Dispatches from FT’s Finance & Growth Conference
The crowd at the Franchise Times Finance & Growth Conference, at the Cosmopolitan in Las Vegas March 14-16.
After rough past, Back Yard Burgers preps next phase
The recession wasn’t kind to Nashville, Tennessee-based Back Yard Burgers, CEO David McDougall said. “I feel honored to be here,” he said in opening remarks, before delving into multi-faceted plans to outline a brighter future before a room full of investors and franchise experts. “Our story is different on a couple levels—you have a brand that’s almost 30 years old that went through some very difficult times.”
Although it may not have the massive store count of some of its better-burger competitors, McDougall said the company feels its Black Angus burgers remain some of the best on the market. He added the company hopes to turn its many regional and local recognitions into a platform to enable growth in unit counts since emerging from Chapter 11 bankruptcy protection in 2013.
“Americans love burgers, and the reality is that the world loves burgers, so I’m not concerned about all of the different competition,” he said. “For us it’s about having that slice of pie that we can leverage.”
McDougall said the company did significant research on what existing customers would like to see. “I’m a big believer in that and being able to understand what the current users want,” he said. “Our focus is to focus on quality, on premium and being able to give people a great product at a fair price, not the lowest price.”
Back Yard Burgers is now up to 58 locations in 12 states, primarily in the Southeast. After four new openings in 2015, the brand has seen three years of growing revenue.
McDougall said it can’t tout eye-popping growth numbers, but promised that will change in two years. “The proof will be in the pudding and obviously this needs to work financially,” he said. “We have a great support team. We are very lean and mean and I’m OK with that.”
Bruce Dean, Black Bear Diner, referred to his brand’s funny bear commercials.
Eponymous animals take center stage at Black Bear Diner
In easily the most delightful presentation at the Franchise Times Finance & Growth Conference, Bruce Dean, CEO of Black Bear Diner, took a humorous approach. He outlined his three keys to success—then admitted Black Bear Diner had taken the opposite tack, but succeeded anyway.
Rule one: “Select an exciting, growing segment within the restaurant industry.” Well, Black Bear Diner is in the family dining space, but “three or four years ago everybody wanted to put a fork in family dining,” he said.
Rule two: “Identify a vibrant, trend-setting market in which to start.” Um, Black Bear Diner started in Mt. Shasta, California, with 3,000 people. “My partner was a teacher and an artist, so we put this thing together in this little town at the base of a 14,000-foot mountain,” Dean recalled, but soon it was drawing customers from a hundred miles around.
Rule three: Come to the table very well-capitalized. “We actually had no money. We had $1,500 each, and we leveraged Sysco; it was the first time they gave 60-day terms,” he said. “Literally for the first year, we had Juke Box Monday. I’d pull out the quarters in the juke box, and say, OK, here’s two for me and two for you. And that’s all the money we made, quarters out of the juke box.”
Rule four: “Have a great idea, an authentic brand,” and here Dean said they nailed it. “We have authentic, homestyle food, large portions, hospitality style, and of course, we’ve got bears—only carved bears; we don’t have real bears anywhere. We have a menu that looks like a newspaper. So we create a menu specific to the town with stories about the town,” Dean said. And the clincher: “We make all the comfort food that nobody really makes any more.”
Black Bear Diner makes great use of the bear in its marketing, with funny TV ads. One features the man who carves all of the brand’s bear statues, which number more than 250 and keeps the artist busy full time. The ad shows bears (or humans dressed in bear costumes, to be precise) wearing orange safety vests and helping the carver pick out the right trees to sculpt.
In another spot, the narrator visits a Black Bear Diner and stops to talk with the various bears running the joint. “Hey, Kaneesha, what’s cooking?” the narrator says, and Kaneesha is a bear. The narrator does a double take. “Whoa—that’s a lot of hair net.” It’s a fun brand carving out success in family dining.
Blink Fitness targets masses as members of its big-box gyms
Blink Fitness is “ready to go” for franchising, said President Todd Magazine. Since opening five years ago, the company opened 42 corporate locations, a move Magazine said was to perfect the prototype and get the model just right.
The conservative move was made possible by parent company Related, which also owns Soul Cycle, Pure Yoga and upscale gym Equinox. Blink aims for those high-end amenities for low, $10 to $25 monthly membership fees.
Essentially, Blink is a fitness franchise for the “85 percent of people in the U.S. who do not belong to a gym,” said Magazine.
Focusing on “mood over muscle” and featuring atypical gym goers in marketing, Blink caters to the large swath of people who are too self-conscious or don’t relate to the standard hard body gym messaging.
Valerie McCartney, Broken Yolk Cafe.
Broken Yolk Café boasts high sales in nine-hour day
Broken Yolk Café’s VP Valerie McCartney had an important differentiating point to make, so she said it several times during her presentation: “$2.1 million average unit volumes in a nine-hour operating day.” The hours are what allowed owner John Gelastopoulos, a former dishwasher-turned-hotline-cook, to buy the restaurant when he first ran across it as a real estate broker.
The first couple of months were OK, “nothing exciting,” Gelastopoulos said about sales, so he realized he had to do something. “I saw my Rolodex and started calling people to meet me for breakfast,” he said. After six weeks, business was great, he reported. “Best marketing I’ve ever done.” They now have 17 units open, with 23 in the pipeline.
