30 franchisors tell their story to lenders
“New and improved” is usually the marketing hype attached to sandwich cookies or shampoo. But it’s also an apt description of the changes in this year’s Franchise Finance & Growth Conference. Thirty franchisors took the stage at the Venetian in Las Vegas for 15 minutes each to give the facts, figures and story behind their offering to a room filled with lenders and financiers. Each presentation included a PowerPoint, and many CFOs or franchise development execs took the opportunity to warm up the crowd with a video showing the brand’s personality. The result was the people with money to lend were exposed to 30 promising concepts—in two days—they might otherwise have missed. Here are some highlights from those presentations:
Danton Nolan, Arby’s
Arby’s finds its way with new products
Wendy’s and Arby’s merged in 2008, and in the three years afterward the brand “lost its way,” according to Danton Nolan, Arby’s senior vice president of finance. And then the two chains split, with the sale of Arby’s to Roark Capital, and since then the chain has been on a roll.
A big reason has been innovation. The roast beef chain has come out with a succession of successful products, including the Angus Three Cheese and Bacon sandwich, the Reuben, the King’s Hawaiian Roast Beef, and last year’s Smokehouse Brisket. Each of them improved same-store sales at the chain’s restaurants by at least 5.6 percent while they were being sold.
And the brisket in particular was a massive hit: During the period it was sold the chain’s same-store sales rose 12.6 percent, and nearly 15 percent of the company’s orders included that sandwich. The result? A chain that for years had been burdened with stagnant sales has had same-store sales growth each of the past three years, including 2.8 percent in 2013.
Bojangles gets a boost at breakfast
Charlotte-based chicken chain Bojangles has increased unit count by 64 percent since 2005, thanks largely to its popular breakfast. Forty percent of the company’s business is done in the morning, and its breakfast items are available all day and continue selling well. Breakfast is an increasingly popular daypart, but other chains can’t necessarily replicate that success. “Many have tried it,” said Eric Newman, executive vice president at the chain. “But it’s a difficult thing to do if you’re not already doing it.”
Burger 21 runs counter to limited-menu trend
“We realize the better burger category is getting crowded. We don’t want to be late to the party,” said Dan Stone, vice president of franchise development with Burger 21. Launched in 2010 by founders of The Melting Pot, Burger 21 aims to stand out from the likes of Five Guys, the pioneer in the category with a simple menu. They serve 21 different chef-inspired burgers, many non-beef, and on the 21st of each month introduce a burger and shake of the month—each with a complicated cooking method that people can’t duplicate easily at home. “Seriously, we are caramelizing bananas for our shakes,” Stone marveled. Burger 21 has 12 stores open, and is looking nationwide for franchisees. Because The Melting Pot is in 36 states, the franchisor can support stores anywhere with its distribution system.
Captain D’s executives: Experienced and fresh
Nashville-based seafood chain Captain D’s is working on its third straight year of sales growth. A key to that growth has been its management team, which is both old and new.
Most of the company’s top executives have well over 20 years of restaurant industry experience. Yet all but one of them has been at the chain less than three years. So in spite of their extensive experience, said Chief Development Officer Mike Arrowsmith, the chain’s executives are all looking at the brand with “fresh eyes.”
Checkers/Rally’s gains backing for growth
Drive-thrus and late-night diners are gold for Checkers and Rally’s stores, said Jennifer Durham, vice president of franchise development, who relies on research about multiple data points to increase sales. The burger QSR with 800 restaurants gets up to 85 percent of its business from the drive-thru, and is rolling out a new prototype to make that operation more efficient. They’ve also attracted a brand-new backer, Sentinel Capital Partners, the deep-pocketed private equity firm that most recently gained fame by buying Massage Envy and then selling it for spectacular returns last year to Roark Capital.
James Sullivan, CKE Restaurants
CKE Restaurants is ready to grow
CKE Restaurants, the owner of Hardee’s and Carl’s Jr. brands, is largely done with its remodels of the chains’ units. The plan now? Expand. The two brands are in 42 states, and the company is planning to get into the other eight. It is using national cable ads to build brand awareness in those other states. “We’re accelerating domestic development,” said James Sullivan, senior vice president of domestic franchise development. “Franchisees are done remodeling. Now they have capital to expand.” It’s not just domestic growth, either. The two brands are expanding internationally, too. Sullivan said that 98 international units should open this year, and 445 locations will open in other countries over the next three years.
