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Franchise Country

We hit the road and went in search of the hottest trends in franchising, from the mountains to the prairies.
Magazine Contributor
9 min read

This story appears in the June 2003 issue of Entrepreneur. Subscribe »

I'm in danger. My car is rocketing south through the heart of Texas, on I-35, one of the busiest highways in the country. This ugly, congested slab is a huge distribution channel connecting Mexico to the heart of the United States. It's a place where countless pickup trucks blast past hardworking drug dogs, amid a sea of looming 100-foot-pole signs, screaming for business. My orders from Entrepreneur were succinct: Go forth into the countryside, perform reconnaissance on "hot trends," and file a scouting report about my firsthand look at the franchise landscape.

The fuel light is blinking, and my stomach growls. I'm on a road trip from Dallas to San Antonio, Texas, to attend the International Franchise Association's 43rd annual convention. My own road rules have put me in danger--namely, that during my travel odyssey, I would not patronize any franchise brand that I had previously patronized. That's why I'm hungry and running out of gas, just four hours into my quest. It is both a tremendous privilege and an incredible burden to report on franchise trends. The IFA says franchises exist in no less than 75 different

How can you tell if the franchise of your dreams is in it for the long haul? Read "The Test of Time" for five tips.

industry categories, and, if I wrote about a different concept each day of the year, it would take me about 13 years to cover the industry. So while it is a little precocious of anyone to tell you the best gamble of your nest egg for a franchised business, the IFA's annual convention is a great place to start getting some ideas. This year, approximately 1,600 franchise professionals attended the convention. It's a great place to attend seminars and listen to compelling speeches, but the real gold is dispersed in the quiet conversations of the inner circle that take place during the breaks.

Whispers in the Halls

My colleagues have spoken to me in confidence, and I'm not going to sugar-coat it for you. Anyone who buys a franchise to operate in this country must be prepared to engage in hand-to-hand combat with the competition. Franchising is so popular in the United States that we have placed a discount haircutter and a 99-cent cheesburger place on virtually every corner.

An annual franchise study published by Franchise Recruiters Ltd., a Chicago-based executive search firm, indicates that "expensive market share battles persist in regional and national segments and will inevitably cause strain on net unit system growth." The competition on the block is so strident, the pros in the franchise industry are looking to international markets for real system growth. Frankly, the buzz is that those who can open the doors to China and other Asian countries will experience a fabulous rebirth of their concepts. It's now a very small world indeed, and the perception among franchisors is that the really good grazing seems to lie in distant lands. However, don't be discouraged if you don't speak Cantonese--there are still ways you can make money on our soil.

What would you think if I told you frozen yogurt is a really hot concept? Today, you might choke at this advice, but had I written this story in 1998, you may have dipped into this philosophy. Just four years ago, the franchise pundits were extolling the virtues of owning a yogurt store such as TCBY or Yogen Fr�z Worldwide. These concepts had grown for years, so much so that Yogen Fr�z named as the number-one franchise in Entrepreneur's Franchise 500� for 1999. But today, frozen yogurt franchises are on the decline in this country. For example, in 1998, TCBY was reported to have 2,696 units nationwide, and Yogen Fr�z 2,089 domestic franchises. In 2002, TCBY's figures dropped to 1,631 franchises, while Yogen Fr�z downsized to 1,687 franchises.

So how can you tell whether a franchise will have long-term success? The common consensus about earning a good income over the next 15 years revolves around a single irrefutable fact: A tremendous number of baby boomers are going to require support, comfort and fulfillment in their golden years. According to the U.S. Census Bureau, the country will continue to see an increase in the population of 55- to 70-year-olds. If you can find a concept that meets their needs, you may find yourself in the right place at the right time.