The breakfast/lunch concept is also popular with landlords, McCartney said, because it fills parking lots during non-peak hours. The breadth of the menu allows regulars to come in several times a week without menu burnout, and food is from scratch or near-scratch, McCartney said. And they break a lot of eggs: One person’s sole job is cracking eggs. Their 12-egg omelet smothered with chili and cheddar was featured on TV’s “Man v. Food,” and put them on the map in 2010. “We’re an old brand in a young brand’s body,” she pointed out. And need she say more: “$2.1 million AUV in a nine-hour operating day.”
Buffalo Wild Wings’ Jeff Sorum touted the brand’s franchisee advisory councils.
Advisory groups boost buy-in at Buffalo Wild Wings
Continuing an evolution that turned Buffalo Wild Wings into a $3.6-billion international growth brand, the company will continue to focus closely on its core competencies of wings, beer and sports, said Jeff Sorum, senior vice president.
The goal is 10 percent unit growth annually. BWW plans to also evolve existing units with new technology, try new prototypes regularly and invest in original sports programming. It will also continue to seek out small growth brands like R Taco and Pizza Rev to diversify the company portfolio.
To keep franchisees engaged and informed, the company created a franchise advisory council with sub-committees dedicated to marketing, technology, facilities, risk management and research and development. Sorum said it’s created a bridge between the home office and the 90 franchising groups. “It’s been a great way to involve our franchisees to understand the decisions we make and get their buy-in up front,” said Sorum.
CraftWorks CEO Srini Kumar operates two brands, Old Chicago and Rock Bottom.
CraftWorks relies on resurgence of beer, plus re-tooled menus
The soul of CraftWorks, a portfolio company that houses Old Chicago and Rock Bottom, is craft beer, and for the first time in five years the beer market is growing, thanks to craft beer, said CEO Srini Kumar. When Kumar took over two years ago, he saw that the Old Chicago brand had not been growing. He brought in a new management team and began making changes.
Since craft beer is what works, a portion of Old Chicago’s 110 beers is exclusive to them. Front-of-the-house workers receive a certification on craft beers so they can educate guests on the variety of beers, plus suggest other beers similar to what they’re drinking.
The food/beverage mix is 64 percent/36 percent, he said, and average unit volume is $2.6 million. They’re known for their pizza, but the food mix includes bar fare, and it’s family-centric, as opposed to sports-centric, he said. Old Chicago targets blue-collar workers as well as white-collar suburbanites.
The 40-year-old brand had one of the first loyalty programs, including its Hall of Foam for those brave souls who have drunk all 110 beers (not in one sitting, but on multiple return visits). Kitchens have been reengineered to make them more efficient, and the new prototype is 5,000 square feet with an open feel.
“We feel good about what the team is doing here,” Kumar said. “We’ve had 21 months of positive comps and traffic.”
‘Nice runway’ ahead for Del Taco, armed with new capital
Del Taco has 300 corporate and 250 franchised stores, with plans to grow its stable of both. The 51-year-old West Coast-based brand views itself as the company’s largest franchisee, and so brings a particular point of view to unit economics.
“The majority of our EBITDA” or gross earnings “are driven by operations. We are an operating culture and an operating brand,” said Steve Brake, CFO.
“Everything we do is aimed at driving top-line sales. But at the same time we have an intense focus on the bottom line as well. Top line is great but you take bottom line to the bank.”
Armed with new capital after Levy Acquisition bought it last year, retired significant debt and took the company public, Del Taco thinks there are plenty of places yet to grow. “We think there is a 2,000-unit domestic potential for the brand, so there’s a nice runway for us,” Brake said.
Dickey’s Barbecue Pit Barry Barron said the third-generation brand is a “tribal group.”
Dickey’s shares fast-casual plans for next generation
“Having the third generation opportunity creates a tribal group,” Dickey’s Barbecue Pit COO Barry Barron said of the company’s 75 years of founding family involvement. “There’s been a lot of new people added over the years, and it’s an interesting dynamic to bring together, grow it and create a culture that changes almost monthly or quarterly.”
A relative newcomer to the brand, Barron said its continued adherence to slow-smoked barbecue in each of its locations remains a key point of differentiation as Dickey’s pivots to its so-called Gen 4, which includes a refreshed store design and a newly fast-casual focus to help attract the millennial crowd.
Barron said the Gen 4 store design maintains touches of the brand’s past, but in a significantly updated, smaller and more refined store package. “It’s still rustic, it’s still barbecue, but it’s a lot different than the original Dickey’s,” he said. “I could laugh when I go to some of the older stores … I may be the youngest guy in there, so that’s pretty interesting because I’m not that young.”
As Dickey’s has continued to scale up, its pace of growth has accelerated with a recent cadence of approximately two new locations every week—an annual growth rate of 31.6 percent. Following the opening of 82 new stores in 2015, the chain is up to approximately 545 locations (and counting) in 43 states.
“Five years of growth is outstanding; 75 years of survival is even greater than that,” he added. “The Gen 4 is our future.”
