20 to Watch: What’s trending in 2016
#1 ANYTIME FITNESS
An Anytime Fitness in Japan is among the brand’s 3,000 units worldwide.
Anytime Fitness hit 3,000 gyms worldwide in 2015, a hefty milestone made even more remarkable because the fitness franchise got there in 13 years, after opening its first gym in 2002. That’s faster than 20 years for McDonald’s, 25 years for Subway and 37 years for Dunkin’ Donuts, according to Mark Daly, Anytime’s national media director. “Admittedly, I’m biased,” he told FT, “but faster than Subway and McDonald’s to 3,000 franchised units is really amazing—and the global expansion to nearly 30 countries by the end of next year is something no one could have imagined 13 years ago.” Anytime’s co-founder Chuck Runyon decided to sell a minority stake in the brand to Roark Capital last year, for which he received a Franchise Times Dealmakers award, and the new private equity backing clearly paid off with a burst of expansion, including internationally. We’ll be watching the other end of the spectrum in fitness franchises this year, including emerging concepts such as Blink Fitness (big-box gyms), Cyclebar (spinning boutiques) and Orangetheory Fitness (heartrate-monitored group fitness) to see which will gain traction and be the next on its way to significant growth. They have a lot of working out to do to catch Anytime.
#2 PRIVATE EQUITY PLATFORMS
It’s not just one-and-done when private equity firms invest in franchise companies these days. Rather, one investment allows the franchisor to launch a program of acquisitions at a rapid clip. One case in point: Roark Capital bought Driven Brands last April, and then Driven Brands proceeded to pick up 1-800-Radiator and CARSTAR, and its newly named president, Jose Costa, promises more purchases to come. Another case in point: The Riverside Co. purchased The Dwyer Group in 2014, jump-starting an expansion binge for the Waco, Texas-based collection of service brands. Dwyer in 2015 acquired all of Service Brands International (Molly Maid, Protect Painters, Mr. Handyman), bought out Grounds Guys Canada, and then purchased Drain Doctor/UK, their largest brand to date outside the United States. A related trend we’re watching is investors and lenders betting on franchise concepts at a much earlier stage than before. “There is a tremendous amount of great development on the concept side. There’s a terrific supply of early stage concepts, inspirational founders,” said Chris Sciortino of Baird, speaking at the Restaurant Finance & Development Conference last November. And all those great brands mean investors feel compelled to get in early. “In years past, financial institutions would like to see proof of concept. Today we’re seeing investment in concepts that have four or five units.”
#3 JOINT EMPLOYER CLARITY?
After 18 months of storm and fury, 2016 should be the year some clarity emerges over the joint employer issue. At least, that likely will be the case regarding the multiple lawsuits against McDonald’s that name it as jointly responsible with its franchisees for alleged labor violations. In case you’ve been living on Mars and haven’t heard, the National Labor Relations Board dropped a bombshell in August 2014 when its general counsel, Richard Griffin, said McDonald’s would be considered a joint employer. Cases have zigged and zagged ever since, with Massage Envy, Jimmy John’s and Freshii decisions favoring the franchisor, for example, but the Browning-Ferris bombshell last August seeming to go the other way. This year will likely see some action on the McDonald’s cases, and if so people can finally start to see whether it’s the end of franchising as we know it (highly unlikely, in our view) or a wake-up call for franchisors to lay off the excessive controls they impose on franchisees. Griffin himself signaled the NLRB considers the latter to be the case, when he appeared at the American Bar Association’s Forum on Franchising last October. At the forum, Griffin emphasized in his remarks that the notion of joint employer is “highly factually driven,” meaning dependent on the specific case itself rather than generally applicable across a business model. In the McDonald’s lawsuits, Griffin stressed at the forum that in his view scheduling software is the problem, which he said is mandatory for McDonald’s franchisees to use, with a trigger that if labor reaches a certain percentage of sales, then the franchisee gets the directive to send people home. Said Lee Plave, a partner in Plave Koch, about Griffin’s remarks: “He really took the wind out of the sails of the hair-on-fire, sky-is-falling crowd,” and that would be a relief for franchisors looking for practical advice rather than raving rhetoric.
#4 A MOD PHILOSOPHY
Scott and Ally Svenson are co-founders of MOD Pizza.
