the regular customers that we have," says Mr. Kurtz.
For reprints and licensing questions, click here.