Dunkin’ Brands puts focus on people as well as profitability
In the past, Dunkin’ Brands selected its franchisees based mainly on the capital they carried, said Jason Maceda, financial planning vice president. Today, as Dunkin’ identifies new markets pushing west, it’s more about the people themselves and the passion they bring to the system.
“I’ve been with Dunkin’ brands for a very long time, and about seven, eight years ago we changed the focus to put more diligence into the selection process for franchisees,” said Maceda. The company is now seeing $811 million in systemwide revenue across Dunkin’ Donuts and Baskin Robbins, with Dunkin’ hitting an average unit volume of $1.1 million.
Dunkin’ saw 349 net new openings in 2015; Baskin, by comparison, opened 19 locations in 2015, but Maceda said both brands offer growth opportunities. The company, he noted, is intensely focused on franchisee profitability—“if your franchisees are profitable, you’re going to build more stores”—and uses a profitability subcommittee made up of franchisees and corporate leaders to study new initiatives and products before they’re rolled out to ensure they meet that standard.
Carl Howard, CEO of Fazoli’s, called his Italian fast-casual chain a comeback brand, and offered a reduced franchisee fee.
Fazoli’s fights back from darker days, banking on food
“We’re a comeback brand,” declared CEO Carl Howard, recalling that he joined Fazoli’s in 2008, after Sun Capital purchased the chain. At one point Fazoli’s had 400 stores, but that was in the past. “We had double-digit sales declines, and double-digit unit declines,” during those days.
Now Howard is focused on growth. Profits have been improving every year since 2010, he said, and EBITDA or cash flow is now 16.3 percent. “We want that to be north of 20,” he admits, “but that’s fully adjusted including royalty fees. For the investment, we’re getting there.”
Fazoli’s is getting there, too, in franchise sales, bit by bit. There are 92 franchise locations open and five more under construction. For an incentive, Fazoli’s is offering discounts. If an operator takes a three-unit deal and opens on time, the $30,000 franchise fee is reduced to $20,000 for unit one, reduced to $15,000 for unit two, and reduced to $10,000 for unit three. Howard hopes the carrot is just enough to attract operators to take a look.
Don Fox of Firehouse Subs shared results from its national TV ad campaign.
Firehouse Subs adds national TV campaign to build its brand
Firehouse added national television advertising in 2015, pushing the fireman-focused brand into millions of households.
CEO Don Fox said the restaurant base of 960 would continue to grow at a “very steady pace” by leaning on franchising advertising that emphasizes that strong brand. Fox said branded sandwiches and a public safety focus makes it easy to advertise.
“Without the branding you can’t talk about it in the same way; you can’t position it in the marketplace in the same way,” said Fox.
Relying heavily on consumer insights from Technomic and BrandGeek, Fox said Firehouse Subs strives to maintain high marks among consumers for food and the company’s commitment to philanthropy as a percentage of sales.
CEO John Maguire of Friendly’s said a survey showed customers didn’t think employees there were friendly, so they re-tooled.
Friendly’s Ice Cream put the ‘friendly’ Back in its name
Eighty-year-old Friendly’s was living up to the ice cream in its name—25 to 30 percent of sales are from ice cream—but according to a survey they took a few years ago, they weren’t perceived as friendly. “We turned over 6,500 of the 8,500 people” in the system, said CEO John Maguire, who spent 20 years with Panera before joining Friendly’s. “If you weren’t friendly, you couldn’t stay…you have to care.”
The food was also given low points in the survey, so management simplified the menu and improved the food from the thickness of the bread to the quality of the bacon. “If you’re an indulgence brand, it’s gotta be worth it,” he said. “Then we went back on TV to let people know what we’d done.”
The next step was a remodel program that cost an average of $100,000 per restaurant. “It’s a timeless design meant only to need refreshing,” he said. New 3,500 square-foot restaurants can be built for $650,000. Average unit volume is $1.25 million. The chain, which is split 50/50 between company-owned and franchised units, has 260 locations in 14 states, mostly in the New England and Mid-Atlantic regions.
“We make the world friendly one scoop at a time,” Maguire said. “We don’t cure cancer, we don’t send men to the moon, but we do help people have great experiences and great memories.”
And Friendly’s might have the silver bullet to improve your chances for longevity. The founders of the chain, the Blake brothers, are still alive (one brother is 101). Their secret: Eating a bowl of ice cream every day, Maguire said with a smile.
Gina Butler is founder of Gigi’s Cupcakes, with roots in a cleaning business and on Nashville’s country music stage.
Gigi’s Cupcakes beefs up its sweet offering with outside capital
Two years ago when Gigi Butler, CEO of Gigi’s Cupcakes, presented at the conference, the story of her journey from cleaning celebrities’ homes and singing Country Western tunes to running the “largest cupcake franchise in the country” garnered a spot on the cover of Franchise Times (January 2015), but the concept was undercapitalized and didn’t have the infrastructure they needed to grow, according to Chad Fitzhugh, president and CFO.
Two years later they now do, he said during his portion of the presentation, which followed the passionate founder’s introduction. During the last two years, the chain raised $3 million in debt financing, and reinvested in their operations teams. They are in the process of overhauling all their major technologies. The look of the stores is also being updated, including a refrigerated case upfront to show off the cheesecakes, which has significantly increased sales of that product. They’ve seen a 10 percent shift in same-store sales, Fitzhugh said.
