Get A Clue

This story appears in the January 1998 issue of Entrepreneur. Subscribe »

Everyone loves a good mystery. And in many ways, prospective franchisees and franchisors face the ultimate riddle: Which franchise trends will falter and which will bring long-term success? In search of an answer, thousands of people each year knock on unfamiliar doors and examine the morphing elements of consumer tastes and economic conditions. And they trust their instincts.

In reality, the answer is as individual as the person asking the question. As each person must unravel his or her own franchise mystery, in no way do we presume to have all the answers. We can, however, provide valuable clues to where the franchise industry is going. Sometimes these clues come in the form of numbers. Believe us, we know the numbers. In preparing our 19th Annual Franchise 500® listing, we have compiled the numbers, pored over the numbers, crunched the numbers and put the numbers in order.

But sometimes clues emerge when you read between the lines--when you start to put together the stories behind the numbers. Stories of new beginnings, old-time veterans and resurrections pervade this year's Franchise 500®. We hope these stories, and the numbers behind them, lead you to the answers you seek, and that ultimately you'll uncover which of today's franchise trends will dominate tomorrow's market. Here are some clues for 1998:

• Frozen desserts. For anyone who's followed franchising for a while, that we would dare call this category "hot" may come as a shock. But we can't deny that franchises selling ice cream, frozen yogurt, ices and soft serve are ascending in popularity once again. Three of our top 10 franchises this year are players in this category.

This trend comes on the heels of a flop that still evokes shivers among franchising insiders. In the early '90s, frozen yogurt was marketed as a tasty, healthy alternative to ice cream and was subsequently touted as the next huge franchise trend. But the very attributes that made the segment attractive--minimal costs and low barriers to entry--contributed to a quick oversaturation of the market. When existing food outlets started adding frozen yogurt to their product lines, some of the weaker frozen yogurt franchises experienced an immediate chilling effect. The quick rise and demise of frozen yogurt shops represents one of the most cautionary tales of saturation that franchising has seen to date.

So what do we make of this latest turn of events? Apparently, now that some of the smaller players have been squeezed out of the market, the frozen dessert concept is proving itself worthy once again. The demand is obviously there. And the players that remain, including Dairy Queen, Baskin-Robbins, Yogen Früz and TCBY, are strong and aggressive.

With new innovations and a smaller band of competitors, it seems the frozen desserts category may finally shed its image of what went wrong and become the new role model of what to do right.

• Juice bars. One of the hottest concepts to emerge from trendy Southern California in years is making its national debut. Its vehicle to stardom: franchising. First marketed to the health- and sports-conscious market, juices are now seeping into the population at large. They're being pitched to Americans wracked with guilt over years of eating traditional fast food. Juices have even found fans among the sweet-toothed, offering smoothie ingredients such as vanilla frozen yogurt, peanut butter and chocolate. And they're tapping into the coffee craze with cappuccino-inspired concoctions.

Something for everyone? Perhaps that's why experts estimate the juice industry will hit the $300 million mark by 2000. Yet not all cups runneth over, says Mark Siebert, president of Francorp Inc., an Olympia Fields, Illinois-based management consulting firm specializing in franchising. "The problem we're seeing with juice bars right now is that some are having problems generating revenue levels that justify development of a franchise program," says Siebert. "The key is to offer complementary products to raise the average ticket to a level that will allow franchisees to make money. Those that are able to generate high enough levels of unit volume are going to have a great deal of success."

• Wraps. In many ways a sister trend to juice bars, wraps are growing in popularity as consumers continue to crave healthier alternatives to fast food--or perhaps just alternatives to fast food, period. Formerly considered too ethnic or too "hippie" for popular consumption, wraps are now enjoying a warm reception by the franchising community, with everyone from up-and-coming franchisors like Wrap & Roll Cafe to established players like KFC offering these glorified burritos. Already a hit on the West Coast, industry analysts consider this new addition to the fast-food market most likely to succeed. We, meanwhile, are celebrating the trend with the inclusion of three wraps franchises this year.

• Senior day care. With the aging of America, one of the most pressing needs of baby boomers is day care, for their parents as well as their children. And as franchises have successfully and innovatively filled the need for child care, they are proving to be just as sensitive to the needs of seniors.

According to the National Adult Day Services Association, there are about 4,000 adult day service centers operating in the United States. Businesses in our listing include everything from home health-care services to one of the most talked-about franchises of late: centers that specialize in caring for seniors with Alzheimer's disease.

In franchising, Siebert reports this category's performance has been somewhat erratic. "For a while, there were a number of companies that went along with the publicity of Clinton's health-care reform proposals, and then there seemed to be a slowing down," he says. "Now we're starting to see people in the industry looking into expansion again."

• Educational/training services. We've already seen the bulk of laid-off employees either re-enter the work force, start their own businesses or purchase franchises, and yet this category remains strong. Today's tight labor market may hold some answers. With skilled employees hard to find, employers are investing in their current workers, paying to improve their skills in certain areas or provide training to take them to the next level.

Recently, the U.S. Bureau of Labor Statistics identified job training as one of the fastest-growing sectors dominated by small businesses. The bureau also expects the industry to grow 43 percent between 1994 and 2005. We're already seeing that growth in our listing, as franchises continue to meet the demand with concepts running the gamut from clerical skills training to high-technology education courses. As this sector booms, expect to see more and more specialization.

• Vitamins. One of the most notable success stories in our ranking this year is General Nutrition Companies (GNC), which has hung somewhere near the peak of our top-20 range since 1994. This year, it won the number-seven spot. The nation's largest vitamin-shop chain, GNC has grown to more than 3,000 stores. Its "secret" formula for renewed franchising energy: capitalizing on society's desire to offset the effects of aging, pinpointing health trends early on, and offering products in convenient, strategically placed mall locations.