Corner Bakery Café uses efficiency to lure operators
Corner Bakery has built an efficient performer in the fast-casual restaurant space. The Roark Capital-owned chain, according to Vice President of Franchise Sales Gregg Koffler, has unit volumes on par with market leader Panera Bread, about $2.3 million, in less space. And so the chain is ramping up franchise growth. Only 55 of the chain’s 164 units are franchisee-owned, but franchisees will open the bulk of units going forward. The chain has deals with operators for another 350 locations.
Culver’s growth comes from owner/operators
Only one Culver’s has closed in the restaurant’s 30-year history. “We know that may not be sustainable, but today we’re still mad about that one,” said Phil Keiser, president of the Sauk City, Wisconsin, chain of 500 restaurants.
Known for its ButterBurgers and frozen custard, Culver’s pipeline is as strong as it’s been in a long, long time, Keiser said. Which is impressive since 35 restaurants are planned for 2014 and the chain doesn’t award development agreements. “The owner/operator model is a critical success factor,” Keiser said. Additional restaurants are awarded based on results and “aligned core values.” “We want people on site, present and engaged,” he added.
Franchisees participate in a discovery week, not discovery day, and all franchisor rebates go to the ad fund. Systemwide sales in 2013 were $905 million, and the average ticket is $9.15.
“You need a passion to work here,” Keiser said. “The restaurant industry is too tough to not have it.”
Dairy Queen gets love in New York
Dairy Queen is an old brand, having been around 74 years. But most of its units are in the Midwest and in rural areas, meaning there are lots of big markets ripe for development. Those markets are welcoming the ice cream chain with open arms: Dairy Queen recently opened a new unit in Massapequa, New York, that drew drive-thru lines 52 cars long, stretching past three traffic lights. This has given the company confidence as it looks to find franchisees in other big markets like San Francisco, Los Angeles, Dallas and Boston. It also means the chain could add to its recent string of four record-breaking new-store openings over the past two years.
Del Taco pushes value prop to new lows
Founded in 1954 in Southern California, Del Taco has 547 quick-service Mexican restaurants in 17 states and system sales topping $600 million. Last April they began hitting their value menu hard, gathering all items a dollar or less on one menu board and promoting it as “a buck and under.” “That’s a strong competitive advantage,” said CFO Steve Brake, “because in QSR today, value is about a dollar and goes up from there. Del Taco has many items south of a buck.” Despite the low price, they emphasize their fresh ingredients, including in a new display case in the stores, where guests can see a 40-pound block of cheese and other whole-food items.
Stephen Jackson, Driven Brands
Driven Brands revving up
There’s a reason the auto aftermarket is doing well. “It’s all favorable trends,” said Stephen Jackson, executive vice president and CFO of Driven Brands. “The age of cars and vehicles are getting older and people are keeping cars longer.” Which means not only more brake jobs and oil changes, but also cosmetic repairs of dents and dings. A market they’re actively pursuing is collision repair that’s insurance driven, he said.
Driven Brands has a suite of auto-related businesses under its hood, but Meineke and MAACO are its spark plugs. For instance, Meineke’s same-center sales have outperformed industry same-center sales for 10 out of 12 months in 2013, Jackson said.
Both Meineke and MAACO are 40-year-old brands that were founded by men who envisioned them as owner-operators who were a part of the community. Private equity bought the company in 2011. Among the improvements, Jackson said, are a new marketing plan and a strong leadership team, plus a growth platform is now in place.
FirstWatch veep tries to rev franchise sales
FirstWatch started franchising in 2008, yet six years later a mere 16 of its 118 stores are franchised; the rest are corporate owned. Enter Joe Genovese, the former Starbucks exec hired in January to get the growth going. He believes in breakfast and brunch, the dayparts FirstWatch covers. (All stores close at 2 p.m., allowing servers and operators to be home for dinner—a selling point he emphasizes.) FirstWatch just acquired The Good Egg in Arizona, adding 20 units to the operation; they’re evaluating now whether to convert those stores to FirstWatch or keep the Good Egg name. “It’s up to you to judge whether this brand is on the cusp of great growth. I can tell you I wake up every morning thinking about it,” he said.