Gigi’s has 100 stores opened, including one in South Korea, with a goal to have 250 open in the next decade. A stint on the reality show Undercover Boss showed her that the chain was “consistently inconsistent,” which led to reinventing it. And while she doesn’t have “a fancy degree,” she does have the “passion to be the best,” she said. In addition, they’ve just hired a new lead generation company with a reputation of doubling unit counts, Fitzhugh said.
The Halal Guys CEO Ahmed Abouelenein.
Halal Guys sign 300 deals and they’re still counting
A typical hot dog cart turned halal based on cabbie demands, and now The Halal Guys is in a phase of explosive growth. “Opening in 1990, the partners quickly switched the hot dog cart to the first halal cart in the city,” said CEO Ahmed Abouelenein. Halal denotes meat prepared as prescribed by Muslim law.
Tapping into the fresh—never frozen—and ethnic cuisine trends, the original cart became famous for its endless line stretching down the block. Now, The Halal Guys boasts nine locations, 14 franchised locations coming in 2016 and development agreements for 300 more.
The company has partnered with Fransmart following the path of Five Guys and Qdoba to keep the franchises coming. Abouelenein said key hires on the management team will also keep the home office equipped to deal with growth.
Jersey Mike’s relies on decisions that aim to be a ‘sub above’
Touting what differentiates the fast-growing, New Jersey-based sandwich franchise from its competitors—fresh-sliced meats, grilled subs and red wine vinegar and olive oil “juice”—Jersey Mike’s president Hoyt Jones said the company remains laser-focused on making “sub above” decisions as its expansion continues.
It crossed the 1,000-unit threshold in the last year, placing in the top four of largest U.S. sandwich chains, with a total of 1,058 stores in 42 states. Jersey Mike’s is also taking its growth overseas, with its first location in Australia, with the second restaurant opening this March.
Beyond aggressive unit growth (approximately 200 locations per year), Jersey Mike’s has seen a 29 percent year-over-year increase in systemwide sales, with a projection of hitting $850 million in 2016.
Although the company still covets multi-unit developers, Hoyt said the company is now more interested in signing three- to five-unit deals, rather than larger deals some mega-franchisees prefer. The goal, he said, is ensuring its future owners are as personally invested in the system as the franchisees who have taken the company this far.
“It’s been a pretty good run for us the last couple years, and with the pipeline we have and sales trends, we’re confident it’s going to be a great company to be with,” Jones said.
Johnny Rockets dumps 1950S decor, aims for ‘relevance’
The ‘50s are dead to Johnny Rockets now, a big switch for the brand that formerly featured post-World War II nostalgia and 1950s diner kitsch. “For today’s consumer that just doesn’t mean anything. We’ve changed all that,” declared Charles Bruce, CEO.
“We fixed the brand in 2015; Sun Capital agreed to that,” he added, referring to the private equity firm that owns Johnny Rockets. “We relaunched the brand in 2016. This is our growth vehicle.”
“This” is known as Johnny Rockets 2.0, which is experimenting with the very current craft soda craze as a counterpoint to the old emphasis on shakes.
Rather than bolting all the tables and chairs to the floor, the new design allows consumers to move furniture around to accommodate any size gathering.
And the juke box? “That’s not really popular” anymore, Bruce said.
This will be a big test for Bruce, who joined the brand one year ago in March. He relies on research to make changes, and believes only one group matters.
“We believe the consumer has to drive your decisions. Only the consumer can tell us what they want,” Bruce said, and millennials and Hispanic consumers are Johnny Rockets’ two targets.
One thing that hasn’t changed is an emphasis on burgers. “We sell 18 million hamburgers per year; they’re about 60 percent of our sales mix. What can be more all-American than burgers?” Johnny Rockets expects to have more than 400 stores in the system by the end of this year. They have 193 units across 35 states in the U.S.; and 150 international locations in 25 countries.
CEO Chance Carlisle joined LYFE Kitchen in 2014.
LYFE Kitchen refines concept, says it’s ready for growth
LYFE Kitchen signed its first franchisee, L3 Hospitality Group, in 2013 and owner Carey Cooper has opened four Chicagoland locations. But the better-for-you restaurant brand hasn’t added another franchise partner since. It was a conscious decision, said CEO Chance Carlisle, who joined the company in summer 2014 and found the concept in need of refinement.
Now, with a smaller, 3,000-square-foot format, better unit economics and a simplified menu, LYFE is looking for a “select few” franchise investors to commit to three-year, five-unit-minimum development deals in East Coast markets such as Boston, Washington, D.C., and the Carolinas.
“We just really want people who are passionate about what we’re doing … and people we can actually get along with,” said Carlisle, who added that second point is probably the No. 1 criteria. “We probably have 90 percent of it figured out and we’re looking for the right people to help us figure out the other 10 percent” in their local markets.
LYFE Kitchen, conceived by former McDonald’s President and COO Mike Roberts, has 11 corporate locations in addition to its franchised Chicago stores (L3 is expected to have 10 units by 2019). The brand calls itself “fast fine,” and Carlisle said the aim is to “change the conversation of what it means to have a great experience dining out. The way we’re trying to do that is democratize what are healthy, great-tasting meals.”
