PEOPLE HAVE TO EAT, DON’T THEY? – WHAT’S HAPPENING ON MAIN STREET?

We have pointed out many times that the restaurant industry is a great leading indicator for the economy as a whole. If that theory prevails, there is no boom ahead.

RESTAURANT INDUSTRY – PEOPLE HAVE TO EAT, DON’T THEY? – WHAT’S HAPPENING ON MAIN STREET?
By Roger Lipton

While the restaurant stocks mark time this summer, at historically high valuations, it is a good time to consider the major trends within the group.

There has been little specific news, since quarterly earnings reports for the period ending 6/30 or 7/31 have yet to be released. However, we can surmise what’s happening in a general sense, and consider whether there have been any major “inflection points” that we can take advantage of. In short, though the general economy, as reported by our “business friendly” administration, is picking up steam, there is little in the hospitality sector, including restaurants and retail, that indicates there is any growing momentum.

To be sure, there is more comfort and confidence by consumers as well as restaurant operators than there was a few years ago and especially back in ’08 and ’09. The public is more secure in their employment, though wage increases are still lagging the numerical employment statistics. The general economy may be on the verge of 4% real GDP growth in Q2, but same store sales and traffic are showing very modest progress.

According to Miller Pulse, Fast Food (QSR) same store sales were up 2.2% in June, the same as May, up just modestly from 1.6% in April and an average of about 0.8% in Q1 which was negatively affected by winter weather. Traffic has improved from a negative 2.7% in Q1, but is still negative every month in Q2, by an average of 0.8%.
It is the same story in Casual Dining, with traffic improving from an average of about 1.8% in Q1 but still negative every month in Q2, and down about 1.0% for the quarter. Same store sales were up about 0.8% in Q2, barely up from a positive 0.4% in Q1.

We have pointed out many times that the restaurant industry is a great leading indicator for the economy as a whole. If that theory prevails, there is no boom ahead. Though some industry observers are touting the better trends, we continue to hear the country western refrain: “Down so long, it looks like up to me”.

Anecdotally, we hear that consumers are feeling better, but still spending carefully, just as the reported sales and traffic results indicate. Job security may be better, but exposure (if not actual expenses) for health care is a substantial financial burden for many families. The housing and auto industries are increasingly sluggish as interest rates rise, and these are important portions of the economy. Gasoline prices are higher again than a couple of years ago and also help to absorb the discretionary spending from slightly higher wages. Restaurant operators are feeling better because sales have stabilized at least, but higher wage, occupancy and even commodity costs are conspiring to keep profits subdued even if sales are firming by point or two. Very few operators are building new stores, preferring to renovate and/or expand current facilities or acquire other operators. Quite a few chains, Jack in the Box, Dunkin Donuts and Chili’s have difficulty meeting return on investment hurdle rates with real estate costs so high, even though interest rates are historically so low. As interest rates rise, more operators will find themselves in the same boat, unable to afford new locations.

Among the restaurant companies that are doing relatively well, we can point to McDonald’s, Wingstop, Domino’s, the Darden concepts, Del Taco, and Texas Roadhouse. Companies that are “holding their own”, with varying degrees of difficulty, include Wendy’s, Burger King, Denny’s, Popeye’s, Cheesecake Factory, Chuy’s, Starbucks, Dunkin Donuts, and Bloomin Brands. There are quite a few companies, more than the few listed first above, that are re-inventing themselves to some degree, including Bojangles, Jack in the Box, Habit, Famous Dave’s, Sonic, Dave & Buster’s, Red Robin, Papa Murphy’s, Buffalo Wild Wings, Tim Horton’s, Applebee’s, Ihop, Chipotle, and Zoe’s, and others. You can read about almost all of these companies at the “corporate description” site on this website, accessed from our Home Page. None of the above listings are meant to be all inclusive, and managements are encouraged to give us a call if we have mis-categorized someone. These listing are meant to illustrate that there are more chains that are currently challenged than are firing on all cylinders.

Earnings reports will start to come in for Q2 ending 6/30 in a couple of weeks. Based upon the apparently still sluggish trends, we see no reason why July and early August numbers will give management a reason to risk the prediction of a strong fall season. There is just no reason to stick their neck out. Guidance will likely be conservative, leaving room to UPOD (under promise and over deliver). We will do our best to read between the lines and report to you the “reality” rather than the “story”.

