Ties That Bond

Operators implement new programs to bolster franchise relationships

By Deborah Silver, Senior Editor -- Restaurants & Institutions, 1/15/2002

When Sean Flynn joined Shakey’s Inc. as its president last March, the pizza chain that numbered 500 units in the 1970s had dwindled to 73 restaurants. A do-nothing attitude by the Garden Grove, Calif.-based company’s past management let the concept stagnate, and a revolving door of senior-level executives created an atmosphere of distrust and apathy among operators of the 71 franchised units that remained.

“The franchisees we had left were understandably anxious about the future, and we knew that many were considering leaving,” says Flynn. “We had to find ways to keep them.”

Unchecked diminution of the Shakey’s system is the extreme result of a downward spiral many restaurant franchisers work hard to avoid. With the ’90s expansion boom over, corporate parents have to provide new services for their franchise holders, ranging from bailouts for those with financial issues to new (often smaller) building prototypes and additional concepts or co-branding opportunities to broaden (and strengthen) franchisees’ bases.

Franchiser-franchisee relationships at many chains are being sorely tested by the economic downturn, making bond-building initiatives even more imperative.

“The success of many [restaurant] chain operators is tied increasingly into growing their franchise business,” says Flynn.

Stabilizing Shakey's ground
Shakey’s chose to bolster franchise connections with a multifaceted approach that indicates the company knows what its franchisees need to attract customers and sell products. A new prototype is intended to give the brand a contemporary look with more curb appeal and a flexible design that fits into a variety of locations, including stand-alone sites and shopping centers. Brighter colors, more seating options and an open layout will give franchisees an opportunity to appeal to the singles crowd and small dining parties while maintaining its core audience of middle-income families and large groups.

Among the revamped menu are new items such as Triplets, an assortment of three-to-an-order finger foods with dipping sauces. It is targeted at consumers looking for snack-type food during non-meal periods, typically mid- to late afternoon and after dinner, as well as to those who want dishes that are less filling than Shakey’s signature pizza or its marinated or fried chicken products.

Shakey’s expects Triplets—being test-marketed in one of its two corporate stores—not only will increase in-store purchases but also ultimately will double takeout’s current 10% sales share.

The revitalization package, to be rolled out in mid-2002, includes other components designed to improve the corporate-franchisee alliance, including updated operations standards and training manuals, new purchasing agreements and a revamped marketing and advertising campaign.

Flynn is optimistic that Shakey’s franchisees will see the restorative benefits of a nationwide brand overhaul, but acknowledges it may take some convincing. After years of what he characterizes as corporate neglect at worst and a laissez-faire attitude at best, the company’s franchisees have become entrenched in regional-specific formats, with Midwest owners serving all-day buffets and their counterparts in the West offering lunch buffets only and limited dinner menus.

“The key is to show them that we’re not diluting the brand or changing what’s tried and true,” Flynn says. “We’re handing them an opportunity to increase sales.”

Systematic approach
Burger King wants to send a similar message to franchisees, which represent about 94% of the Miami-based company’s system. Kitchens upgrades, a shift in the focus of its advertising and promotional efforts, the revamp of menu items and addition of new products, including a flame-broiled veggie burger and thicker beef patties, are among the initiatives.

“We’re all for the changes,” says Larry Jaro, chairman and chief executive of Westchester, Ill.-based AmeriKing, the chain’s largest franchisee with nearly 380 units. “If you don’t introduce new products, after awhile you don’t get your customers back.”

AmeriKing has seen its restaurant operations slump in recent months and it has been in discussions with creditors (including Burger King) about restructuring its debt. Burger King acknowledges that several large franchisees, representing about 1,500 units, are in need of financial assistance.

As a result, Burger King is bucking the trend of chain restaurateurs to convert company-owned stores to franchise units. Although its 4.5% royalty fee is in line with industry standards, the company has decided to rebuild its base of company-owned stores in an effort to boost earnings with straight-to-the-bottom-line profits they provide.

More typical is the tack of AFC Enterprises, Inc., owner of Church’s Chicken, Popeyes Chicken & Biscuits, Seattle’s Best Coffee, Cinnabon and Torrefazione Italia. In early 2001, the Atlanta, Ga.-based firm moved to franchise as many as 500 of its company-owned restaurants, bakeries and cafes nationwide within a three-year timeframe. The move allows AFC to dedicate more resources to the remaining sites it owns, including revamps of 150 company-owned Church’s units this year at a cost of $75,000 each. Money from the sale of the units will go toward reducing corporate debt, adding units in new and underrepresented markets and funding a massive re-imaging of all AFC concepts, being led by the 142-unit Seattle’s Best. The coffee specialist recently unveiled a redesigned cafe concept that will serve as a prototype for future units.

