Fast-Food Franchisees Share Secrets to Success
Though most new restaurants don't succeed, experts say three new concepts likely will make it, and show up at an intersection near you.
After 20 years in the restaurant business working for Domino's Pizza and other giants, John Howard has purchased a Baja Fresh Mexican Grill franchise in Greenwood Village, Colo. It is the only Baja Fresh unit in the entire state and one of only a handful east of California, the system's home base.
"This would be scary," Mr. Howard says, "if I didn't have a lot of confidence in the franchise and in the products we serve."
In a nation with over 844,000 restaurants, according to the National Restaurant Association, and a fast-food stand on every corner, it seems unlikely that more are needed. But Americans' appetite for restaurant food is growing bigger, spending $1 billion a day eating away from home. And by 2010, the National Restaurant Association predicts consumers will spend more money eating out than on eating at home. Each year, hopeful new restaurant concepts arrive to serve diners and several more mature regional brands roll out national expansion campaigns.
Although many of them will not succeed, organizers of the recent Restaurant & Development Conference in Dallas have introduced three up-and-coming concepts they think will make it and may soon appear at an intersection near you. They are Baja Fresh of Thousand Oaks, Calif.; Panera Bread Co. of Webster Groves, Miss., and Red Robin International of Englewood, Colo. All three have launched ambitious franchise expansion plans. Panera, the only public company of the three, is even a stock-market hit.
To succeed today, restaurants must cater to the tastes of the nation's baby boomers, says the "2000 Chain Restaurant Industry Review & Outlook," published by Franchise Finance Corporation of America in Scottsdale, Ariz. They are the largest population segment, have the most spending power and eat out more often than older people. Their tastes demand more casual and fast-casual dining, fresher ingredients, healthier dishes and greater variety.
Baja Fresh and Panera Bread were designed with just those customers in mind. Ronald Shaich, Panera's CEO, began his foray into quick-casual dining in 1981 with Au Bon Pain Co., a bakery/cafe concept that grew to 370 corporate units-units run by restaurant companies themselves. In 1993, he purchased Saint Louis Bread Co., another chain of bakery/cafes, that he renamed Panera Bread Co. In 1999, Mr. Shaich's company sold off the Au Bon Pain units to concentrate on expanding Panera.
There are now 260 Paneras spread across 28 states, 170 of them franchised, with 25 area developers-large franchisees who sign on to develop dozens of stores-planning to build 500 more.
Panera's menu is simple; the chain serves up bagels and other baked goods, soups, salads and sandwiches focusing on the three main meal times, plus a fourth part of the day which Mr. Shaich calls "the afternoon chill-out time." This is when adults meet in cozy seating areas to drink coffee, talk and, hopefully, select baked goods to carry home. The counter-service restaurants use china and silverware and are designed to be a cut above fast food, which Mr. Shaich calls "self-serve gas for the human body." Each franchise costs under $1.5 million to build, excluding the cost of the land. Franchise fees are included in the costs.
When John Golinvaux, a Pizza Hut franchisee with offices in Clinton, Iowa, encountered his first Saint Louis Bread Co. restaurant, "it was love at first sight," he says, "but they weren't franchising then." Mr. Golinvaux waited 10 years until Saint Louis had morphed into Panera before he could buy his first franchise, in a mall in Brookfield, Wis. "The landlord was so skeptical, it took him five months to lease me a site," Mr. Golinvaux says. "Now he's thrilled at the amount of traffic we bring in." Mr. Golinvaux has six Panera franchises and plans to build at least 13 more.
Baja Fresh franchisee Mr. Howard says he'll soon start looking for sites for more Baja Fresh units in Colorado. The fresh food-franchisees prepare guacamole three times a day, for example-appeals to the "outdoorsy-type people" who live there, he says.
Baja Fresh CEO Greg Dollarhyde says the fast-casual segment of the restaurant industry is now growing quickly. Professional adults, he says, are into healthier lifestyles and are willing to pay a little more for meals with "memorable flavors." His chain has 44 company units and 57 franchises in nine states with plans to open 250 more-mostly franchises-by 2005. Franchises include just grills-"no microwaves or freezers," Mr. Dollarhyde says, and cost around $550,000 to build. Average unit sales are $1.4 million a year.
Mike Snyder, CEO of Red Robin Restaurants, has read the same reports about fast-food healthy eating trends, but he has trouble subscribing to them. Red Robin has become one of the hottest casual-dining concepts by serving hamburgers and "bottomless" French fries and soft drinks. "You'd think we'd appeal mainly to men," he says "but 59% of our guests are female, with above-average incomes and education."
Most of Mr. Snyder's 169 restaurants (60% are franchised) are located in upscale shopping malls. Units cost about $1.7 million to build and are each bringing in almost $3 million a year in revenue. Such consistent unit economics are critical to restaurant chains that want to grow in today's environment, says Mr. Weichmann of First Tennessee Securities Corp. "We've seen breakdowns in well-intentioned chains like Boston Market, when sales per unit eroded."
Another success factor, says Mr. Weichmann, is renewal. "Basically, restaurants need to be able to reinvent themselves to keep the concept fresh," he says. Red Robin, for example, offers new menu items and drinks three or four times a year, and Panera varies its soup and sandwich choices daily. Even McDonald's is expanding its fare, by adding new items like Fruit 'n' Yogurt Parfaits and shakable salads.
But popularity in one geographic area doesn't guarantee a successful national rollout, Mr. Weichmann says. A chain must have a distinctive market niche that travels well. Concepts that sizzled in California, he says, fizzled when moved to other parts of the country.
Panera and Red Robin, which is in 23 states and Canada, have moved beyond their bases, but Baja Fresh, with units mainly in California, faces competition in the race to become the dominant Fresh Mexican player. McDonald's has purchased a similar concept, Chipolte Mexican Grill, that it plans to start franchising this spring and Rubio's of Carlsbad, Calif., has announced plans to franchise its own Baja Grill concept.
But Baja Fresh franchisee Mr. Howard isn't worried. "I looked at all the Mexican concepts and felt that Baja Fresh had the best potential," he says. And, of course, the freshest guacamole.
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