Gigi’s Cupcakes' silver bullet
“Cupcakes, really? You’ve got to be kidding me. That’s what I thought, and boy was I ever wrong about cupcakes,” said Chad Fitzhugh, CFO of Gigi’s Cupcakes.
“Gigi” is Gina Butler, a woman who gave up on her country-western singing dream, to bake cupcakes for a living.
Since opening that first single-concept bakery in 2008, Gigi’s has grown to 94 locations in 23 states, with 18 more expected to open in 2014.
Unit economics are attractive—$400,000, with lower food and labor costs than the typical foodservice franchises. The average check is $12, and in addition to cupcakes, they’ve expanded into the wedding cupcake business, as well as mini-versions of the oversized ones.
The cupcakes are great, but “Gina is as close to a silver bullet that you can get in this industry,” Fitzhugh said, about the founder who may have some TV reality shows in her future.
Great Clips CFO cuts to the chase
Great Clips’ CFO Steve Overholser couldn’t relate to the first presentation’s tagline. “We won’t use ‘freaky fast’ at Great Clips like Jimmy John’s, because freaky fast and scissors don’t match,” he quipped.
But affordable haircuts are a match for the economy. Great Clips stylists gave 84 million haircuts in 2013, for $1 billion in systemwide sales. The Minneapolis-based chain is 100 percent franchised. About 1,200 franchisees own 3,540 locations in the U.S. and Canada. Franchisees don’t have to quit their day job to join the system, because they are business people, not stylists.
A differentiator for the chain is its online check-in app with a store-locator map that can also tell the customer what the nearest salon’s wait time is. About 15 percent of customers are now checking in online, Overholser said, which is about 1 million customers a month.
Great Clips’ newest tagline, “It’s gonna be great,” is to reassure people about their hair experience, but Overholser believes it could extend to the lending community as well.
Hurricane Grill is “going to explode”
It’s safe to say that Darin Beck is enthused about Hurricane Grill & Wings, the West Palm Beach, Florida-based chicken wing chain, of which he is a new franchisee. “We’ve got the ability to get in on the ground floor of an exploding brand,” Beck said on a video introducing the brand. “This thing is going to explode. The numbers are going to get huge.” An annual growth rate of 25 to 30 percent is the brand’s mantra, according to Mike Lubitz, and they depend on franchisees as enthusiastic as Beck to make those numbers year after year.
Rich Carlson, Intercontinental Hotels Group
InterContinental Hotel Group has a healthy story
If attendees wanted a first-hand endorsement of the IHG brand, all they had to do was go upstairs to their room. “The Venetian is an IHG,” said Rich Carlson, director of the chain that covers the night-parts of midscale to luxury to extended-stay hotels.
But it’s the iconic Holiday Inn that is their most recognized brand. “Three guests check into a Holiday Inn or Holiday Inn Express every second,” he said.
The company represents nine brands with 4,600 hotels and 686,000 rooms in 100 countries. Its loyalty program is the industry’s largest with more than 77 million members, Carlson said. Among its brands are the Hotel Indigo, an upscale boutique hotel that promises a unique hotel experience, and Even Hotel, “the first wellness brand, which offers healthy meals and a fitness center that is four-times larger than the traditional hotel offering.
“We’re proud of our people and our systems,” Carlson said, “and we drive value to our customers, business to our franchisees.”
Jersey Mike’s strategy switch bears fruit
A failed attempt in 2006 to sell Jersey Mike’s to a private equity firm turned out well for the sandwich chain. Instead of selling, CEO Peter Cancro decided to overhaul the brand’s strategy, targeting multi-unit operators as franchisees. The brand boasts 140 such franchisees today, up from zero before 2008, and they’re driving fast growth. Jersey Mike’s has 750 restaurants in 34 states, with average unit volumes growing to $620,000 last year. Six hundred more restaurants are under contract to open. John Teza, chief development officer, cited a “very active pipeline management process” as an important driver. He added a note of caution: “We want to make sure we don’t get too far ahead of ourselves. We are governing that growth.”
Johnny Rockets gets flexible with sites
Restaurants in recent years have developed more flexible locations to take advantage of available real estate. But few have done so with as much flexibility as Johnny Rockets. The burger chain’s smallest concept is 200 square feet. Its largest is 12,000. The company has options with wait staff and without.