We’ve all heard tales about creating the right culture at our companies. But the story of Cory tops them all, as told by MOD Pizza’s founder at the Restaurant Finance & Development Conference last November. As Scott Svenson tells it, a hiring manager there took a risk on Cory, despite his showing up at a job interview wearing a prison-monitoring device on his ankle, after serving three stints in jail. Another manager questioned the move, but Cory was hired anyway and turned out so well he was eventually promoted to general manager. Shortly afterward, however, a $2,200 deposit went missing. Cory was immediately suspected, but after talking to him MOD decided to trust him that the lost deposit was a mistake, not a theft. Cory went on to become one of MOD Pizza’s most valued and influential employees, rising to lead trainer among other roles, Svenson said. Fast forward to a MOD Pizza all-employee meeting, in which people were asked to tell what MOD means to them. A big man with a bald head and all the tattoos you might expect from his history, Cory spoke last, and turned his back on management to face his peers. “MOD means everything to me, and none of you guys are going to fxxk it up,” he declared, according to Svenson. That’s the kind of culture and message money can’t buy, and now that MOD is moving up in the fast pizza business, we’ll look to see if the people power translates into gains against competitors. For sure, we plan to learn more about this founder’s philosophy, and share it with our readers.
#5 NEW FACES AT IFA
Robert Cresanti is the new CEO of the International Franchise Association.
Many people praised Steve Caldeira, CEO until last August at the International Franchise Association, as he aggressively fought threats against the franchise business model, and especially for his fund-raising prowess. But we heard grumbling, too, mostly about spending on such things as a high-profile lawsuit against the city of Seattle (although in our view that lawsuit is a smart and creative move, and new CEO Robert Cresanti now says they’ll pursue it all the way to the U.S. Supreme Court.) Hyper-partisanship, too, was a common complaint, as the IFA seemed to paint every disagreement in franchising as a pitched battle between the Evil Left and the Virtuous Right—a problem, many would point out, when a Democrat has been sitting in the White House for the last seven years. When the IFA asked members to pony up additional funds last year, many howled, and by August Caldeira had abruptly resigned. Enter Cresanti, the IFA’s chief lobbyist who was quickly elevated to CEO. Many look for a more even-keeled approach, noting Cresanti’s record as a lobbyist with ties to both sides of the aisle in Congress. Cresanti told FT his No. 1 issue will remain joint employer; that is, working to beat back assertions that franchisors should be considered joint employers along with their franchisees. “It’s incredibly serious for us,” Cresanti says, and especially for the small- or mid-sized franchisor that doesn’t have the resources to fight like McDonald’s does. “The approach may have changed slightly in that we’re trying to pursue a more open-minded and more diverse policy for solving the problem. For us there can’t just be one way to get to a potential solution.” That approach will include “greater engagement with the administration,” he says, meaning the Obama administration—something Caldeira never uttered. With the rise of Aziz Hashim, the multi-unit franchisee turned private equity investor, to IFA chairman in February, we expect a new and refreshing operating mode as well.
#6 GALEN WELSCH
Using a two-pronged approach, Jibu founder Galen Welsch is changing the world from his home in Kampala, Uganda, providing clean water and sustainable business opportunities to the residents of this impoverished African nation. Welsch is a 28-year-old social franchisor from Colorado who joined the Peace Corps after college and now runs a fast-growing company whose social mission has repercussions throughout the entire franchise industry. Now he’s taking Jibu international with a pilot project in Kenya. Jibu is up to 18 franchises and two countries with more coming soon. With a line of prospects out the door, Jibu has no marketing beyond the sign on the front door. Unwilling to focus on his own success, Welsch predicts an explosion in social franchising for its ability to combine a for-profit motivation with a beneficial end product—clean water, in this case—literally making the world a better place. Changing the intersection of development aid and international business is not easy. “Businesses are realizing the importance of making social impact core to their missions, and I think social enterprise is the future,” he said. “Social franchising, specifically as a tool for international development, is probably growing more slowly because the international development community sort of distorts/misunderstands what franchising is and holds the keys to the car too tightly.” Welsch hopes his future includes co-founding the first decacorn (company that achieves a $10 billion valuation) social franchise—not for fame and glory, but as an indicator that the values of the global economy have been disrupted. Not a bad trajectory for somebody pushing 30.