Learn more about Roger Lipton at: http://www.liptonfinancialservices.com

Inclusion used to Create a Competitive Advantage

In various work activities and in the execution of job duties, there is a myriad of opportunities to leverage the existing diversity of the organization to enhance the development of solutions to solve everyday business challenges.


Inclusion used to Create a Competitive Advantage
By Warren Cook

Over the past few decades, organizations have repeatedly asked me to “bring them diversity” and help them improve how they are viewed by the workforce and rest of the world. The request is fundamentally wrong and the strategy to enhance the workforce and create both ROI and a competitive advantage remain in an inclusion strategy.

Inclusion is the act of being inclusive, to include others. In various work activities and in the execution of job duties, there is a myriad of opportunities to leverage the existing diversity of the organization to enhance the development of solutions to solve everyday business challenges.

I encourage business leaders and human resource professionals to step back and analyze their current practices and approach to Diversity & Inclusion, and instead formulate a new strategy that does not focus on creating the diversity that already exists, but instead focuses on the development of programs that involve and include members of the workforce in creative and innovative ways to use their diverse characteristics as a competitive advantage.

If after reading this short article on this topic you are asking yourself “How can we turn inclusion into ROI and a competitive advantage”, then it is time to call me to schedule training for you and your leadership team on Creating ROI from Diversity and Inclusion. You can reach me at 302.276.3302 or via email at [email protected]

Tim Horton’s – RESTAURANT BRANDS INTERNATIONAL

The lawsuits will be settled at some point, there may or may not be monetary damages applied to QSR, but that will be one time in nature, easy to overlook by investors. Especially in light of the operating initiatives outlined just today, including delivery, advertising of all day breakfast and a new kids menu, roll out of a new loyalty program, profit margins and EBITDA at TH will be very difficult to improve from the current level and could even come down.

By Roger Lipton

RESTAURANT BRANDS INTERNATIONAL – Conclusion

This morning’s release by Restaurant Brands International relating to initiatives at Tim Horton’s, its now admittedly troubled subsidiary that contributes about half of its corporate EBITDA tells us a lot about the prospects for the RBI over the next few years. The now well-publicized lawsuits by the franchisees have obviously gotten the attention of their parent company. RBI management acknowledged today that “some things could have been handled better, but management has changed……in an effort to bolster that relationship….and it’s just going to be a matter of time to prove out that this is a new day, and there’s a very sincere interest in working collaboratively with all the franchisees”.

Recall that Tim Horton’s is the largest contributor to RBI’s cash flow and earnings, and the distribution margins, along with G&A efficiencies at TH have been major contributors to the overall corporate progress. To be precise, the “cost of sales” at TH distribution has gone from 99.2% in 2014, on a straight line, to 83.3% in 2015 to 78.0% in 2016, 76.6% in 2017, finally up ticking modestly to 77.9% (up 160 bp YTY) in Q1’18. (Might the franchisee complaints have anything to do with the recent uptick?). At the same time, TH segment G&A went from 4.6% in ’14, to 3.2% in 2015, to 2.6% in 2016 with a modest uptick in calendar ’17 to 2.9%. In just the last two years ending 12/31/17: total corporate adjusted EBITDA, grew $480M, up 28.8%. The Tim Horton segment grew $229M, representing 47.7% of the total increase (up 11.8% in ’16, slowed to 5.9% growth in ’17, and decreased 5.0% in Q1’18). Burger King contributed $143.6M of the two-year increase (29.9% of the corporate total) and Popeye’s contributed $106.9M, all of it in ’17. The improvement in CGS at TH contributed $122M of that. G&A efficiencies at TH contributed another $5.9M. So the better distribution margin and G&A “efficiencies” accounted for 127.9M or 55.8% of the two year EBITDA improvement at Tim Horton’s.

The first quarter of Q1’18 showed total corporate adjusted EBITDA up by 12.2% or $54.5M. That included an increase of $27.0M at BK, or 14.4%, a contribution of $38.5M from Popeye’s versus nothing a year earlier, and a decrease of $11.0M at TH with non-recurring adjustments (to be discussed later) flowing through TH’s first quarter results.