That flexibility should help the chain intensify its development in the coming years. James Walker, the chain’s chief development officer, said the company plans to add 100 units in the U.S. by 2017, and 200 in international markets by that same year. Johnny Rockets has 322 units, 212 of which are in the U.S.
The company did something else to ease the development process: It made its units cheaper. Walker said the company has reduced its development costs by $100,000 in the past few months.
Marco’s Pizza wants growth to be sensible, but fast
Marco’s Pizza’s CFO Ken Switzer won our hearts when he illustrated the concept’s growth by saying they are No. 9 on Franchise Times’ Fast & Serious list of fast-growing companies.
The Toledo, Ohio-based company is “getting a lot of attention for our growth, but in the sensible way we’re growing,” he said. Marco’s opened 109 stores last year for a total of 470 restaurants in 33 states and the Bahamas. Sales-to-investment ratio is two to three times their costs and one-third of their franchisees start the relationship as customers. The company is privately owned—34 percent by the management team. Key executives also own 12 stores.
To ensure their growth is sensible, Switzer said, area reps are paid 40 percent of royalties and 50 percent of employees’ bonuses are tied to franchisees’ sales and profitability.
Marco’s started a loan guarantee program in 2009 to help obtain financing for franchisees. “We put our money in to help lenders be comfortable,” Switzer said.
Massage Envy is alive and well in 49 states
Massages may be the envy of non-recessionary-proof businesses. While fewer dollars in the pocket may make consumers eat out less, they still want regular massages, which they’re viewing as wellness, not a luxury, according to Massage Envy’s CFO Greg Esgar.
As a membership-model, the 960 units don’t start each day at zero, Esgar said. About 70 percent of their activity is from the 1.4 million members who pay a monthly fee for a $59 or $79 massage, depending on the market. Facials were added in 2008, and although it only accounts for 5 percent of the business, it allows franchisees to have retail, thanks to a partnership with Murad’s skincare line.
Atlanta-based private equity firm Roark Capital purchased the chain (which won one of our Dealmaker awards last year), in a competitive auction. There are 43 regional developer groups nationwide in every state but Wyoming, and 73 percent of franchisees are multi-unit owners. There are 1,200 total awarded franchises, he said.
“What can lenders do to help us on this run?” Esgar concluded. “We need dollars for renovation…for upgrades to the spa model.”
Jeff Sturgis, McAlister’s Deli
McAlister’s Deli tests pick-up windows
“Before fast casual was a segment, we were already doing fast and casual,” said Jeff Sturgis, chief development officer of the chain founded in Jackson, Mississippi, in 1989. They’ve got 325 restaurants open with average unit volumes topping $1.5 million. The brand is trying a new test of pick-up windows at a couple of locations, where people can order online and then drive to a restaurant to get their food. “It’s driving a huge increase in sales at those restaurants,” he said, indicating more such windows are to come. Drive-thrus aren’t a good option for McAlister’s, which counts Jason’s Deli, Panera Bread and Corner Bakery among competitors, because food can’t be made quickly enough to make one work.
Mrs. Field’s/TCBY tests co-branded model
Two brands around for more than 30 years are both getting a makeover, following a consolidation from seven private equity owners to one in 2011. Franchisees now can choose a co-branded location, with Mrs. Field’s cookies and TCBY frozen yogurt shops side by side, plus a gifting operation. That’s three revenue streams for franchisees, who can expect average unit volumes of $600,000, said Dustin Lyman, director.
New partnerships, too, are part of the mix: a non-dairy yogurt made in partnership with Silk; a new Greek yogurt offering; and a yet-to-be-launched partnership with Angry Birds. Lyman noted other frozen yogurt brands may be in vogue right now, but the oldies can still work. TCBY, for example, holds 18 percent of the frozen yogurt category, by far the leader. “Despite its ups and downs, the brand still maintains status,” he said.
Newk’s Eatery is all about the food—and unit economics
“We love our food,” Newk’s CEO Chris Newcomb said more than once. The same team that developed and sold McAlister’s Deli is behind the 10-year-old culinary-driven Newk’s, where the food is prepared fresh daily from scratch, using family recipes.