Popular menu items are a Quinoa Crunch Bowl, mahi mahi tacos and a vegan, GMO-free corn chowder using cashew cream instead of whole milk cream.
Most dishes have fewer than 600 calories and on-site ingredient prep is a key component.
With membership model, Massage Envy can predict revenue
Consistency is the name of the game for Massage Envy, the provider of massages and facials with 1,135 units. “We’re a recurring revenue model. Over 80 percent of our franchisees’ revenue is predictable,” said Gregory Esgar, CFO.
Massage Envy is a pioneer in offering massages to the masses in retail settings for a flat monthly membership fee. It now has many copycats, such as Massage Heights in the same space, for example, plus beauty brands like Amazing Lash Studio.
Massage Envy is also a believer in the regional developer model, backed by a franchise support team based in Scottsdale, Arizona. “We have 119 folks in Scottsdale. They’re serving 150 regional developers and their teams, who are helping train and lead 570 franchisees, who are inspiring 1,100 business managers,” and so on, Esgar said.
The next challenge for the brand is based on numbers, too. “We are currently going through updating our brand; our logo is changed, and you’ll see it more and more in the public,” said Esgar. “So the box has to change; it’s going to get updated and refreshed.” That means from now until 2018, Massage Envy has 669 locations that will need to be remodeled, and so Esgar said he hopes the lenders in the room will back franchisees as they take up that charge.
Massage Heights’ Glenn Franson talked about the family-owned company’s purchase of The Gents Place.
Massage Heights buys new brand, the gents place, from founder
Family-owned Massage Heights launched in 2004, and while the recession delayed its growth the San Antonio-based franchise is up to 140 locations and CEO Glenn Franson noted it achieved revenue of more than $86 million in 2015. Massage services, he said, are becoming part of the regular wellness routine of millions of people, with Massage Heights well positioned to capture the resulting profits.
Franchisees benefit from multiple revenue streams, including membership fees, add-on product “Elevations,” and the Heights at Home branded retail line.
Targeting cities such as Denver, San Diego and Knoxville for new development, the company’s franchise fee is $42,000, with franchisees needing liquid capital of $175,000 and a net worth of $400,000 per location.
During his presentation, Franson also announced the formation of Elevated Brands, a holding company with Massage Heights and The Gents Place, a new “ultra premium men’s grooming concept,” under its umbrella, along with Summit Franchise Supply, the arm that distributes the products.
Moe’s Southwest has 7 food platforms to LURE return diners
Despite Chipotle, Moe’s president Bruce Shroder says the Mexican segment is a sweet spot for growth. The brand started in 2000 and was acquired by Focus Brands—parent company of Cinnabon, Auntie Annies, McAlister’s Deli, Carvel and Schlotzskys. Shroder said the restaurants, with $1.2 million average unit volumes, are capturing quick-service diners trading up and full-service diners who are looking for value. He said offering seven food platforms “means customer frequency by offering more choices,” said Shroder.
The Rockin’ Rewards program also keeps diners coming back and inviting new patrons by gamifying loyalty. Users tally points with each order for free food, but garner the biggest rewards by inviting a friend. Users can also order on mobile devices to skip the line for pick-up orders. The company is also experimenting with in-house delivery via the app.
Newk’s Eatery wants all eyes on the food
“I’m an operator by choice, a speaker by default, and I can see I need a video,” CEO Chris Newcomb deadpanned during his introduction. Newk’s Eatery, the Newcomb family’s follow-up act to McAlister’s Deli, is a culinary-driven, “next generation fast- casual” concept.
An open kitchen allows customers to see their meal being prepared with fresh food—which also helps quell criticism if the wait times are slightly elevated.
While waiting for their food to be delivered to their table, guests are invited to help themselves to the bread sticks and condiments on the “Roundtable,” a signature piece.
In addition to its dine-in business, Newk’s has a grab-and-go section with its own entrance and parking, catering and beer and wine. Alcohol only accounts for 1 percent of sales, he said, but having it on the menu is a differentiator in the fast-casual world. The average ticket price is $11, but online orders tend to be higher, Newcomb said. Newk’s opened 20 units in 2015, for a total of 97 units, and projected 29 openings for 2016. They’re hoping for sales to hit $250 million this year, although Newcomb said they’ve conservatively budgeted $230 million. The management team has been expanded with industry veterans, and franchisees tend to be experienced multi-unit operators. “It’s all about the food,” Newcomb said. “Once you try Newk’s, you’re going to want to keep coming back.”
Pie Five Pizza gains fuel from legacy brand, Pizza Inn
Dual brand franchisor Rave Restaurant Group is laser focused on growing the fast-casual pizza concept Pie Five Pizza.
Numbering 87 restaurants, Pie Five is one of the unit-leading fast-casual pizza concepts with average unit volumes around $750,000 and EBITDA or gross profits between 17 percent and 19 percent of sales. Growing to 30 percent of Rave’s revenue in 2016, up from 11 percent in 2014, Pie Five has become the dominant growth vehicle and more than 400 franchise commitments will extend that further. “The overall makeup of the business is changing dramatically,” said CFO Tim Mullany.
Rave’s original concept, Pizza Inn, provides a strong base for the company to evolve the new brand with new technology, updated stations and other updates to reduce bottlenecks.
