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The Big Time

June 21, 2010
URL: http://www.entrepreneur.com/article/207192

When he was growing up in the 1960s, Greg Cutchall watched his father put in long hours running an A&W Root Beer franchise in Omaha, Neb., and he swore he'd never work in the food industry. But 40 years later, Cutchall is deep into franchised food.

The CEO of Cutchall Management Co. owns 43 restaurants from six different concepts, including Sonic Drive-Ins, Famous Dave's Barbecues, Paradise Bakeries and Cafes and a Rock Bottom Gold Medal Tap. His operation, one of the 100 biggest employers in Omaha, has more than 1,800 full- and part-time workers on the payroll. Cutchall's multi-unit, cross-branded franchise business is a far cry from the single-unit model his father labored over, and it's different from what most people envision when they think about a franchise.

"In the past, franchisors did just look for single-unit operators or concept developers," Cutchall says. "Now they are beginning to realize that franchise groups can be good partners that understand the business. Franchisors are drawn to me because I've been running franchises successfully for 24 years."

Cutchall's multiple-unit operation isn't an anomaly; over the last two decades, multi-unit franchising has blossomed, and multi-unit owners--from mom-and-pop operations with a handful of locations to "mega-'zees" with hundreds--have become the dominant players in the franchise world. In fact, multi-unit ownership is so prevalent, it has its own magazine, and there are two conferences dedicated to the industry, including the International Franchise Association's new multi-unit conference. These days, to understand franchising, you need to get a handle on how and why multiple-unit ownership has taken over the franchise world.

According to research by IFA, more than 50 percent of all franchises are owned by just 20 percent of franchisees. "The vast majority of unit growth over the last 25 years or so comes from multi-unit franchising," says Marko Grunhagen, franchise researcher and the Lumpkin Distinguished Professor of Entrepreneurship at Eastern Illinois University. "It's a strange phenomenon. The reason franchising is so popular and successful is the assumption that the owner has a particular interest in their unit and pours their sweat into it. But multi-unit owners create a chain within a franchise system. So why would a company franchise instead of just starting a corporate chain?"

The answer, is, of course, complicated. From the franchisor's perspective, putting its brand in the hands of experienced, well-capitalized franchisees can help accelerate growth and keep the number of franchisees it works with small and more manageable.

The Big Three

The three largest restaurant franchisees in the country.

1. NPC International Inc.
• Overland Park, Kan.
• 1,100 Pizza Huts and WingStreets
• CEO James K. Schwartz
• Founded in 1962 by one of the first Pizza Hut franchisees, NPC went public in 1984 before being bought by the Merrill Lynch Global Private Equity Firm in 2006.

2. AAFES (Army & Air Force Exchange Service)
• Dallas
• 803 A&W Restaurants, Baskin-Robbins, Seattle's Best Coffee, among others
• Maj. Gen. Bruce A. Casella
• Founded in 1895. Revenues in 2008 were $10.8 billion.

3. Carrols Restaurant Group
• Syracuse, N.Y.
• 559 Burger Kings, Pollo Tropicals, Taco Cabanas
• President Daniel T. Accordino
• Founded in 1960, the group operates in 17 states, employs more than 16,000 people and pulled in $816 million in 2009.

Multi-unit owners are able to open their stores more quickly and efficiently. For franchisees, Cutchall says, "There are a lot of efficiencies. From the office aspect, you can use the same accounting staff, the same marketing people, and there's some efficiency in cross-marketing brands."

Gene Carlisle, whose Memphis-based Carlisle Corp. operates 97 Wendy's restaurants, says the size of his operation helps him get discounted building materials, allows him to do his own construction without financing--both resulting in significant savings--and centralizes human resources, accounting and other administrative tasks that are typically big line items for single-unit operators.

"We're able to spend several million on training and capital, things a single-unit operator could never do," he says. "Some people are gifted and talented in some areas, like managing people, or doing construction and finance. But when you put all those hats on one guy, he's not going to do great in all those areas. As a single-unit operator, there are lots of things you do better, but there are also a lot of things you miss."

For franchisors, multi-unit franchisees offer similar economies of scale. "There are efficiencies in marketing, in purchasing, in brand awareness," says Kevin Kruse, vice president of franchise development for Colorado-based Einstein Bros. Bagels, a fast-growing company that works only with multi-unit franchisees. "Giving someone an area to develop allows them to really work with commercial brokers to find the right sites over time."

"Ten years ago, we thought offices with more square footage was bigger and better," says Jim Ramsay, senior vice president for franchise sales for Century 21. "Now we have a hub-and-spoke model. Our secondary offices can be smaller, 500-square-foot storefronts in more visible locations, almost like boutique offices.

"It is a change for our brand. We like to have stronger, bigger operators and let them branch out. They benefit from using the same back office, the same signs and other efficiencies."

Food service, tax preparation and real estate firms tend to dominate the multi-unit world, with fast food at the top. Service brands such as plumbers and cleaners are often able to expand their territories by adding staff or extra vans, but food service has to invest in real estate and a whole slate of managers to expand.

Mike Bidwell, president and COO of the Dwyer Group, which franchises brands such as Mr. Rooter, Glass Doctor and The Grounds Guys, says service brands suffer if their owners don't keep their hand on the tiller. "We go into people's houses, and there's lots of things that can go wrong with the customer experience. These businesses aren't conducive to passive management."