Galen Welsch, far left, and colleagues who are developing Jibu, a social franchise providing clean drinking water in Africa.
#7 FAMOUS DAVE
Dave Anderson returns to Famous Dave’s, the franchise he founded in 1994, and is also developing Jimmie’s.
After founding his namesake business back in 1994, “Famous” Dave Anderson left the company in 2014, upset with poor performance and what he called an over-reliance on Wall Street’s advice. Now struggling mightily in the public eye, Famous Dave’s brought back its founder to help rejuvenate the struggling BBQ chain. So why is Anderson so interesting to watch? It’s not his only gig. After leaving Famous Dave’s, he went on to found Jimmie’s Old Southern BBQ Smokehouse—an homage to his late father—to avoid the mistakes that hobbled his namesake chain. Fast-casual, more modern and with a stripped down menu that’s more authentic and locally sourced than Famous Dave’s, Jimmie’s is a concept Anderson told FT he hopes to grow into a 1,000-unit international chain. Now that he’s splitting his time between concepts, we’ll be watching closely to see if Anderson continues adding Jimmie’s units across the Upper Midwest—his initial target market. The first Jimmie’s location was built in Hayward, Wisconsin, a tiny tourist town in the northwest part of the state. It just so happens to be the same town where Famous Dave’s was founded and, unfortunately, where its flagship location burned to the ground on the shores of Round Lake last fall. Of course, following the turnaround of Famous Dave’s will remain fascinating due to continued C-suite shakeups and the implementation of its plan to improve the food, spruce up the dated stores and fend off younger, more nimble competitors like Dickey’s Barbecue Pit.
#8 LABOR COSTS
The cost of labor is on the rise as benefits expand under the Affordable Care Act and wage boards across the country fight to push wages even higher. The 2016 ACA updates will make it one of the most expensive years for the ACA so far. First, fines for the uninsured are going up a lot. Taxpayers without insurance will now pay $695 or 2.5 percent of modified adjusted gross income (MAGI), instead of $325 last year. All those healthy young adults that were holding out are going to be signing up. Healthy workers are good workers, but employers will now feel the full effects of the employer mandate. Employers must provide plan options that cover 60 percent of allowed medical costs for full-time employees (FTEs) and their children (26 and under) as well as subsidize any cost over 9.5 percent of MAGI. Companies with more than 50 FTEs must offer coverage for 95 percent of FTEs. All that will be amplified by insurers, which hope to raise rates by double digits—some as much as 52 percent. But the most pressing labor issue is just finding staff. As the economy grows and hiring continues to expand across all industries, there are fewer and fewer workers to staff the scores of new franchises. Many restaurants, for instance, are going above the minimum and providing better benefits and more transparent career paths to get people in and engaged with the company. Paying more just doesn’t retain workers anymore. The “fight for $15” continues across the country and wage boards are getting more confident that they can boost minimums, despite an onslaught of anti-business and anti-inclusionary accusations. Some boards are pushing for even higher wages than that.
The push for higher minimum wages includes “fight for $15” demonstrations.
#9 FOOD SAFETY
It’s something nobody in the restaurant industry wants to think about, but Chipotle’s recent E. coli outbreak brings the problem back into the limelight. Today the issue is seldom about cooking meat, and hasn’t been since the major Jack In The Box outbreak in 1993 motivated chains to start charring burgers. Now, it’s a produce supply chain issue, too. The move toward sustainable and local food is straining less-sophisticated regional networks. That’s creating frightening gaps in the food safety net. In fact, most cases of E. coli are at small farm-to-table restaurants. Commitments by big franchisors like Subway, McDonald’s and Taco Bell are stretching small supply chains even more as they attempt to source cage-free eggs and antibiotic-free chicken. Large suppliers are already working sustainable foods into the mix at a cost, but more restaurant groups will be partnering with growers and collectives on the supply side. Managers and operators will be taking on more responsibilities when it comes to food safety as suppliers become more dispersed for a second layer of safety. It’s just a matter of time before there is another major outbreak, and every restaurant franchise must take precautions to protect themselves from being the culprit.