Four revenue streams include dine-in, call-ins, catering and grab-and-go items. “Our biggest selling point is our round table with crackers, anything you want to plus-up your menu item,” Newcomb said, including items to nibble on, breadsticks, pepperchinis, capers, roasted garlic in olive oil. Another value of the round table is that guests visit it during the eight-minute wait time, which makes the wait seem faster.
Check average is $9.62 and restaurants can accommodate 300 guests per hour. “We sell beer and wine. We don’t see a lot of it, but it’s a differentiator,” he said.
Newk’s just closed a deal with Sentinel Capital, and Newcomb expects the brand to go from 67 to 300 in the next year. “They’re going to fund company growth, as well,” he said.
Papa Murphy’s loves mom
Papa Murphy’s has grown to more than 1,400 units since its founding in 1981 with a unique concept that makes its customers do some of the work. Consumers buy the pizza at the restaurant, take it home and bake it themselves. And why does it work? Moms.
Those moms feel better, apparently, about serving a hot meal to their families at home, rather than in a restaurant, and “rather than waiting for a stranger to knock on the door and give us lukewarm pizza,” said Scott Mellon, the company’s vice president of development.
Moms are also loyal and discerning, unlike young males, Mellon said. “If you take a shiny ball and roll it in front of the male, they’ll chase it, and that’s great,” he said. “The problem is that the next person picks up that ball and rolls it the other way and they go after that.” In other words: Males aren’t as loyal as are moms.
PizzaRev looks to boost lunchtime sales
Eighty percent of the pizza market is sold in the evening, but PizzaRev is aiming to change that, according to Mark Lyso, vice president of franchise development. Their young craft-your-own chain is selling nearly 60 percent of its pizzas at lunch at one of its stores, and the goal for the system is a 50-50 split between lunch and dinner. One key is a lighter crust, under 350 calories and thin and crispy. Another is a second oven in the back of the main one, so stores can fulfill call-in and catering orders while keeping walk-in customers moving fast.
Brian Belmont, Planet Fitness
Planet Fitness’ fast growth proves gym-haters will sweat
Planet Fitness is a gym for people who don’t like gyms, said Brian Belmont, executive vice president of operations and development. And so far that number is around 5 million people.
The model, which has evolved over the last 20 years, is a low-cost gym—$10 a month with no long-term commitment—without the bossy trainers, fitness classes and other full-service gym perks that add expenses and employees to the bottom line, he added. Real estate agents like us, he said, because “we don’t have water (pools, spas), and no classes, so we don’t create bottlenecks around peak demands. We don’t need 120 parking spots.” Or large properties.
Planet Fitness currently has 769 clubs, 140 of which opened last year. Projections are for 170 gym openings this year, Belmont said. Private equity firm TSG Consumer Partners purchased them in 2012, bringing in a new executive team.
About 80 percent of the growth is coming from existing franchisees.
“It’s incredibly simple to operate,” Belmont said. “I can run one with 12 to 14 people 24-7.”
Popeyes Louisiana Kitchen takes share
Popeyes’ sales have grown consistently over the past five years as the Atlanta-based chain has taken share in the chicken market. As a result, unit volumes in the system have grown 25 percent over that time, from $1.2 million in 2008 to $1.6 million last year. Not surprisingly, operators are more profitable and they’re building more units. “As one of our franchisees said, if you don’t add it on the top line, you can’t bring it to the bottom line,” said Grady Walker.
Toppers sees plenty of space in pizza delivery
Many people think the pizza delivery category is saturated, but not Chris Cheek, chief development officer of Toppers. Of the 72,000 pizza stores in the United States, only 27 percent of them are the big four—Domino’s, Pizza Hut, Papa John’s and Little Caesar’s. “This is a category that’s not going away. With 56 stores, we have a lot of runway left to go,” he said. Toppers is a favorite among millennials, or the 18- to 34-year-olds whom Cheek calls “passionate, enthusiastic and always hungry.”
Zaxby’s aims for switch from reg’l to national
Zaxby’s started in 1990 in Statesboro, Georgia, and its still-involved founders haven’t strayed too far from those roots—yet. They have 600-plus restaurants in 15 states, concentrated in the Southeast, and more than $1 billion in annual sales. That’s about to change, according to David Waters, senior director of business analysis and planning. “The vision is to grow from a regional to a national brand. We’re looking west and north to the Midwest,” he said, displaying a U.S. map with stores targeted for every state except for West Coast ones.