The lawsuits will be settled at some point, there may or may not be monetary damages applied to QSR, but that will be one time in nature, easy to overlook by investors. Especially in light of the operating initiatives outlined just today, including delivery, advertising of all day breakfast and a new kids menu, roll out of a new loyalty program, profit margins and EBITDA at TH will be very difficult to improve from the current level and could even come down.

Summarizing the entire situation, RBI management is very smart, but they are not magicians. Popeye’s has a great deal of potential, but corporate efficiencies may be more difficult to employ here, especially considering the history at Tim Horton’s and Popeye’s is too small to move the corporate needle by much. Even though Burger King’s contribution could continue to grow at a 15-20% rate (not without their own set of challenges), TH will be hard pressed to grow from here. There is an increasingly aggressive competitor called Starbucks, Dunkin’ Donuts is not going away and McDonald’s does all day breakfast and all three have a head start against the latest programs at Tim Horton’s. We view QSR as an adequately leveraged (and valued) single digit growth company over the next several years.

Company Overview

Restaurant Brands International was created in December 2014 from the merger of then Burger King Worldwide (BKW) and Tim Hortons International (THI). Early in 2017, Popeye’s Louisiana Kitchen was added to the portfolio. Headquartered in Oakville, Ontario, the company is now the operator and franchisor of over 24,000 Burger King (BK), Tim Horton (TH), and Popeye’s (PLKI) brand restaurants generating system-wide sales of over $29B in over 100 countries. All three brands are virtually 100% franchised and are operated as independent segments from their traditional headquarters (BK in Miami, FL, TH in Oakville, Ontario, and Popeye’s in Atlanta, GA.) to preserve their respective heritages.

BK is the second largest burger chain by locations (after McDonald’s), and third largest by sales (after Wendy’s). The menu features its signature flame-grilled hamburgers, chicken and other specialty sandwiches, french fries, desserts and beverages. In 2017, the system generated a little over $20B in sales from approximately 16,800 units (about 48% in the US). The principal sources of the BK segment revenues are franchise royalties (normally 4.5% in the US) and fees, since the chain is nearly 100% franchised. The remaining revenues derive from the 12% of BK locations leased or subleased to franchisees and from sales at 52 company units. QSR does not discuss the development costs of a new Burger King, but the largest franchisee, Carrols Restaurant Group (TAST) does. As described by TAST in their 10K, the initial cost of franchisee fee, equipment, signage & other interior costs is approximately $400,000. Additionally, their cost of land ranges from $500k to 900k and the cost of building and site improvements generally ranges from $850k to 1,025k. Using the midpoint of these numbers, the total development cost would be $2,037,000 – a fairly high total cost for a unit that averages $1.3 million. In spite of a sales/investment ratio (fully capitalized) well below the long accepted 1:1 objective, the Burger King system continues to thrive. We attribute TAST operating success and BKs continuing unit development to the fact that many units were built years ago (with lower development costs), the long term operating success of the system that attracts build-to-suit development, and of course the very low interest rate environment of the past decade. It is also worth noting that QSR does not indicate how many units are “traditional” versus “non-traditional” such as kiosks, food courts, etc. We suggest that not too many units in the US in particular, are built from the ground up these days, and fewer still will be built if interest rates rise. Of course, in any event, BKs primary expansion will be overseas from this point forward.

Tim Hortons quick service restaurants have a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, (donuts, cookies, muffins, pastries), grilled paninis, sandwiches, wraps and soups. It generates about $6.7B in system-wide sales from about 4,700 units (about 80% in Canada). The TH segment generates revenue from sales of supplies and equipment and packaged products to retailers; from property revenues from the 80% of properties leased or subleased to franchisees; from franchise royalties and fees; and from sales at 24 company restaurants.

While BK’s supply operations are largely outsourced to approved third parties (procured in the US by a purchasing entity jointly managed with franchisees), TH operates a significant supply system to procure, store and distribute raw materials, and supplies to most of its Canadian restaurants (US units are supplied by a third-party distributors). It operates 2 roasting facilities for blending coffee for its Canadian and US restaurants (and retail), and it operates facilities for the manufacture of icings and fills for its products, though all donuts are purchased from a third-party supplier. TH has a variety of franchise agreements which largely reflect the extent of its ownership interest in franchised locations. Franchisees who lease land and/or buildings from the company typically pay a royalty rate of 3%-5% plus rent of 8.5% to 10.5% of sales. Where the premises is owned by the franchisee or is subleased from TH or leased from a third party, the royalty rate is higher; and where the franchisee essentially operates a fully outfitted company property (i.e. includes equipment, signage and trade fixtures), a rate of about 20% covers royalties and rent.