“The cash flow from Pizza Inn we’re able to allocate to the Pie Five, so it’s very organically funded,” said Mullaney. He said they are also using technology to cut hiring times by rejecting up to half of applicants that don’t match the service culture based on online questionnaires.
Pizza Hut’s Artie Starrs addressed “the elephant in the room,” declining sales until very recently.
Pizza Hut predicts revenue is headed in right direction
“Let’s address the elephant in the room,” said Arthur “Artie” Starrs, general manager of Pizza Hut. He was talking about revenue at the 57-year-old brand that has 7,800 stores with 93 percent of them franchised. “We haven’t had the best story to tell from the sales perspective. We had terrific unit level economics, but the last two years have been tough and sales have not been there for us.”
Indeed, here are the elephantine numbers: Same-store sales growth declined for nine quarters in a row, starting the first quarter of 2013 and bottoming out with a 4.5 percent decline in the first quarter of 2014. Not until the second quarter of 2015 did the trend turn positive, with sales up less than 1 percent in the second and third quarters, and up just more than 2 percent in the fourth quarter of last year—steps in the right direction, to be sure, but tiny steps.
“Toward the last part of last year,” he added, “the tide has turned. This has been driven by traffic.” Starrs said Pizza Hut’s challenge is “making it easier to get a better pizza. Consumers love our product, they love our brand, but we’ve made it really difficult for them to access it.”
Pizza Hut’s big story in the coming year is a refranchising program. “There’s going to be a lot of M&A; we’ll be selling half of our equity stores in the next two years,” Starrs said. That’s particularly true in the Northeast. “We’re under-penetrated in the Boston DMA and we have an exciting opportunity there.” If sales growth gets going, Pizza Hut is likely to have many takers.
John Dombroski is CFO of Rita’s Italian Ice.
Rita’s Italian Ice touts simple, small-box model, long lines
With more than 430 stores contracted to open over the next five years, Rita’s Italian Ice has set its sights on growth since a management change in 2013 brought in Jeff Moody as CEO and John Dombroski as CFO. Rita’s has a proven growth model as a “small box concept” with low initial investment of $250,000, low ingredient costs and simple operations, said Dombroski during his presentation.
The brand is looking to further harness its impassioned, cult-like following as it focuses on West Coast expansion, where store openings in California and Utah have seen lines around the block and customers camping out the night before. Millennials, Dombroski pointed out, make up 57 percent of Rita’s sales volume, and opportunities also exist internationally. In the Philippines, Rita’s average unit volume is $500,000 to $600,000—almost double the U.S. average. The company also has franchisee opportunities in Canada and the United Arab Emirates.
Salsarita’s ceo says southeastern states are its target market
Calling it a reemerging brand, CEO Phil Friedman said the Salsarita’s Fresh Cantina chain he acquired in 2011 is deepening its presence in current Southeastern markets, including development deals for 10 stores in Mississippi over six years and another 10 in the Tampa, Florida, area. The strategy, he said, is to “not increase the footprint, but take the markets where we’ve been successful and get some depth.”
“We acquired a very strong brand but it needed a lot of help organizationally,” he said.
Friedman is both the franchisor and a franchisee of Salsarita’s. The former McAlister’s Deli CEO aims to differentiate the concept from other fast-casual Mexican restaurants through its comfortable interiors, multiple protein choices including chicken, steak, pork, shrimp and beef, and offering beer and margaritas. A cleaner, more modern store design debuted 18 months ago and is proving popular, Friedman said.
The top third of Salsarita’s locations have an average unit volume of $1.2 million, with the middle third at $836,000. “Lunch is paramount to our success,” said Friedman, noting that daypart accounts for 45 percent of sales. “We have really good throughput.” Friedman is also excited by opportunities in catering, which he said is at 22 percent of sales and growing.
Shakey’s CEO Nick Mayer.
L.A. focus remains as Shakey’s USA retools
After joining the company in 2012, Shakey’s USA CEO Nick Mayer expressed surprise to hear about a brand that had dropped off his own radar for years.
With a peak of more than 300 domestic and nearly 500 international units, Mayer said the brand experienced “quite a bit of contraction with franchisees departing the system.” After being purchased by one of its largest franchisees in the early 2000s, Shakey’s USA has pivoted to a smaller, fast casual brand.
Mayer acknowledged the brand still has a considerable amount of work to bring the concept into the 21st century.
“It’s been a terrific experience coming out of 18 years of full-service casual dining into a small regional brand, he said. “We really have had some success in prioritizing some of the fundamentals.”
Those fundamentals included the brand’s key triad of pizza, chicken and its Mojo potatoes. “The first thing we needed to tackle was the perception of our consumer,” he said. “We’ve always been a family business, but we weren’t attracting the millennials or coming up with the product innovation needed to grow the company.”
To spread the word of its refreshed focus, Shakey’s has doubled down on its home turf with more than $2 million dollars in advertising in the Los Angeles region alone. It also removed 50 percent of its discount programs in 2015, while also investing in building remodels and tackling deferred maintenance in many locations.
Sport Clips owners often keep day jobs when starting out
Sport Clips, the franchisor of hair salons for men and boys, has no debt on its balance sheet and hasn’t had debt for a long time—meaning management can re-invest in the brand, said CFO Scott Perry.
