Get With the System
Most often thought of as opportunities for new entrepreneurs to get into business, franchises are usually overlooked by seasoned business veterans. Established companies should think again, however, before they leave franchises solely to the newbies. Franchise companies are more than just start-up opportunities, they're also extensively networked buyers of products and services, and could be your ticket to a giant increase in sales as well as vast new markets you might not otherwise be able to tap.
That's the experience Dianne and Mike Dougherty had when they searched for--and found--a way to increase sales for their Atlanta business, Heavenly Cheesecakes Inc. Selling cheesecakes, key lime pies and other desserts to additional independent outlets wouldn't have boosted their revenues much beyond their 1992 level of $360,000. "To really grow, we needed a major account," says Dianne.
The account the Doughertys landed was Steak-Out Inc., an Atlanta franchise whose restaurants offer grilled meals. In January 1993, the couple signed a contract to supply 1,000 cheesecakes per week to the system's 50 franchisees. Within the same year, that one new account more than doubled Heavenly Cheesecakes' revenues to $893,000.
Since then, the Doughertys have developed similar vendor relationships with four other franchisors--Atlanta Bread Co., Italian Oven, Centra Archy Restaurant Group and Solomon Restaurant Group. The company's sales grew another 40 percent to $1.4 million in 1997, much of which the couple attributes to its franchise connections.
The story of Sol Arledge Jr., executive vice president of sales and marketing at Discount Labels Inc., his family's firm in New Albany, Indiana, is similar. In eight years, he has formed relationships with AlphaGraphics, Pip, Quick Print and 13 other printing franchise systems, propelling revenues from $5 million to $58 million.
Carla Goodman is a Sacramento, California, writer who covers small-business topics for a variety of national publications.
A Hot Ticket
What's fueling the franchise connection? In part, it's the franchise industry's own continued growth over the past 30 to 40 years, according to Robert Purvin, the board of trustees' chairman for the American Association of Franchisees and Dealers in San Diego. "We estimate there are 500,000 franchisee-owned units and an equal number of independent dealerships in the United States today," Purvin says.
Another factor is the uniformity of franchise systems. "If you become an approved vendor for a franchisor, you can automatically multiply the number of customers who are either required to buy from you or encouraged to buy from you," says Purvin. "For example, by selling to 1,000 units in a franchise system, you don't have to make 1,000 separate presentations to 1,000 different businesses.
"In addition," Purvin says, "most franchise systems have very aggressive supplier programs in which franchisees come together to amalgamate their collective buying power. Vendors sell directly to these franchisee co-ops. It's a great way to increase your sales potential."
Franchise systems--spread throughout some 60 different industries--are poised and receptive to vendors who can supply their needs. And they need it all: mailing labels and printing services; spices and cooking utensils; custom fleet van rentals; and accounting services. Franchise systems look for vendors that understand how their systems operate, know their specific needs, and are prepared to deliver products or services that meet exacting specifications and quality-control standards.
"If you think you can change the specifications or do something differently, you're dead wrong," says Dr. Robert Justis, a professor of franchising at Louisiana State University's Institute for Entrepreneurial Education and Family Business Studies. "But adhere to a franchisor's specifications and provide the best quality and the largest quantity you can, and you can make millions."
How It Works
Franchisors set strict specifications for products and services used by store owners. In most cases, however, owners can do business with any vendor that meets those specifications.
"We don't have many standardized products, except for wheat, which must be purchased from our approved vendor list to maintain quality control," says Janet Tatarka at Great Harvest Franchising Inc., a Dillon, Montana, bakery franchise that posted sales of $62 million in 1997. "Otherwise, we don't tell our 133 owners whom to buy from. They decide on their own."
Giving store owners the freedom to choose their own product lineup is an extension of Great Harvest's philosophy of developing a network of bakeries that reflect owners' individual personalities and communities. "We want Great Harvest stores to be known as community stores," Tatarka explains, "so we encourage owners to do business with their neighbors by using, for example, a local printer or honey supplier."