#10 MCDONALD’S MOVES
McDonald’s Egg McMuffin
With its first quarterly U.S. same-store sales growth in two years, McDonald’s finally has something good to talk about after a protracted period of bad press and dire predictions. According to the company’s third-quarter earnings release, almost all the numbers look great, or at least better than the much-maligned fast-food giant has in the past few years. Even so, many industry watchers will keep their eyes focused on the success of its all-day breakfast move, as well as the new “McPick” value menu coming in January. CEO Steve Easterbrook said all-day breakfast, rolled out nationwide in October, has given the company much-needed momentum going forward. Franchisees, however, have expressed mixed feelings, with many maligning the extra expense and space required to sling McMuffins and hash browns to (presumably hungover) midday and late-night diners. After reporting its rosy third-quarter numbers, Wall Street responded with a nearly 20 percent pop in McDonald’s stock price, which is now trading at the highest reaches of its 60-year history. The new value menu promotion, McPick 2 for $2, is in addition to its preexisting Dollar Menu. Its goal is to nudge consumers into spending more money and burnishing its reputation beyond a purveyor of cheap food. It’s all part of the company’s plan to become a modern burger company, strong and nimble enough to withstand the Shake Shacks, Umami Burgers and Mooyahs of the world, which are all coming on very strong. Convinced? Not yet, but McDonald’s has a long track record of reinventing itself against the odds.
#11 BETTER-FOOD TSUNAMI
From suppliers to servers, restaurant watchers of all stripes have their eyes on the tsunami of fast-food and fast-casual chains joining the “food with integrity” movement that discourages the use of antibiotics, genetically modified organisms (GMOs), eggs from chickens raised in cages and other “better food” trends that are quickly going mainstream. Food that’s perceived as less industrial and fraught with new-age health concerns is no longer just the domain of health-focused restaurants or $30-a-plate establishments that can more easily absorb higher costs than volume-dependent fast- or quick-service chains. In just the last several months, Wendy’s announced it has no plans to sell genetically modified apples; Subway adopted a stronger antibiotic-free policy; McDonald’s, Taco Bell, Burger King and Panera switched to cage-free eggs; MOD Pizza shunned GMO flours for its pizza dough—a mere snapshot of the changes rolling out at restaurants of all kinds and price points. As commodity prices remain unstable, given shifts in weather and tastes, all restaurants need to, at a minimum, prepare to invest in more sustainable food options for the growing list of consumers demanding to know what’s in their food and where it comes from. When to roll out these changes and how far to go is hard work for CEOs and the like, but actually implementing these changes is a Herculean task for suppliers, and a shift that will ultimately help quell concerns about food quality in large-scale restaurant chains. Baby boomers aimed to bring peace to the world—with limited success—but millennials are hitting it out of the park in getting Big Food to pay attention to their highly publicized taste proclivities.
#12 NEXTGEN’S FUTURE
Jennifer Kushell backs NextGen
Quite simply, the International Franchise Association’s NextGen In Franchising is the future of an industry that’s not often viewed as young and fresh. Indeed, last year’s five young franchise entrepreneurs honored and mentored by the program represent the official entrance of millennials into one of the most dynamic sectors of the global economy. As the program evolves into its second year, David McKinnon, co-founder of ServiceBrands International, has pledged a significant endowment to the IFA Educational Foundation, which will be used to bolster the coffers of the NextGen In Franchising program seed funded by Doc Cohen. McKinnon is managing director of TriniD Ventures. Service Brands International, which includes Molly Maid, Mr. Handyman and ProTect Painters, with a combined $283 million in systemwide sales, was acquired in June by The Dwyer Group. The Education Foundation will award all winners a trip to the International Franchise Association’s annual convention in February in San Antonio, participation in a year-round “accelerator” business development program with industry leaders and CEOs, and a complimentary IFA membership. The contest is open to entrepreneurs from 21 to 35 years old, in business for one to five years, with business concepts that have the potential to scale through franchising. Because franchising has long struggled to connect with young adults, program organizer Jennifer Kushell, CEO of Young & Successful Media, said the importance of the NextGen program is demonstrating the power of the franchise model to a new generation, while connecting them with established players to create cross-generational, cross-cultural and mutually beneficial relationships.