Perry recommends a similarly conservative approach to prospective franchisees. Theirs is a multi-unit concept, meaning each prospect has to commit to opening three stores. And many prospects come from the corporate world, but keep their day jobs while the operation gets on its feet. “Most of them see themselves leaving that corporate job in less than five years,” he added.
Sport Clips franchisees also tend to keep adding licenses, according to Perry. “One of the leading sources of revenue is existing franchisees buying additional licenses. They’re coming back again and again and again.” Sport Clips is up to 1,500 stores, and has stepped out internationally, too, Perry said with a laugh. “About three-and-a-half years ago we went crazy and we went international—we went all the way to Canada.” But don’t expect the “craziness” to continue; Sport Clips likes to add about 100 to 150 stores a year. “We don’t let people get out over their skis too far,” he said, and that goes for corporate, too.
Subway keeps fresh momentum rolling
Subway was born in 1965 at a family picnic when Fred DeLuca asked family friend Dr. Peter Buck, a physicist, for college money. DeLuca “didn’t think he’d refuse because Buck lived in a house with a two-car garage,” and in DeLuca’s mind that made him rich, said Ralph Piselli, Subway’s franchise sales manager for the past 30 years.
Two-car garage or not, Dr. Buck didn’t give him a loan, but he did propose going into the sandwich business together. Today the brand they created, Subway, is the largest U.S. franchise in the world, based on units, with about 44,000 locations in 111 countries. In the last five years alone, they’ve added 10,000 units. “A lot of that growth came from satisfied customers who saw the phone number for franchise information on the napkins and called,” Piselli said. That was one of DeLuca’s innovations, along with the assembly-line sandwich prep and the area developer expansion model.
DeLuca died in September, and his sister, Suzanne Greco, who has been there from the first day, is now leading the company. The franchise fee is $15,000 for the first unit and half that for a second. “Fred’s thought was they’ve already paid once, why charge them again,” Picelli said. Royalties are 8 percent, with an additional 4.5 percent for advertising. Like other concepts, Subway is jumping on the antibiotic-free chicken train, but in its case, the sheer size of its supply chain will have an impact on the commodities market. Subway’s restaurant of the future is in the design process, he said. And training and customer service are important. “Only satisfied customers can give people job security,” Piselli said.
TITLE Boxing retools model, aims for ‘sticky’ customers
TITLE Boxing is on track for 190 gyms by the end of 2016. Workout spaces built around boxing bags boasts a 1,000-calorie workout and benefits from a “sticky model” that keeps customers coming back to ensure three revenue streams: premium memberships, personal training and retail sales.
The 70 percent female boutique gym went through a major reimagining in 2014, removing large locker rooms, boxing rings and slimming down the footprint.
Available in single or multi-unit packages, the gyms run $35,000 for a single unit or $87,000 for a three pack, with buildouts running $225,000 to $400,000 for the updated prototype.
Managing Director David Barr said the company is aiming for more than 500 clubs nationwide.
Pushing the food is job one for Tropical Smoothie cafe’s ceo
Five years ago, Tropical Smoothie Café’s No. 1-selling smoothie was strawberry banana. Today, that sweet stalwart has fallen to No. 12, with the top spot captured by a smoothie with kale and second place by an avocado-forward drink.
It’s a sign of sophistication in the taste of consumers, says CEO Mike Rotondo, as well as innovation at the brand to try to capture what he calls “healthy hopefuls,” people who don’t necessarily eat better all the time but aspire to do so.
His biggest challenge is to spread the word that Tropical Smoothie is about food, too. “People think it’s mostly smoothies, but 60 percent of our brand is smoothies; 40 percent is food.”
Tropical Smoothie was started as a family business in 1997. The founders added food in 1999, and they even started a national holiday, national flip-flop day, in 2007. In 2009 the food innovation began in earnest, and when the brand reached 325 cafes in 2012, BIP Franchise Accelerator, a private equity firm in Atlanta, invested. “And that’s when you really start to see the transformation,” Rotondo said. There are 477 open today, and Rotondo hopes to convince many more to join the party. Maybe this will help: In 2012 average unit volumes were $500,000. Today that number has risen to $633,225. Will it be enough to keep the growth going? Don’t bet a kale smoothie against it.
Wayback Burgers puts modern twist on old-fashioned values
“We go way back to give our guests a different experience,” CEO John Carter said about the chain that started life as Jake’s Hamburgers in Delaware.
Jake’s sold fresh- ground, never-frozen burgers to lines out the door, even though they were in a bad location, Carter said. The name change came about when it needed money to grow and started franchising.
Carter said he followed the same protocol as when he wanted help with a new product or catchy slogan: He reached out to the public. “Someone suggested Shake Shack and I passed on that name,” Carter said to laughter from the audience. During the transition period, the chain was known as Jake’s Wayback Burgers. Service is the other tenet that goes way back. “(Good) service is what makes food taste better,” he said. To teach young employees how to deliver the service that produces out-the-door lines, Carter said they use humorous videos pairing up today’s teen with “Betty,” a server from the 1920s, a nod to “when service was service.”
