Get With the System Is it a partnership made in heaven or...? Examining the profitable possibilities of becoming a franchise vendor.

Most often thought of as opportunities for new entrepreneurs toget into business, franchises are usually overlooked by seasonedbusiness 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 andservices, and could be your ticket to a giant increase in sales aswell as vast new markets you might not otherwise be able totap.

That's the experience Dianne and Mike Dougherty had whenthey searched for--and found--a way to increase sales for theirAtlanta business, Heavenly Cheesecakes Inc. Selling cheesecakes,key lime pies and other desserts to additional independent outletswouldn't have boosted their revenues much beyond their 1992level of $360,000. "To really grow, we needed a majoraccount," says Dianne.

The account the Doughertys landed was Steak-Out Inc., an Atlantafranchise whose restaurants offer grilled meals. In January 1993,the couple signed a contract to supply 1,000 cheesecakes per weekto the system's 50 franchisees. Within the same year, that onenew account more than doubled Heavenly Cheesecakes' revenues to$893,000.

Since then, the Doughertys have developed similar vendorrelationships with four other franchisors--Atlanta Bread Co.,Italian Oven, Centra Archy Restaurant Group and Solomon RestaurantGroup. The company's sales grew another 40 percent to $1.4million in 1997, much of which the couple attributes to itsfranchise connections.

The story of Sol Arledge Jr., executive vice president of salesand marketing at Discount Labels Inc., his family's firm in NewAlbany, Indiana, is similar. In eight years, he has formedrelationships with AlphaGraphics, Pip, Quick Print and 13 otherprinting franchise systems, propelling revenues from $5 million to$58 million.

Carla Goodman is a Sacramento, California, writer who coverssmall-business topics for a variety of nationalpublications.

A Hot Ticket

What's fueling the franchise connection? In part, it'sthe franchise industry's own continued growth over the past 30to 40 years, according to Robert Purvin, the board of trustees'chairman for the American Association of Franchisees and Dealers inSan Diego. "We estimate there are 500,000 franchisee-ownedunits and an equal number of independent dealerships in the UnitedStates today," Purvin says.

Another factor is the uniformity of franchise systems. "Ifyou become an approved vendor for a franchisor, you canautomatically multiply the number of customers who are eitherrequired to buy from you or encouraged to buy from you," saysPurvin. "For example, by selling to 1,000 units in a franchisesystem, you don't have to make 1,000 separate presentations to1,000 different businesses.

"In addition," Purvin says, "most franchisesystems have very aggressive supplier programs in which franchiseescome together to amalgamate their collective buying power. Vendorssell directly to these franchisee co-ops. It's a great way toincrease your sales potential."

Franchise systems--spread throughout some 60 differentindustries--are poised and receptive to vendors who can supplytheir needs. And they need it all: mailing labels and printingservices; spices and cooking utensils; custom fleet van rentals;and accounting services. Franchise systems look for vendors thatunderstand how their systems operate, know their specific needs,and are prepared to deliver products or services that meet exactingspecifications and quality-control standards.

"If you think you can change the specifications or dosomething differently, you're dead wrong," says Dr. RobertJustis, a professor of franchising at Louisiana StateUniversity's Institute for Entrepreneurial Education and FamilyBusiness Studies. "But adhere to a franchisor'sspecifications and provide the best quality and the largestquantity you can, and you can make millions."

How It Works

Franchisors set strict specifications for products and servicesused by store owners. In most cases, however, owners can dobusiness with any vendor that meets those specifications.

"We don't have many standardized products, except forwheat, which must be purchased from our approved vendor list tomaintain quality control," says Janet Tatarka at Great HarvestFranchising Inc., a Dillon, Montana, bakery franchise that postedsales of $62 million in 1997. "Otherwise, we don't tellour 133 owners whom to buy from. They decide on theirown."

Giving store owners the freedom to choose their own productlineup is an extension of Great Harvest's philosophy ofdeveloping a network of bakeries that reflect owners'individual personalities and communities. "We want GreatHarvest stores to be known as community stores," Tatarkaexplains, "so we encourage owners to do business with theirneighbors by using, for example, a local printer or honeysupplier."

