Article
QSR franchise sales require harder work
Growth is possible in the tightened credit market, but brands and franchisees must get creative.
June 7, 2009
The tight credit market is frustrating franchisors and franchisees alike across the foodservice industry. Still, new franchising agreements are being made as parties from both ends of the spectrum get creative.
Alisa Harrison, spokesperson for the International Franchise Association said she has seen franchisors develop a variety of incentives to assist franchisees obtain lending approval, from offering discounts on franchise fees to guarantees on their return of investment. Some are even providing their own financing programs.
More commonly, franchisors are closely examining their systems to prove — or improve — their business model.
"We're seeing a lot of franchisors really just get back to basics. I mean, now is the time to really make sure you are proving your value proposition to those prospective franchisees," Harrison said. "There's a little bit of competition to attract those qualified leads, so it's a matter of making sure that you've got a story that is compelling and a system that's set up that really tells the story of your system."
A&W Restaurants, for example, has been using its 90th anniversary to educate consumers and potential franchisees about its new store concept and its focus on area development, and has signed a few multi-development deals this year.
But now, the company has to communicate its brand story to lenders, said Doug Heinrich, direct or asset strategy for A&W and Long John Silver's. Also, the company found it critical to get on the Small Business Administration Registry to help facilitate the loan process. A&W recently announced its first-time inclusion on the registry and fellow Yum! brand Long John Silver's expects approval shortly, he said.
"We never thought it was necessary," Heinrich said. After seeking input from lenders and franchisees, getting on the registry "became a pretty easy way to take one roadblock out of the way for our franchisees."
Working with local lenders
As one of its services, FranDATA assists franchisors' applications to the SBA Registry. Trey Dean, client solutions specialist for FranDATA, said in today's economy, inclusion on the registry has become a necessity for many companies regardless of their portfolio.
Before the credit market tightened, franchisors typically developed relationships with a number of preferred lenders. But as those major creditors now "prefer not to lend," Dean said, franchisees are turning to local lenders.
Yet, those local lenders may be unfamiliar with the brand or the metrics of franchising in general and may not see the benefits of going through the process of educating themselves, he said. So being on the SBA Registry provides a dual benefit.
First, the inclusion facilitates the SBA loan review process. Secondly, it signals that a franchisor has an established system and meets SBA requirements.
"Lenders who see you're not on the registry see it as risk issue," Dean said. "It's pretty much a necessary capital access qualifier."
Heinrich said A&W has several new and existing franchisees going through the credit approval process and the company hopes to see soon whether being on the registry has helped.
FRANdata has refined another of its services in light of the economy, using its Bank Credit Report to help franchisors evaluate their brand and address, if necessary, any risk factors the system may have. The report provides lenders with the information they need up front in order to start the process.
While FRANdata's Bank Credit Report or inclusion in the SBA Registry are important parts of the initial process, lenders in today's economy want a franchisee to have a strong portfolio, regardless of the size of the loan or the depth of the franchisor's system, Dean said.
Brand incentives
Franchisors are doing what they can to attract and help qualified prospects, from offering incentives to developing store designs that are financially more attractive. Church's Chicken, for example, recently launched a modular design to speed up the construction process and drive down equipment costs. Krispy Kreme rolled out its small retail shop to offer operators options and a smaller footprint.
A&W's 3-D store model has created excitement among franchisees and is boosting the company's growth plans, Dean said. The new model offers a drive-thru as an addition to the traditional dine-in and drive-in store. More importantly, the company has improved its processes and added new drink and menu items.
Last year, the company added five units and expects to add 10 this year. Before 2008, it had been 10 years since the brand's last store opening.
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NexCen Franchise Management is focusing on nontraditional locations and cobranding opportunities for its quick-service brands, such as Pretzelmaker and MaggieMoo's Ice Cream. The company also has extended a multiunit development program originally designed for its retail brand, The Athlete's Foot.
The company is encouraging area developers over single-unit franchising by offering a tiered-pricing program. The goal is to allow operators to successfully start their first store with the intention of developing multiple units, said Martin Amschler, chief development officer, NexCen Franchise Management.
NexCen also recently rolled out other incentives, including a program that offers an additional 15 percent discount to minorities who sign agreements for two or more locations in a multiunit development. A veterans' incentive program offers a 15 percent reduction on the initial franchise fee for one or more units.
Another incentive is a referral program that pays $1,000 to anyone who refers a potential franchisee upon his or her signing.
Despite NexCen's desire to grow its stores and attract franchisees, it's still necessary to find the right operator for the right brand, Amschler said. Finding those candidates requires more work with today's credit situation. For example, the company recently rolled out a new Web portal designed to develop leads for franchise sales.
"Franchising is not easy in the United States, by any stretch of the imagination," he said. "So we just need to be prepared when the right candidate comes along, one who is financially capable and has the correct business acumen, to figure out a way to get them on our team vs. the competition."
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