They also hired a certified master chef, who is just one of 65 in the nation, Carter said. Wayback has 105 stores open and 350 in development. The turnkey price is $300,000. “We make it easy and attractive for people to get into the restaurant business that don’t have experience,” he added.
Wendy’s banks on restaurant refresh
Last year Wendy’s introduced its “road map to 2020,” a strategic reimagining for the restaurant brand started by Dave Thomas in 1969. It includes the remodeling of 60 percent of the stores in the system, along with the development of 500 net new restaurants and a focus on system optimization within its franchises.
One hundred franchised restaurants got a refresh last year, with another 100 on deck for 2016, at a cost of between $300,000 and $500,000 per store.
Wendy’s is using lower royalties to motivate franchisees to undertake the remodel. The company is also facilitating a “buy and flip strategy” of franchise-to-franchise transfers to inject new franchisees into the system.
An average unit volume of $2 million is achievable, said Chris Armbruster, vice president of restaurant development, as the AUV of company stores is already at $1.64 million. Armbruster touted the success of Wendy’s “4 for $4” value promotion alongside the limited-time-only gouda bacon cheeseburger and said margins are going up. The new restaurant design improves the investment and returns for franchisees by utilizing a smaller footprint, greater energy efficiency and integrated technologies.
Charlie Morrison, CEO of Wingstop, gave the keynote address on the first day of the conference, March 14.
Wingstop’s not changing, but just getting started
As the keynote speaker at this year’s Franchise Times Finance and Growth Conference in Las Vegas, Wingstop CEO Charlie Morrison highlighted the brand’s adherence to core principles while simultaneously preparing for massive additional growth in the United States and abroad.
“We’re just getting started and you talk about brands and working with fun brands, this brand is a blast … it’s the way we engage with our customers,” Morrison said. “They speak a different language than I’m used to speaking, but that’s where the world is going and that’s where we’re going with our approach to marketing.”
After sharing some powerful numbers—$1.1 million average unit volumes, 12 years of same-store sales growth, now more than 840 restaurants open—Morrison added the company has “one of the most coveted guest bases in the industry” that skews younger and more diverse than the typical fast-casual restaurant chain. That diversity is particularly pronounced within African-American and Hispanic populations.
In an extended interview, Morrison went into greater depth about Wingstop’s strategy of entering new markets by focusing on urban cores and building its way out to the suburbs, rather than the more traditional approach of starting in the suburbs.
He said the brand considers B-, and sometimes even C-level, locations, which aid its obsessive focus on efficient unit-level economics. As he put it, the wings are generally inexpensive, even high-performing units can run full-tilt with only five or six staff members and most stores come in at approximately 1,700 square feet—all helping maintain low overhead for new locations.
Morrison added the company’s fundamentals, its status as a well capitalized public company, an efficient store model and lack of direct competitors suggests Wingstop will have no trouble becoming a billion-dollar company with more than 2,500 locations in the United States.
Speaking about competition—or lack thereof—in the wing space, Morrison said the brand “is in a category of one,” noting its largest fast-casual wing competitor is “10 times smaller” than Wingstop.
Armando Pedroza, Citizens Bank Restaurant Finance, served on a panel about putting financing packages together for franchisees.
Panel weighs ways to solve the franchise financing puzzle
Financing is a puzzle for a business of any size; certainly the pieces get bigger and easier to put together as a company grows, but even in this period of friendly banks franchise financing is never simple.
To help put the pieces together, Dennis Monroe, chair at law firm Monroe Moxness Berg, Jim Ellis, managing director at Capital Spring, and Armando Pedroza, national director at Citizens Bank Restaurant Finance, discussed the ins and outs of financing today.
“There’s always this continuation of finance in the franchising world that depends on the size you are and how long the concept has been in existence,” said Monroe.
Senior lenders, he said, mostly look to work with large franchisees, but when it comes to smaller operators or new restaurant brands, things get tricky.
Pedroza said he’s seen the exact situation where a seasoned operator with more than 50 locations has no problem getting financing from a senior lender, but has signed a six-location development agreement with a new franchisor and siloed the operations from the rest of the company.
“While he’s got a ton of experience, it’s a new entity,” said Pedroza. “The bank said, ‘Sorry I can’t help you.’”
The operator could put up a chunk of the business as collateral, but doesn’t want to bet cash flow on a new concept. So he stayed local.
“What he’s done is he’s found a local bank,” said Pedroza, who mentioned that with a further SBA loan component, the first three locations are taken care of. And the next three locations can be financed by putting the first three up for collateral.
For consolidating operators, things are getting trickier as the industry becomes more mature.
“Back in the day, when you’re dealing with a million, $2 million EBITDA business,” meaning cash flow, “a high net worth individual could write that mezzanine check themselves,” said Ellis. “As consolidation has taken place, you don’t have anyone who can write those checks when you’re dealing with a $5-, $10-, $15-million check.”
That’s where unitranche financing comes in. “That’s just a big word for marrying senior debt and mezzanine debt with one lender,” said Ellis. “Depending where you are in the cycle, the lender will go three or four EBITDA deep, maybe mezzanine does 3.5 to five.”
The outcome is the money the operator needs to buy new restaurants and the lender takes less risk by virtue of being a preferred lender for the majority of the debt.