At AlphaGraphics, a Tucson, Arizona, printing services companywith 360 franchises worldwide, franchisees enjoy similar freedom."The store owners prefer corporate-approved vendors because ittakes the worry out of the selection process," says EmmyCarter, 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 hasdeveloped a three-tiered vendor list, an approach offered by manyfranchise systems. At the lowest rung are vendors whose productsamples have been reviewed but not necessarily approved by thefranchisor. Next are approved vendors--those whose products orservices have been used successfully by store owners for at leastsix months and have passed the franchisor's quality tests andreference checks.

"If a franchisee wants competitive bids, I'll offernames off our approved-vendor list. I might also give out names ofother vendors if I've reviewed their product samples,"says Carter. The advantages of having your name onAlphaGraphics' approved-vendor list are worth noting: easiercommunication within the franchise system, access to a list of itsfranchisees and an invitation to participate in trade shows atannual franchisee meetings.

On the top tier are designated suppliers, vendors who'vepassed a franchisor's rigorous examination for product quality,customer service and reliability. Some franchisors require storeowners to purchase from designated suppliers. At AlphaGraphics,owners are only encouraged to do so.

"In product categories where franchisees make repeatedrequests for vendor referrals, such as three-ring binders, labelsand presentation folders, we've established national agreementswith the vendors we feel can do the best job," Carterexplains. "Franchisees aren't obligated to buy from thosevendors, but we don't actively promote any other vendors inthose product categories."

Naturally, exclusivity as a designated supplier can do plenty toboost sales. Notes Arledge, who got the corporatedesignated-supplier nod in AlphaGraphics' label category,"Individual store owners can choose whom to use, but when youget [the franchisor's] blessing, most store owners followit."

It is the degree of freedom around the lower rungs, though, thatallows suppliers to get into the system. Getting your foot in thedoor of a franchise system often starts with convincing individualfranchisees--not the franchisor--that your product or service willmake his or her business more efficient, more profitable and morecustomer driven.

On the way to earning designated-supplier status fromAlphaGraphics, Arledge built one-on-one relationships withapproximately one-third of the company's franchisees, showingeach owner a detailed plan of how Discount Labels could handle hisor her needs. With the backing of such a large number offranchisees, Arledge approached the franchisor's corporateoffice to show how his company could improve operationssystemwide.

"Have a plan," advises Arledge. "If you'regoing to do nothing more than beg for sales, you'll have a hardtime with a franchise company."

Another way to get inside a franchise system is through apurchasing cooperative organized by franchisees within a particularsystem. The co-op buys products in bulk at a lower unit cost andresells them on a national basis to its members.

"These purchasing groups are well organized and deliverhuge numbers of purchases," explains Andrew A. Caffey, alawyer in the Washington, DC, area who specializes in franchise lawand a former general counsel of the International FranchiseAssociation. "They're very competitive and are, of course,looking for the best price and delivery terms." Purchasinggroups also have strict quality standards and productspecifications that mirror those of the franchisor.

Measuring Up

Franchise systems can be tough taskmasters when it comes tovendor approval. At AlphaGraphics, products must be free of defectsand delivered on time at the negotiated cost. In addition, productor service problems must be resolved immediately by the vendor."We're in a custom manufacturing business," Cartersays, "where there's a higher margin for error than inindustries where products or services are standardized. Whensomething goes wrong, we want to see to what lengths a vendor willgo, regardless of who's at fault, to satisfy the store owner,our customer."

While not all franchise systems are as demanding, each expectsquality and consistency, two requirements that can challenge asmall firm when it's suddenly inundated with orders. TheDoughertys went from producing 400 cheesecakes a week to 1,000 whenthey signed their initial contract with Steak-Out. "We had tobuckle down," Diane says, "promote reliable people andensure that quality control standards were maintained at alltimes."

Having the physical capability and financial resources to fillorders on demand can be more challenging than you might at firstrealize, Caffey cautions. "It might mean adoptingproduct-handling, storage and preparation procedures thataren't required by your other customers," he explains."In addition, there are upfront costs associated with becominga specialty supplier to a franchise system."