#13 INTEREST RATES
Fed Chair Janet Yellen says interest rates will soon rise.
Will they, won’t they? How much, and what does it mean? The rollercoaster of hypotheticals is finally over, as the Federal Reserve finally declared it will raise interest rates in the coming year. What that means for this phenomenal expansion cycle hinges on how the rest of the market reacts and where the Federal Reserve goes from here. Public equity markets already sank in preparation for the bump, sinking well below yearly highs as anticipation of a Fed move grew. Rates will still be at historically low numbers for the indefinite future as the Fed monitors and adjusts guidance while aiming for their economic targets. But one thing is certain: money won’t be quite so cheap. Businesses teetering on the brink may not teeter much longer. The overheated emerging brand market, restaurant real estate, refranchising and franchise bank lending is going to slow down as companies refocus on growing revenue. Strong brands don’t have much to worry about in the near term, and could even see more options as traditional lenders get more active. Higher rates, after all, will make new partnerships more attractive. Sky-high real estate prices may fall too, making room for companies that are looking to expand and can service a little more debt.
#14 SUBWAY’S SUZANNE GRECO
Suzanne Greco, the late Fred DeLuca’s sister, takes over at Subway.
Last year, Subway had what could have been the one-two knockout punch for a lesser brand: the death of its founder Fred DeLuca and the sentencing to 15 years in federal prison of its sales-producing former pitchman, Jared, on child pornography charges. Not to mention having to settle a consumer lawsuit that claimed their footlong subs were closer to 11 inches than 12. Like many companies in Franchise Times’ Top 200+, including McDonald’s, Subway saw unit growth last year, but also saw a decline in sales for the first time in recent memory. Its new president, Suzanne Greco, has her work cut out for her, for sure, but it’s not as if she’s new to the 50-year-old company. As DeLuca’s younger sister, Greco has been involved since the first board meeting around their parents’ kitchen table. Like many strong leaders, she came up through the ranks, starting as a “sandwich artist” and moving onto research and development—where she helped introduce the breakfast program, seasoned breads and “7 under 6” line of lowfat sandwiches—and then senior vice president, before accepting the role of president on June 1 of last year. Getting the subway train running on time will take some dedicated work, however, considering the No. 4 franchise in the U.S. on FT’s list has more than 43,000 units worldwide, and counting.
#15 FRANCHISING GIVES BACK
CertaPro Painting franchisee Chris Drucquer ‘celebrates’ after a 5K charity race. His efforts won a Franchising Gives Back award.
Just as you can catch more flies with honey than vinegar, you can catch more sympathy on Capitol Hill with charity than economic impact figures. The International Franchise Association’s Education Foundation, led by former IFA Chairman Steve Romaniello of Roark Capital in Atlanta, formally launched a program that will track the dollar amount and volunteer hours of the various charities to which franchisors and franchisees contribute. The first celebration of that generosity in September handed out three awards in five categories to franchises judges deemed the most noteworthy. The charities of the top five gold winners each received $5,000 from the foundation to continue their work. Why this is important is that is paints a human face on franchising just as the “industry” is being hit by government in a number of areas that threatens its expansion as a business model. Whether this charitable act can call off the dogged government has yet to be seen. But if more franchisors and franchisees give back to the communities that support them, more power to all. Did you hear that, Mr. and Ms. Representative?
#16 NON-TRADITIONAL REAL ESTATE
As Mark Twain once said, “Buy land, they’re not making it anymore.” As restaurateurs fight for that increasingly rare A+ property, savvy operators are looking for other real estate options. Non-traditional real estate doesn’t always mean “off the main drag.” Adapting to smaller spaces can get a concept with a strong drive-thru component onto an awkwardly shaped piece of land across the street from that A+ competitor. Forming lease agreements with big box stores is another non-traditional route that can have major benefits for brands that don’t have the bidding power or capital for a full build-out—and the stream of shoppers already at the door makes it even more attractive. Reaching into underserved neighborhoods can also be a boon as shopping center construction slows down. Less traffic is buoyed by cheap rent, and becoming the neighborhood spot is a major marketing win. While every franchisor would love to have a standard unit design to stamp out across the country, it’s just not viable in this era of easy money and aggressive growth. Being adaptable keeps real estate options open and helps operators get above the bidding fray for historically perfect locations.