At AlphaGraphics, a Tucson, Arizona, printing services company with 360 franchises worldwide, franchisees enjoy similar freedom. "The store owners prefer corporate-approved vendors because it takes the worry out of the selection process," says Emmy Carter, AlphaGraphics' vendor services manager. "They're not obligated to use vendors from our list, however. They can choose whomever they want."
To help store owners make the best selections, AlphaGraphics has developed a three-tiered vendor list, an approach offered by many franchise systems. At the lowest rung are vendors whose product samples have been reviewed but not necessarily approved by the franchisor. Next are approved vendors--those whose products or services have been used successfully by store owners for at least six months and have passed the franchisor's quality tests and reference checks.
"If a franchisee wants competitive bids, I'll offer names off our approved-vendor list. I might also give out names of other vendors if I've reviewed their product samples," says Carter. The advantages of having your name on AlphaGraphics' approved-vendor list are worth noting: easier communication within the franchise system, access to a list of its franchisees and an invitation to participate in trade shows at annual franchisee meetings.
On the top tier are designated suppliers, vendors who've passed a franchisor's rigorous examination for product quality, customer service and reliability. Some franchisors require store owners to purchase from designated suppliers. At AlphaGraphics, owners are only encouraged to do so.
"In product categories where franchisees make repeated requests for vendor referrals, such as three-ring binders, labels and presentation folders, we've established national agreements with the vendors we feel can do the best job," Carter explains. "Franchisees aren't obligated to buy from those vendors, but we don't actively promote any other vendors in those product categories."
Naturally, exclusivity as a designated supplier can do plenty to boost sales. Notes Arledge, who got the corporate designated-supplier nod in AlphaGraphics' label category, "Individual store owners can choose whom to use, but when you get [the franchisor's] blessing, most store owners follow it."
It is the degree of freedom around the lower rungs, though, that allows suppliers to get into the system. Getting your foot in the door of a franchise system often starts with convincing individual franchisees--not the franchisor--that your product or service will make his or her business more efficient, more profitable and more customer driven.
On the way to earning designated-supplier status from AlphaGraphics, Arledge built one-on-one relationships with approximately one-third of the company's franchisees, showing each owner a detailed plan of how Discount Labels could handle his or her needs. With the backing of such a large number of franchisees, Arledge approached the franchisor's corporate office to show how his company could improve operations systemwide.
"Have a plan," advises Arledge. "If you're going to do nothing more than beg for sales, you'll have a hard time with a franchise company."
Another way to get inside a franchise system is through a purchasing cooperative organized by franchisees within a particular system. The co-op buys products in bulk at a lower unit cost and resells them on a national basis to its members.
"These purchasing groups are well organized and deliver huge numbers of purchases," explains Andrew A. Caffey, a lawyer in the Washington, DC, area who specializes in franchise law and a former general counsel of the International Franchise Association. "They're very competitive and are, of course, looking for the best price and delivery terms." Purchasing groups also have strict quality standards and product specifications that mirror those of the franchisor.
Franchise systems can be tough taskmasters when it comes to vendor approval. At AlphaGraphics, products must be free of defects and delivered on time at the negotiated cost. In addition, product or service problems must be resolved immediately by the vendor. "We're in a custom manufacturing business," Carter says, "where there's a higher margin for error than in industries where products or services are standardized. When something goes wrong, we want to see to what lengths a vendor will go, regardless of who's at fault, to satisfy the store owner, our customer."
While not all franchise systems are as demanding, each expects quality and consistency, two requirements that can challenge a small firm when it's suddenly inundated with orders. The Doughertys went from producing 400 cheesecakes a week to 1,000 when they signed their initial contract with Steak-Out. "We had to buckle down," Diane says, "promote reliable people and ensure that quality control standards were maintained at all times."