The Doughertys invested $120,000 in new ovens, freezers andother equipment, and moved from their 1,800-square-foot site to a16,000-square-foot commercial facility. They also increased theirstaff from four to 17. Fortunately, with the help of their signedcontract from Steak-Out, the Doughertys persuaded the SBA to lendthem money for the expansion.

A Little Legwork

Now that you know how the system works, how can you go aboutmaking a golden connection? First, do a little research. Determinewhich industry is best suited for your business and get a list ofall the franchise companies in that industry.

For the sake of convenience, narrow your focus to franchisecompanies in your state or region. Review each company's growthpattern for the past three to four years. How many new units havebeen added? Are revenues increasing significantly? Of the newestcompanies 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 ofvendor relations for a list of franchisees in your area and a listof approved suppliers. Find out what the specifications are foryour product or service and how a designated vendor is selected.Will the franchisor want to inspect your facility? Will it chargeyou a fee to review your vendor application?

Finally, call individual franchisees to introduce your firm andlearn about their specific needs in reducing costs, maintainingquality control and improving customer service. "If a vendorcontacts us and we believe in what he's selling, we'll givehim a list of bakery owners he can contact," says Tatarka."But it's still up to the vendor to call a franchisee anddevelop 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 withSteak-Out, their firm was supplying desserts to 47 outlets. Today,it's supplying desserts to nearly twice that many Steak-Outrestaurants alone. "We're growing right along withthem," says Dianne.

Making the franchise connection can benefit your firm in otherways. Notes Arledge, "If you can handle a franchisor'sdemands for quality and service, it'll make your firm betterable 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 theseout, or contact a few of your own:

Barber's Hairstyling for Men & WomenInc.
(Cost Cutters Family Hair Care, City Looks SalonsInt'l., We Care Hair)
Franchise Development Department
300 Industrial Blvd. N.E.
Minneapolis, MN 55413
(612)331-8500
Seeking financial services, equipment, construction services

Cendant Corp.
(Franchisor of hotels, real estateservices, rental cars, and tax services)
Preferred Alliance Department
7 Sylvan Wy.
Parsippany, NJ 07054
(973)496-5697
http://www.cendant.com
Seeking varying products/services

Gymboree
Franchise Development Department
700 Airport Blvd., #700
Burlingame, CA 94010
(650)579-0600
http://www.gymboree.com
Seeking advertising & financial services

RadioShack
Merchandising #1500
100 Throckmorton St.
Ft. Worth, TX 76102
(817)415-3011
http://www.radioshack.com
Seeking electronic products

Wendy's Int'l. Inc.
PurchasingDepartment
4288 Dublin Granville Rd.
Dublin, OH 43017
(614)764-3100
http://www.wendys.com
Seeking minority suppliers

Yogen Früz Worldwide
ProcurementDepartment
8300 Woodbine Ave., #500
Markham, ON, Canada L3R 9Y7
(905)479-8762
http://www.yogenfruz.com
Seeking dairy products, cone mix, paper goods

Compiled by Bowen Park

Next Step

• You can market your product or services to franchisees througha supporting membership in the American Association of Franchiseesand Dealers (AAFD) in San Diego. Supporting members become part ofthe AAFD's Suppliers Network, a national network of businessesthat members can contact for products at a special AAFD-negotiatedprice. You're also eligible to qualify as a vendor to itsnational purchasing co-op. The annual cost is $500 for a supportingmembership 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-basednational trade group, represents franchisees who own more than14,000 outlets in 60 industries. AFA represents member interests onCapitol Hill and offers discounted prices on products and servicesthrough its purchasing group. Call (800)334-4AFA or visit theassociation's Web site at http://infonews.com/franchise/afa

Contact Sources

AlphaGraphics,http://www.alphagraphics.com

Great Harvest Franchising Inc., (800) 442-0424, http://www.greatharvest.com

Heavenly Cheesecakes Inc., (800) 777-HALO, fax: (770)491-9060