GNC's success story is one that exemplifies the mystery of franchising: A company offering a concept so clearly in demand, using a proven formula, can be not-so-hot one year and blazing the next.

But, as with any good mystery, we can't resist searching for answers.

• Fitness. After a brief absence from our listing, fitness franchises are muscling their way back into the Franchise 500®. People are once again getting physical, but they're leaving the leg warmers, torn T-shirts and headbands in the '80s. The '90s take on fitness franchises ranges from the typical gym-type fitness club to individual extracurricular sports like martial arts and family-oriented activities such as children's tennis instruction. Considering the proliferation of varied fitness and sports options, we may soon see franchise heavyweights in the form of kick boxing, spinning and yoga.

Perhaps the resurgence of this category is more psychological than physical. As baby boomers feel their age creeping up on them, they're heading for the gym to try to stave off the inevitable. If that's the case, expect the fitness franchise category to keep bulking up.

• Internet franchises. A category that emerged in our ranking for the first time last year, Internet franchises are still going strong. In fact, as the industry matures, "it's become a very fragmented market," says Siebert. "There are a lot of [companies] out there. We're getting to the point where name recognition makes a difference."

Expect to see more in the way of franchises offering Web site design, computer training or some combination of both. "It appears the key to success in this area is finding a broad enough product mix to have high enough levels of unit volume," says Siebert. "From a volume standpoint, people who are just selling advertising space on the Internet are having a harder time, but those with a broader approach are doing significantly better."

Trends

OUT: Rotisserie chicken, Bagels, Cosmetics companies, Video rental stores.
IN: Wraps, Frozen desserts, Health-care businesses, Video game franchises.

HOT: Golf
EVEN HOTTER: Women's Golf

MM-MMM GOOD: SOUP BARS

When Jerry Seinfeld and crew obsessed about the Soup Nazi, they inadvertently created must-eat TV. "Everyone in New York wants to franchise a soup bar because of the publicity associated with the `Seinfeld' episode," says Francorp's Mark Siebert. "First, you've got `Seinfeld,' then soup bars pop up, and then franchising comes later. It tends to be sort of a phase three. So soup bars, says Siebert, should be "one of [franchising's] next big food trends of 1998."

IN TRANSITION: HOME-MEAL REPLACEMENT

A surprise ending to franchising's Midas story unfolded this year, as Boston Chicken Inc. ran into major snags (see "Extra! Extra!" page 170). "While home-meal replacement is still a strong sector, I think the rotisserie chicken trend has probably run its course," says Francorp's Mark Siebert. "The Chicken" (as it's known on Wall Street) may be running around with its head cut off, however, the home-meal replacement trend that it spawned remains viable: More restaurant meals were taken out than eaten in last year. Who will take over the reins of this major opportunity? Franchising's big guns have already misfired in this arena: McDonald's and Burger King failed to even make a ripple in the market with their first attempts. "What we'll see over the course of the next year or two is more existing franchisees trying to target this segment of the marketplace," says Siebert. "Rather than the evolution of one new franchise concept, my guess is existing franchisors are going to find different ways to attack that market."

Extra! Extra!

Top news story of the year: Shake-up among the big guys.

Last year, pedestals were knocked down, crowns were tarnished, and Achilles' heels were bared. A surprising chain of events proved that no one in franchising is invincible.

It's certainly no shock to hear people in the franchise industry buzzing about saturation, grumbling franchisees and increased competition affecting profits. The shock is that people were buzzing about McDonald's. "Reality has had an effect on McDonald's, which has had to deal with a very competitive fast-food market and has stumbled in some of its advertising and marketing approaches," says Erik Wulff, a partner with Washington, DC, law firm Hogan & Hartson.

The promotion that proved even McDonald's can slip up was the infamous Campaign 55, offering Big Macs and other sandwiches for 55 cents. "It was not well-received," says Wulff. "And I think McDonald's ended up being deeply embarrassed by it." Meanwhile, pressure from a renewed Burger King and a vigorous Wendy's added salt to the wound.

Now under a new management team, McDonald's seems prepared to rethink advertising and marketing strategies and meet future challenges. "I suspect that, notwithstanding the challenges McDonald's faces, it still has a long line of prospective franchisees outside its doors," says Wulff.

Boston Chicken may not be as fortunate. The company that took franchising, Wall Street and the public by storm was publicly plucked last year, with reports that the company's 15 area franchisees lost a total of $356 million in three years. Meanwhile, the franchisor downscaled its aggressive 300-stores-per-year expansion plan and subsequently announced it would close 50 restaurants in 1997 and will likely buy back all its franchises. "The fact is you've got a concept with very high food costs that requires a lot of space but at a price point that is not much higher than fast food," says Wulff.

On the bright side, Wulff sees PepsiCo's decision to spin off Pizza Hut, Taco Bell and KFC under the moniker Tricon Global Restaurants Inc. as a healthy move, as it relieves the restaurants from the constraints of being part of a larger organization.

Wulff believes there are lessons to be learned by prospective franchisees as well as veteran franchisors. "The fast-food industry is extremely competitive, and you have to rely on a fine-tuned, workable concept in order to get a good return on your investment," he says. "You can get swept up in the story [of a big franchise], but at the end of the day, it's all about buyer beware."

Contact Sources

Francorp, 20200 Governors Dr., Olympia Fields, IL 60461, (708) 481-2900

Hogan & Hartson, (202) 637-5665