Refranchising most likely is a reflection of an uncertain economic climate, according to Don DeBolt, president of the Washington, D.C.-based International Franchise Association. “When the economy is soft, experienced franchisees are a company’s best bet,” he says. “They know the business, have the infrastructure in place and are better-quality lending risks.” In addition, when same-store sales are flat, unit expansion is a key means for chain operations to make money.

Ground cover
American Hospitality Concepts Inc., which owns the 150-unit Ground Round Grill & Bar, concurs. It has opted to ease the financial constraints that impede expansion by selling the majority of the 112 company-operated Ground Round units. Ultimately, AHCI wants only to own only 10% of the stores.

Franchising will relieve real estate, staff and cash limitations that keep the company from growing its business fast enough to stay competitive, according to Thomas Russo, AHCI chairman, president and CEO. “This isn’t about selling stores,” he says. “This is about franchising stores with the objective of increasing brand awareness and increasing the number of units.”

AHCI is affiliated with 26 franchising companies that operate a total of 38 Ground Round units and that have13 more units under development.

AHCI will require new franchisees to sign a development agreement to open new units based on the demographics of their region. As Russo notes, franchising stores only makes sense if a company plans to build more.

Changing course
Chains that historically have been growth- but not franchise-oriented are beginning to see the upside of franchising.

In an effort to accelerate the development and expansion of its Bertucci’s Brick Oven Pizzeria concept, Bertucci’s Corp. will open the brand to domestic franchisees for the first time this year. The Northborough, Mass.-based company is seeking experienced operators who have the potential to open 15 units over a five-year period, preferably in a single state or region, according to Rick Barbrick, Bertucci’s president and COO. Barbrick expects to franchise the brand internationally in the not-too-distant future as well, possibly in Great Britain and the Middle East.

The company waited for what it considered the right moment before venturing into franchising, and that moment is now. Bertucci’s has consistently logged comparable-store sales increases monthly for over two years, and systemwide sales for the chain are rising annually, with 2001 sales expected to reach about $153 million, compared with $144.5 million in 2000. “We’re ready to ramp up significantly, and franchising is the vehicle that will make it happen,” says Barbrick.

Bertucci’s may be franchise-ready now, but before that could happen, a number of things had to change. Management was restructured, with two new vice presidents, seven district managers, two regional chefs and two quality-assurance managers now on board and more than 70% of restaurant-level managers replaced.

In addition, a more extensive menu now augments its signature item—traditional pizza prepared in a wood-burning oven—and ease its pizza-heavy positioning. Bertucci’s has added 26 permanent menu items, many of them higher-priced dishes such as chicken, salmon and shrimp. As a result, post-menu-shift pizza sales have dropped to 35% of sales from 48%, and the average per-person check has risen almost 14%, to $10.60, from $9.38 two years ago.

Bertucci’s also redesigned the restaurant to create a rustic Italian ambience, bolstering the menu’s aura of authenticity, and its four newest units have added in-house retail stores that sell prepared Italian food products and Bertucci’s menu items. The retail outlets have been generating from $3,000 to $8,000 weekly.

“To attract good franchisees, you have to show them that you’re willing to put an effort into ensuring the brand is a success today and in the future,” says Barbrick. “You have to develop a strategy that will allow them to generate revenues on a number of levels.”

More bells and whistles
For companies that have more than one chain under their corporate umbrella, co-branding can be used as a perk for franchisees. In the new prototype, Seattle’s Best will feature an expanded menu that offers sweets of both Seattle’s Best and sister-brand Cinnabon. Louisville, Ky.-based Tricon Global Restaurants Inc. has already bundled variations of its KFC, Pizza Hut and Taco Bell brands under one franchise roof in a number of cities. Yorkshire Global Restaurants, based in Lexington, Ky., is taking a similar approach by marketing its Long John Silver’s and A&W restaurants to franchisees as a package deal.

Some, such as Shakey’s, are looking to sign on franchisees willing to run co-branded restaurants owned by different companies. Shakey’s would not specify which chains it hopes to co-brand with, but, according to Flynn, it wants to expand the brand’s number of distribution points exponentially with the least amount of capital investment possible.

Of course, there are those operations with a highly efficient franchise program already in place that are happy to just adjust what already exists. Austin, Texas-based Schlotzsky’s, Inc., with more than 660 franchises and less than 30 corporate units, is drawing franchisees with the prospect of two new prototypes—a 3,200-square-foot free-standing unit, complete with coffee bar and free Internet access, and a less costly smaller store that fits into retail shopping centers. Sonic Corp., owner of the Sonic Drive-In brand, plans to keep adding franchises—some 200 annually—to its already 86% franchised system using the same store design and basic menu that put the Oklahoma City-based chain on the map. One change that it has added to keep franchisees happy is a breakfast menu, which it began rolling out last year.