Grunhagen would classify Cutchall and Carlisle, both hands-on owners, as organic, entrepreneurial multi-unit franchisees. But for many franchisees, once they go beyond 10 or 20 units, their roles change, he says. "If they have 20 units here and 20 units there, the bottom line becomes more important. Instead of trying to maximize profits at each location, like a single-owner would, they try to increase a point or two throughout the system. One type of multi-unit franchisee see franchises purely as investment and see franchise systems as a good opportunity."

As a result, some of the biggest players in the franchise game are management companies with dozens, even hundreds, of stores. Take, for example, HMSHost, which runs more than 300 restaurants in airports and rest stops, and NPC International, which operates 1,100 Pizza Huts and WingStreets and brings in $600 million per year.

Not everyone is impressed by the mega-sizing trend. Fiorenzo Bresolin, the Florida area developer for Teriyaki Experience, a Canadian concept expanding into the U.S., says that personal involvement is key to getting a franchise right. "The best results from a consumer standpoint come from franchisees who are there and passionate about what it is they're doing," he says. "I used to take my daughters to McDonald's, and I could always tell the difference from one run by someone who owns a single unit versus someone who owned 10 or 15. Of course, there are always exceptions."

Doc Cohen would put himself in that category. The Tomball, Texas-based entrepreneur runs 29 stores, including Great American Cookie, TCBY and Pretzel Times. He started in 1979, baking his own cookies at a mall in Lafayette, La. "You've heard of the Dunkin' Donuts guy? 'Time to make the doughnuts?' Well, that was me," he says. During the past 31 years, he's acquired more cookie shops, sold them, bought them back and diversified his holdings, but he insists he's still hands-on and that operations are his chief priority.

"Every day I look at every store's sales. I'm constantly looking at sales, cost and labor, the three biggest items under our control. I'm thinking about who to promote. I don't have less passion than when I had just one store."

Cohen says today's franchisees are looking for a bigger challenge than running a single unit. "When I came into the business, there were a lot of mom-and-pop franchisees who didn't know how to run a business," he says. "Today, people are more sophisticated and their skills lend themselves to running multiple-unit franchises and putting together solid teams."

Having area managers and supervisors who feel invested in the store is vital to running a tight ship. "It's all about interviewing and having a good instinctual feeling and understanding what their expectations are," Bresolin says. "Finding a manager is like picking a girlfriend or spouse. You want to make sure there's a meeting of the minds, a consensus."

A huge growth area for multi-unit franchisees has been diversification of brands. Many franchise systems are beginning to offer multiple brands--for instance, Yum! Brands offers KFC, Taco Bell and Pizza Hut--to keep experienced franchisees investing in their company if they've saturated their local markets or are interested in reducing their single-brand exposure.

"Franchisors used to look down on owning two concepts, and they wanted you to concentrate solely on their system," Cutchall says. "But over the last 10 years, that's changed. Working with multiple concepts keeps you fresh. You're hearing new ideas from several different directions. It's definitely more responsibility, but it's something that keeps me vibrant and interested."

Cohen has seen how multi-branding can improve sales. "I've been able to take locations that might be borderline and turned them into viable businesses, like adding a pretzel store next to a cookie franchise," he says. "Multi-branding has really worked for me over time."

Not only that, Grunhagen says, "There's an effort by multiple-unit franchisees to diversify and spread the risk," pointing out that an upscale franchise may take a hit in a recession while a concept with a lower price point might prosper.

Despite the positives associated with multiple-unit franchising, there are potential risks for franchisors and franchisees. Grunhagen says that multiple-unit franchisees might forget that they are franchisees and begin butting heads with the franchisor. Large franchisees may expect special treatment or discounts. They could block product introductions, or try to force their own changes on franchise systems--or decide to change systems unilaterally.

If a large franchisee does go rogue, it could be a nightmare; franchise contracts are notoriously difficult for franchisors to cancel, and once bullying franchisees are in the system, they may be around for 15 or 20 more years, depending on their contracts.

Cohen warns that franchisors need to be careful when handing out large multi-unit contracts. "It scares me when I see a new or young system selling large areas," he says. "They need to keep their options open. What if a guy gets the rights to develop Texas, opens three stores and decides that's enough? You never know what a candidate's going to be like."

That's why Einstein Bros. is most comfortable giving a single franchisee just five to seven at a time. "The biggest potential problem is that they may not be able to keep up with the development schedule and may tie up a significant territory," Kruse says. "If you're not developing in a timely fashion, it can hurt everyone related to the brand."

The little guy, however, shouldn't be afraid that the big boys are taking over. The single-unit owner/operator is still the gold standard for many franchisors--in fact, McDonald's is primarily run by franchisees with one or two restaurants. Multi-unit franchising, for the most part, isn't designed to drive the little guys out of business. Instead, it's part of the maturation process of the franchise world, and it gives more sophisticated investors and successful owner/operators a way to stay invested in franchising.

Carlisle says just because he's big, he doesn't have any undue influence with Wendy's. "There are about seven of us that have 100 or more Wendy's," he says. "But nobody jumps when we call. They are very protective of their small franchisees. Nobody gets left out."