Popeyes Louisiana Kitchen, Inc. (PLKI), QSR’s most recently completed acquisition, develops, operates and franchises over 2,700 quick service restaurants with system-wide sales in 2016 of $3.4B in 48 states, D.C., and 25 foreign countries. Popeyes specializes in strongly flavored Louisiana-style offerings, particularly chicken, but also fried shrimp, red beans and other regional specialties. PLKI is nearly entirely franchised (98% of system’s units). The US stores averaged about 2.7k square feet with AUV’s of $1.4M in 2016. US franchisees generated EBITDAR of $340K on average (23% margin). From 2008 through 2016, comps averaged 3.2% (though slowing in 2016, and further in 2017), which was the major factor in the 4.9% CAGR in the AUV’s and EBITDAR margin expansion of over 500bps (along with new store performance). In 2016 revenues were $268.9M ($108.3M company stores, $154.8M from franchise royalties & fees, $5.8M rent from franchised restaurants), EBIT at $74.5M (27.7% margin), EBITDA of $84.6 (31.5% margin) with free cash flow of $56.0M (20.8% margin). Aside from the strong financial track record, QSR said Popeyes leadership position in the chicken QSR category (26.5% market share in 2016, up from 25.5 in 2015) fits well in its brand portfolio. Also attractive, obviously is the “asset light” highly franchised structure, with further growth potential, especially overseas.

3G Restaurant Brands Holdings LP (3G RBH), with 43.6% voting rights, provides 3G effective control of QSR. 3G is an international activist fund specializing in consumer brands and a frequent partner with Berkshire Hathaway, which provided $3B to finance the TH acquisition in the form of 9% preferred equity, redeemed in late ‘17. The 3G playbook is to acquire and fix up mature brands (e.g. Anheuser-Busch InBev SA/NV (Euronext Brussels: ABI) and The Kraft Heinz Co (NYSE: KHC), but unlike most activist investors, 3G is a patient investor, with an investment horizon measured in years. In order to judge QSR’s future, including incorporation of PLKI, it’s worthwhile to understand 3G’s historical initiatives in turning around BK and TH.

Burger King – For at least a decade before 2010, management and franchisees had been in growing conflict over repeated failures to revive the brand. The conflict peaked with a franchisee lawsuit charging management with driving system sales with promotions (specifically $1 Double Cheeseburgers) that were good for royalties but costly for franchisees. Into this poisonous atmosphere, 3G stepped up to acquire the company. The fund, which had been instrumental in assembling global beer behemoth AB InBev, also had established a reputation as a long-term investor that achieved strong returns by turning around flagging brands, often with aggressive cost cutting and management changes.

When 3G acquired the company in October 2010, it promptly installed partners onto the board and inserted itself in operations, staffing key executive positions with partners from a deep bench of proven managers from other investments. It instituted cost controls centered on zero-based budgeting (every budget item must be justified afresh each year). It moved quickly to restore trust with the franchisee community by giving them a larger voice in the decision-making process and by making franchisee profitability a top priority. This included simplifying the menu and eliminating money-losing promotions. To this end, new menu introductions and LTO’s aim more for flavor variations on legacy standards (e.g. “Angry Whopper”) than additions that are more operationally challenging. Management has, however, attempted to fill gaps in the core menu with added or improved items such as salads, chicken strips, beverages and desserts. These additions aim to broaden brand appeal beyond its traditional young male customer to include women and seniors. Management also attacked overhead bloat, again using the zero-based budgeting which requires justification of both historical and incremental expenses. The payoff was a reduction in G&A from $356M in 2010 to about $160M by 2015 and 2016. The dramatic reduction in G&A, while improving profitability at the franchisor level, has not been without controversy, however. Some franchisees feel that support has been compromised along with the reduction of expenditures on behalf of the franchise system. The response of the franchisor has predictably been something like “in every large system some franchisees are happier than others, but our priority continues to be the profitability and financial health of every franchisee”.

