El Pollo Loco, Firehouse Seek Multi-Unit Operators With Aggressive Incentives
It's not easy to expand a restaurant through franchising in a chosen market. Every time a new market opens up in Texas, you’ll have a prospective franchisee say, “How about Virginia?”
To add to the development department’s worries in this era of easy capital and high valuations, a pent-up stream of operators looking to exit makes it easy to acquire a block of restaurants instead of put in the work of development.
In an attempt to focus and entice development, Firehouse Subs has created some major incentive program in the Northeast and El Pollo Loco has just announced an aggressive incentive for growing markets outside the core of California and Nevada. For each company, it’s the first foray into development incentives.
Both deals cut franchisee fees dramatically. Firehouse has reduced the fee by 50 percent for any markets in the Northeast from greater Philadelphia and the greater New York City area to Rhode Island and Massachusetts. Brent Greenwood, the director of franchise development, said the fee is just part of it.
“The development fees will be reduced to zero and we’re offering 50 percent off royalties for the first two years of operations for each restaurant opened under the incentive,” said Greenwood. “The whole idea behind that is to feed the growth of that business.”
For John Dawson, the chief development officer at El Pollo Loco, it’s a similar push. The brand is lowering initial franchise fees from $40,000 to $30,000 for the first restaurant in Texas, Oklahoma, New Mexico and Arkansas. The fee drops to $20,000 for subsequent locations. That fee will be further reduced by 50 percent for any restaurants that open early. It also includes a reduced royalty rate for the first three years.
“I think across the industry, when a brand is growing beyond it’s core base it’s difficult,” said Dawson.
He said franchisees are well poised to tackle a new market.
“I think that’s where a franchisee has an advantage, they typically operate in the community where they live and have strong community connections,” said Dawson. “But so often a franchisees will say, ‘You’re trying to grow off my back,' but we’re growing alongside our 'zees.”
As demonstration of that oft-desired skin in the game, Dawson said corporate locations are being developed right alongside franchised locations, pushing for full market penetration together.
Each incentive plan aims for multi-unit operators, the well-capitalized golden children that every franchised system is clamoring over. To Greenwood, the Northeast expansion just couldn’t happen with single-unit operators.
“The development of that area is over 100 markets in New York and New Jersey and that can’t be done successfully with only single-unit commitments,” said Greenwood. “The goal of the incentive is to attract more of those investors and operators that have that appetite for multi-unit development. That will allow us to really develop that market like it should be developed.”
Both Greenwood and Dawson said that this is no fire sale to pad a sad P&L. By focusing on a handful of markets, both are able to bring the market up to speed faster than standard, organic growth.
“In these markets, they’re huge DMAs,” said Greenwood. “So when you only have two or three restaurants in this area, you’re just not noticed. But there is certainly a tipping point somewhere down the road.”
Dawson said by focusing on markets near their core of California and Nevada, they’ll be able to support franchisees who take advantage of the incentive.
“I think it’s where we want to be and it’s an extension of where we are. That’s critically important,” said Dawson. “That’s why our growth plan is very disciplined and orderly, if someone is interested in Maine or Florida, I’ll say, ‘No.’”
To answer the inevitable question of whether this cheapens a brand, he said that market discipline is key.
“I think if the only approach you have is discounting, then you are denigrating the brand,” said Dawson. “But when you have a structured growth plan with the associated resources to devote and you know where you want to be and grow, that’s very different than a sloppy sale.”
Dawson looks to continue with an 8 percent to 10 percent annual growth rate on top of the brand’s 450 locations. Greenwood said he doesn’t have any specific goals, but full penetration is the end game for the competitive sandwich market of the Northeast.