Having the physical capability and financial resources to fill orders on demand can be more challenging than you might at first realize, Caffey cautions. "It might mean adopting product-handling, storage and preparation procedures that aren't required by your other customers," he explains. "In addition, there are upfront costs associated with becoming a specialty supplier to a franchise system."
The Doughertys invested $120,000 in new ovens, freezers and other equipment, and moved from their 1,800-square-foot site to a 16,000-square-foot commercial facility. They also increased their staff from four to 17. Fortunately, with the help of their signed contract from Steak-Out, the Doughertys persuaded the SBA to lend them money for the expansion.
A Little Legwork
Now that you know how the system works, how can you go about making a golden connection? First, do a little research. Determine which industry is best suited for your business and get a list of all the franchise companies in that industry.
For the sake of convenience, narrow your focus to franchise companies in your state or region. Review each company's growth pattern for the past three to four years. How many new units have been added? Are revenues increasing significantly? Of the newest companies on the list, which appear to be growing the fastest? Select one or two companies with the best growth records.
Call the corporate offices, and ask the person in charge of vendor relations for a list of franchisees in your area and a list of approved suppliers. Find out what the specifications are for your product or service and how a designated vendor is selected. Will the franchisor want to inspect your facility? Will it charge you a fee to review your vendor application?
Finally, call individual franchisees to introduce your firm and learn about their specific needs in reducing costs, maintaining quality control and improving customer service. "If a vendor contacts us and we believe in what he's selling, we'll give him a list of bakery owners he can contact," says Tatarka. "But it's still up to the vendor to call a franchisee and develop a relationship."
Growing Hand in Hand
If you can meet the challenges of selling to franchises, you'll be rewarded. When the Doughertys first signed on with Steak-Out, their firm was supplying desserts to 47 outlets. Today, it's supplying desserts to nearly twice that many Steak-Out restaurants alone. "We're growing right along with them," says Dianne.
Making the franchise connection can benefit your firm in other ways. Notes Arledge, "If you can handle a franchisor's demands for quality and service, it'll make your firm better able to handle anyone's business."
Straight to the Source
We've uncovered a sampling of franchises that are ready, willing and able to give an independent supplier a try. Check these out, or contact a few of your own:
Barber's Hairstyling for Men & Women
(Cost Cutters Family Hair Care, City Looks Salons Int'l., We Care Hair)
Franchise Development Department
300 Industrial Blvd. N.E.
Minneapolis, MN 55413
Seeking financial services, equipment, construction services
(Franchisor of hotels, real estate services, rental cars, and tax services)
Preferred Alliance Department
7 Sylvan Wy.
Parsippany, NJ 07054
Seeking varying products/services
Franchise Development Department
700 Airport Blvd., #700
Burlingame, CA 94010
Seeking advertising & financial services
100 Throckmorton St.
Ft. Worth, TX 76102
Seeking electronic products
Wendy's Int'l. Inc.
4288 Dublin Granville Rd.
Dublin, OH 43017
Seeking minority suppliers
Yogen Früz Worldwide
8300 Woodbine Ave., #500
Markham, ON, Canada L3R 9Y7
Seeking dairy products, cone mix, paper goods
Compiled by Bowen Park
- You can market your product or services to franchisees through a supporting membership in the American Association of Franchisees and Dealers (AAFD) in San Diego. Supporting members become part of the AAFD's Suppliers Network, a national network of businesses that members can contact for products at a special AAFD-negotiated price. You're also eligible to qualify as a vendor to its national purchasing co-op. The annual cost is $500 for a supporting membership plus $500 to enroll in its Suppliers Network. Call (800)733-9858 or visit AAFD's Web site at http://www.AAFD.org
- The American Franchisee Association (AFA), a Chicago-based national trade group, represents franchisees who own more than 14,000 outlets in 60 industries. AFA represents member interests on Capitol Hill and offers discounted prices on products and services through its purchasing group. Call (800)334-4AFA or visit the association's Web site at http://infonews.com/franchise/afa
Heavenly Cheesecakes Inc., (800) 777-HALO, fax: (770) 491-9060