Additionally, the company accelerated a refranchising initiative that had been under way, becoming virtually 100% franchised by 2013 (from 89% at acquisition in 2010). Importantly, the 1,200+ refranchised units were placed with the system’s strongest hands, such as Carrol’s Restaurant Group (NASDAQ: TAST), BK’s largest franchisor and an exceptional operator. As of year-end 2017, only 26 company stores remained, which the company has intended to retain principally for test purposes. The new management also launched a store re-imaging initiative of the US and Canadian stores. The company provides incentives, principally in royalty and advertising fund relief, to accelerate the pace of remodeling. According to management, the remodels cost about $300K per unit and drive a 10%-14% sales lift. At the end of 2017, we estimate over 70% of the stores have been remodeled.

Finally, it launched a strong international push, particularly into under-penetrated regions. In a departure from BK’s traditional franchise agreements, the company aims to accelerate international growth through master franchise joint ventures (MFJVs) and master development agreements with experienced local partners. The structure of these agreements varies significantly, but in general local partners are granted exclusive regional rights to develop or sub-franchise units. The partners commit to aggressive development targets and franchisee support. They usually pay discounted upfront fees and royalty rates (vs the usual 5% rate) based on the characteristics of each market. The partners make substantial upfront equity contributions, while the company usually obtains a meaningful minority stake in the MFJV’s with little or no capital contribution. Of course, this enhanced growth comes with financial and brand risks, principally because the company’s operational control over sub-franchisees is weaker than with direct franchisees. QSR believes it protects against these risks by entering agreements with experienced, well-capitalized partners supported by strong management teams.

So far, results at Burger King have been impressive. The unit growth rate has more than tripled in the 8 years since the acquisition vs the preceding 6 years—from 1.5% CAGR, to 6.5% unit growth in ’17. (In validation of the MFJV strategy, the international MFJV’s have generated most of BK’s 3,800+ unit growth since acquisition, notably: Brazil >600 in 2017, up from <150 in 2011, China >650 units in 2017, up from <90 in 2012 and Russia >400 units in 2017, up from <90 in 2012.) There has been an increase over six years in AUV’s from $1M to $1.4M and a 30% increase in profitability (according to management).

Tim Hortons At the time of the December 2014 merger, the TH brand did have its challenges, but overall performance was strong. In the five years before the merger system units grew at a 5% annual pace, while quarterly same store sales (20Q’s) averaged 3.1% in Canada and 4.1% in the US, turning negative only once, in Q1’13, and then only modestly (-0.3% Can & -0.5% US). Meanwhile, operating margins were consistently around 20% and free cash flows averaged around $300M, with average FCF margins ~11.0%. The company’s challenges were (and are) to protect the brand’s Canadian dominance (>40% traffic share), particularly from the encroachments of SBUX, to expand in the US where it has struggled to gain critical mass, and to exploit the large untapped opportunity it sees on other continents (~1% system units are located outside North America). In Canada, management’s principal focus is on solidifying its lunch and breakfast dayparts and improving its coffee business. In the US it closed 27 underperforming stores in New York and Maine during 2017, to concentrate instead on building density in priority markets in the Midwest. To that end, it has signed development area agreements with partners in the Cincinnati and Columbus, Ohio DMAs and the state of Minnesota. Internationally, it also concluded MFJV agreements with partners in Mexico, Great Britain and the Philippines.

The company has focused on G&A which, at $78.9M, was down 15.4% in 2016 over 2015, the first full year of operation under new management, then rose back to $91.0M in 2017. (The reductions may be more significant when compared with the pre-acquisition G&A levels, > $150M USD, but it isn’t clear this is an apples-to-apples comparison.) While TH’s capital-intensive supply chain operations seem ripe for management overhaul, nothing on that front has been reported yet. While management disclosed that though it will be maintaining capital incentives to remodel stores, which it deems an important priority, it seems this is aimed more at the smaller franchisees. Separately it has announced it will be reducing capital support for new stores, principally the leased and subleased locations. This shift to a more asset-light corporate structure is consistent with its strategy for seeking out larger, well-capitalized MFJV partners to drive growth.