Another phenomenon taking place is the rise of the fast-casual dining segment. Years ago, places like McDonald's and Burger King were considered to be fast-service hamburger joints. Now my peers are referring to these outlets as "discount" fast food. In the new void between discount food and casual restaurants such as TGI Fridays, a breed of quick-service restaurants is evolving. Why are customers lured to these concepts? There's no tipping, the food is fast and fresh, and the atmosphere is trendy and fun. These concepts include Qdoba Mexican Grill and Moe's Southwest Grill, which, in essence, offer Tex- Mex food like burritos for less money than a full-service restaurant. However, this early success is already subject to attack, as new competition will come from Baja Fresh, which was acquired last June by Wendy's International. According to Cheryl Mullin, a franchise attorney in Dallas: "This is the essence of competition. When the new kids strike upon something exciting, the big boys will step in and give it a run."

My road-trip observations back up my review of franchised convenience store growth, or lack thereof-this segment is essentially flat. Hotel chains also seem to be struggling as a result of oversaturation. Pamela Mills, who's in charge of the franchise law section of Chicago-based Baker and McKenzie, believes the future of franchising will come from those offering innovative takes on the service industry. "We'll see an insurgence of greater corporate outsourcing of traditional in-house functions, as well as structure coming to such emerging industries as black mold abatement." This emerging trend in outsourcing corporate functions is exemplified by new franchisor HR First Contact, which has four locations that provide pre-employment screening services, including drug testing and background testing, for its corporate clients.

Twisting Traditional Concepts

In my humble opinion, those who take traditional businesses and add a new twist will be the drivers of new franchise growth. A good example of this is the explosive growth of Curves International, the franchisor of Curves for Women. Curves is a chain of small fitness centers for women, featuring a 30-minute workout and nutritional advice. Since it started franchising in 1995, this company has grown to more than 5,000 locations. Curves is now ranked second in Entrepreneur's Franchise 500�. I could go on for years, but if there's a need to be filled, be assured franchising will find it and fill it. The real question is, how do you fit in?

What's hot in the future really depends on our collective view of the world. For example, if you are prone to believe that war, unemployment, depression and deflation will control our destiny for the next 10 years, you should be looking at franchises that cater to these precepts. Tom Buckley, CFO of the Dwyer Group, the franchisor of a number of home-maintenance franchises such as Mr. Electric and Rainbow International, claims the recent recession has actually helped their franchisees. "Instead of buying new carpeting, people are cleaning their old carpeting, and instead of buying new appliances, they're calling Mr. Appliance," he explains. On the other hand, if you think prosperity is around the corner, you may want to consider looking into entertainment or better dining establishments. Franchisor-in-the-making Simply Fondue is betting on such a trend with its special-occasion restaurants that add excitement without the need for a large kitchen and the attendant expense.

It is now the third day of my journey, and my interviews have run late into the night. Wearily, I set out on foot down the Riverwalk in San Antonio in search of food. I have stayed true to my convictions, but after an hour of searching, no one will seat me at this late hour. Tom Buckley and his wife, Heather, were my last interview, so they are suffering with me. Not unlike the Donner party, who chose to cannibalize each other rather than starve, I began to bargain with the premise that I would not dine anywhere familiar. Fortunately, salvation came when I learned Heather had never been to Denny's. Under the circumstances, that was good enough for me. As we basked in the warm glow of our midnight hotcakes, I reflected that this is the essence of franchising--to go to a familiar place with consistent quality and pay a fair price.

Research at a Glance
Month 1, General Study:Research by visiting as well as individual franchisors' Web sites.

Month 2, Local Field Trips:Frequent any place in your area that looks like it might be a franchise. Try to shop at the concepts you're interested in.

Month 3, Franchise Show:The International Franchise Expo in Washington, DC, is the biggie. If you can't attend a show, take a trip to see concepts not in your area.

Month 4, Applications and Due Diligence:Apply to at least three concepts; weigh the benefits and strengths of each offering. Hire a franchise attorney/consultant.

Month 5, Lending Sources:Talk to your banker and see if funding for the concept would be available. Write an executive summary with estimates of cash requirements.

Month 6, Signing the Agreement:Dot those i's and cross those t's. And keep your day job until the last possible moment.

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