#17 TROPICAL SMOOTHIE’S MIKE ROTONDO
Tropical Smoothie’s Mike Rotondo.
Mike Rotondo may be the textbook example of the new franchise leader. He took the reins of Tropical Smoothie Café seven-plus years ago, and turned it into an economically healthy concept with more than 460 units, where the café no longer takes a backseat to the smoothies. Not content to let him rest on his laurels, Tropical Smoothie’s owner, Buckhead Investment Partners in Atlanta, is charging Rotondo with doing the same job for Buckhead’s other franchise, Tin Drum, a fast-casual Asian concept with 13 units. The only difference is that Rotondo isn’t giving up his role at Tropical Smoothie, just adding the CEO job at Tin Drum to his plate as well. How’s he going to do both? “I have an incredible team,” he said. There will be shared resources, some in-house and some outsourced, which gives Tin Drum expertise most chains that size can’t afford. It’s an example of private equity offering more than just dollars to the brands they invest in—and a long-term approach to building a brand. In addition, Rotondo’s franchisee-centric approach—which includes regular communications with franchisees and tangible ways for them to make money—is one that should be emulated. “We need franchisees more than they need us,” he said. But will he stop at two hats? A CEO hat trick, anyone?
#18 TRIPLE-BOTTOM-LINE COMPANIES
The new ABCs for companies today is PPP—people, planet and profits. Companies with this coveted triple bottom-line approach are out to please customers, employees and shareholders alike. Workplace culture has always been paramount to workers, but millennials especially want to feel their work matters, up and beyond receiving a pay check. For restaurant companies that can mean ensuring your protein is treated ethically before it becomes center of your plate, and your suppliers are into sustainable farming practices and naturally healthy foods. In addition, companies are linking their cash registers to a cause, such as ovarian cancer in the case of Newk’s Eateries in Jackson, Mississippi, or donating a portion of grand opening sales to local charities, as with Jersey Mike’s. Transparency is the other buzzword buzzing about triple bottom lines. Sure, employees want to see a clear pathway to advancement and pay increases, but will they reward companies that provide it?
#19 NASAA’s LATEST PROPOSAL
We’re referring here to the NASAA organization with the extra “A,” which means it doesn’t explore space travel. Instead, the North American Securities Administrators Association through its Franchise and Business Opportunity Project Group is exploring ways to make the franchising space a level playing field (it’s an outdated cliché but still a good one). This time the committee is taking a look at earnings claims (financial performance representations) as they are listed in the franchise disclosure document. The vast majority of franchisors and every prospective franchisee believe that FPRs are useful information to have before making a decision to invest in a franchise. The tricky part is ensuring the information is accurate, understandable and not misleading, while still being flattering. The comment period on the proposed guidelines ended last November, and now the committee is reviewing the input from the industry. If adopted, these new clarifying guidelines will be used when state regulators review franchise documents, important work that sometimes gets overlooked. And franchisors may be more comfortable providing that important financial information to prospects. Look for movement before the end of 2016.
#20 RESTAURANT AUTOMATION
No, robots are probably not going to start serving you pizza, but automation is becoming a reality at restaurants.
The idea of an automated restaurant operation has been around for decades, but it’s finally coming close to reality. No, robots aren’t going to be flipping burgers any time soon, but there’s no need for such gimmicks. Restaurateurs are just starting to adopt smart automation in the back of the house, and with a wave of new equipment, burgers don’t need to be flipped, neither does chicken and nor do light switches. New automatic grills can form burger patties (no smashing required). Chipotle and Pizzeria Locale hired a team of engineers to create a two-minute pizza oven. Chick-fil-A spent $50 million to create a grill that adjusts pressure during the cooking process to churn out 10 pieces of chicken in minutes. That grill and the pizza oven are still proprietary, but they signal a growing trend toward automated cooking that will shed labor costs by requiring fewer and less-skilled kitchen workers. Automation suites can turn lights on; sensors can monitor equipment efficiency for major power savings and keep tabs on temperatures. And everything from inventory to hours worked can be tracked via a tablet. This type of equipment has been either unavailable or cost-prohibitive until very recently, but the explosion of restaurant technology investments means high-tech devices are becoming available to and affordable for all operators.