When Rubio's Fresh Mexican Grill, a chain specializing in
fish tacos, started offering franchises in 2000, it hoped to make a
big splash in the world of quick-casual Baja Mexican cuisine.
The unit of Rubio's Restaurants Inc., Carlsbad, Calif.,
embarked on an ambitious plan to open franchises in several Western
states over the course of a few years. But after a handful of
franchises opened in 2002, some meaty problems soon surfaced. Sales
were floundering at the new franchises, analysts say, and even the
signature dish wasn't luring enough customers outside of the
California market.
One Rubio franchise defaulted on its agreement within months of
opening, and the company ended up buying back two franchises,
management says. Rubio's froze its franchising initiative
before problems spread. The company then refocused its efforts on
reorganizing management, diversifying the menu and lowering prices
before thinking about growth.
Content Continues Below
"We outgrew ourselves," says Ralph Rubio, founder of
the company and current chairman. "We thought we had a
prototype such that we could just franchise it, but it wasn't
working." Recently the chain decided to start franchising
efforts again -- this time with a more disciplined approach.
As many businesses discover too late, rapid expansion
doesn't always mean success when building a franchise. When
growing quickly trumps other goals, such as grooming competent
leaders, controlling costs, picking prime locations or building a
customer base, the company's operations can turn sloppy.
"It's definitely possible to kill off a good concept by
trying to grow too fast," says Scott Shane, an economics
professor at Case Western Reserve University.
Several franchising experts point to Boston Market as a prime
example. The company, formerly Boston Chicken, grew from 20 stores
in the late 1980s to more than 900 franchises by 1998. But while
costs at the chain were mushrooming as it tried to build more
stand-alone restaurants, the individual stores couldn't sell
enough food to pay the bills and repay company loans. The chain
ultimately filed for Chapter 11 bankruptcy reorganization, bought
back nearly all of the franchises and closed almost 200 stores in
1998, before getting eaten up by McDonald's Corp. in 2000. The
problem, experts say, was the company became so obsessed with
growth that it overlooked principles of good business like grooming
good managers and building relations in the community.
Any franchiser has to be especially careful in the beginning to
evaluate its growth, says Mr. Shane. "If you're not making
money at a single outlet," he says, "chances are pretty
great that you're not going to make a lot of money at a lot of
outlets."
It's not uncommon for companies to get overly ambitious in
their franchising plans, especially since many are first attracted
to franchising because they want to grow faster than their own
capital allows. Some want to penetrate target markets quickly
before competitors do.
And the income stream from franchising can be alluring, so much
so that growth becomes the overarching objective. Franchisees
normally pay the company an initial fee of anywhere from $5,000 to
$75,000. Some of that may pay for new-franchisee training,
equipment and administration, but much of it is profit for the
franchiser. So the more franchises that open, the more profit for
the company. And franchisees pay royalties to the company, from 2%
to 25% of revenue, regardless of whether the franchise is
profitable.
"There are still some that focus more on the initial sale
and making money and not as much on how well they treat the
franchisee on the back end," says Stephen Story, a franchise
lawyer in Norfolk, Va. However, to grow quickly, franchises usually
need an overabundance of prospective franchisees, which isn't
normally the case in the first few years of franchising, he
adds.
Bad Word-of-Mouth
Mario Herman, an Adamstown, Md., lawyer who represents franchisees
in suits against franchisers, says the companies that focus too
much on their own profits and not enough on the franchisees'
success tend to end up hurting themselves. Disgruntled franchisees
network and share their gripes, and that can make it difficult to
get prospects in the door. He likens the franchise relationship to
marriage. "If, in a marriage, it's a one-way street where
one person is always getting their way," he says,
"it's probably not going to last."
Of course, not every rapidly growing franchise fails. In fact,
some thrive on fast growth.
Although Subway Restaurants, a unit of Doctor's Associates
Inc. of Milford, Conn., began with relatively modest growth in
1974, it expanded quickly in the 1980s and 90s, growing from 166
outlets in 1981 to more than 24,000 world-wide today. But the
company was able to effectively help keep individual stores
profitable and control the burgeoning growth by hiring area
developers who oversaw and sometimes owned multiple stores in a
region.
In the early years, Subway closely monitored whether the system
was hitting targets that the company had set, and whether new
franchises were outselling older stores, says Don Fertman,
Subway's development director since 1981. The company also
strived to keep costs as low as possible for franchisees -- an
important component to success as a franchiser, Mr. Fertman
says.
So, how can a franchiser balance the desire to grow with not
letting growth become a burden? There's no particular growth
formula, although the median number of franchises sold is four to
five in the first year, says Mark Siebert, chief executive of
iFranchise Group, a consulting firm in Homewood, Ill.
While growth is important, it must be balanced with picking
highly motivated managers and owners, training the franchisees
about the business and helping them build a customer base.
And a company needs to make sure that the franchises are getting
ongoing support and making sure brand standards are being met.
"You have 1,000 outlets, and all of a sudden a dozen outlets
are having trouble with a recipe," says Case Western's Mr.
Shane. "You can really quickly ruin a reputation that
way."
Moving Fast
Some businesses have legitimate reasons for wanting to franchise
quickly, such as trying to gain market share before a competitor
can. One way companies try to keep growing pains under control is
to do what Subway did: by using multiunit rather than single-unit
franchisees.
Fantastic Sams hair salons, part of Fantastic Sams International
Corp., uses master-license agreements, which give regional owners
control over growth. Using this strategy gives a company a better
chance to recruit talented owners, who wouldn't have been
interested if they could only invest in a few stores, says Jack
Keilt, chief executive and president of Fantastic Sams.
That way, the company isn't responsible for managing all the
growth itself -- provided it can find the talent it needs.
And hiring the wrong developers isn't the only risk of the
strategy, says Bob Gappa, president of Houston franchising
consultant Management 2000. Some area developers, for instance,
don't fulfill their commitment to open the agreed-upon number
of franchises.
Mr. Gappa usually recommends that companies grow slowly, at
least in the first few years. The most successful franchisers, he
says, track customer loyalty and frequency at the first franchises
so they can gauge whether the franchise plan is working. "You
need to make sure that your first franchisees are very successful,
because they're going to validate your next group of
franchisees," Mr. Gappa says. "Otherwise you're in
trouble."
From StartupJournal.com
Copyright © 2005 Dow Jones & Company, Inc. All Rights
Reserved