As of the end of 2017, with only 3 full years of TH ownership under its belt, the results were promising, but have proved to be controversial. This “progress” at the franchisor level has apparently not been shared at the franchisee level, at least as described in a number of lawsuits filed by something like half of the Canadian franchisee base, and US franchisees as well. They claim that, while their sales progress has stalled, QSR has raised the price of supplies and food, contracting franchise margins further. Additionally, the franchisee lawsuit claims that advertising contributions have been “misallocated” somehow to reduce corporate overhead. Since most of the improvement from 2015 through 2017 within the TH operating results came from “distribution” and to some lesser extent G&A efficiencies, the strained relationship with franchisees is obviously a material development. While management may claim that they went through similar “growing pains” after acquiring Burger King, there was not a similar distribution segment, and BK has built sales more successfully than TH, which takes the sting out of higher costs. As strong as MCD has been vs. BK, SBUX is an even more powerful dominant competitor in the coffee segment.

Restaurant Brands International Consolidated On a consolidated basis, QSR’s EBIT in 2016, at $1.666.7M was up about 90% over a pro-forma $875.6M USD for 2014 (i.e. assuming TH was owned the entire year), driving 1,950bps of operating margin expansion to 40.2% from 20.7%. Calendar year 2017 showed a further increase of 4.1% to $1.735M.

As a result of its acquisition strategy, QSR is leveraged at the top of the range for peer “pure play” franchisors. Total net debt at 3/31/17 of $11.4B was about 5.1X adjusted TTM EBITDA of $2.25M versus 4-5X more typically for its franchising peers. The current dividend, yielding 2.86% requires over $500M of the free cash flow and management has allocated C700M over the next four years to help TH franchisees with re-imaging stores.

QSR: Current Developments – Per Q1’18 Corporate Release and Conference Call

“Adjusted Diluted” earnings, on a “New Standard” were $0.66 vs. $0.67 a year earlier, which is the number that seems to be carried by analysts and the reporting services. GAAP earnings, reported on a “Previous Standard” were $0.66 vs $0.36. The difference in “Standards” relate (among other things) to franchise agreement amortization, amortization of deferred financing costs and debt issuance costs, reflection of advertising fund contributions and expenses, supply chain related revenues at TH, and foreign exchange impact. Forgive us for presenting these technical features of the reporting approach, but this is an unusually complex financial structure, obviously requiring these various methods of disclosure.

In any event, the “organic” EBITDA for Q1’18 was up 5.0%, including Popeye’s, driven primarily by an increase in revenues at BK and PLK, partially offset by a decrease in supply chain related revenues at TH. A breakdown of Adjusted EBITDA by Segment is roughly as follows: Tim Horton’s was down 4.3% to $250M, Burger King was up 14.4% to $215M and Popeye’s was up $80% to $40M. We’ve “mixed and matched” these numbers between the “adjusted New and Previous Standards”, but, in spite of the reporting complexity, we have confidence that the direction and order of magnitude is indicative of the operating trends. More simplistically, comps were down 0.3% at TH, up 3.8% at BK, and up 3.2% at PLK. Systemwide sales growth was up 2.1% at TH, up 11.3% at BK and up 10.9% at PLK.

Per the conference call: Tim Horton’s reported flat sales in Canada and softness in the US. Early in the call, management addressed the tension in the TH franchise system, describing the press as mischaracterizing RBI intentions, citing inaccurate information that “usually reflect a purposely negative tone dictated by a group of dissident franchisees”. Changes have been made in communication strategy, both with the press and the franchisees, which will presumably bear fruit over time. First quarter sales at TH reflected softness in coffee sales, partially offset by breakfast foods. The results of some new lunch products are encouraging. A new Brand President at TH, Alex Macedo, previously President of Burger King, North America, is leading the effort. A “Winning Together” plan has been put in place, based on restaurant experience, product excellence and brand communications. A new TH restaurant design, called the Welcome Image has been put in place at 10 locations, with an encouraging customer response. Management “admittedly should have done more of this in the past……we are confident that this plan will help us achieve long term sustainable comparable sales growth for TIMs.”

We won’t dwell here on the Burger King discussion. Delivery and technology applications are among the current programs. Suffice to say that results within this segment continue to be fine and the positive prospects are undiminished.

Popeye’s is focusing on delivery and technology as well, and international franchising is a major focus, Brazil being the first master agreement. With EBITDA of $40M in Q1’18 out of close to $500M for RBI in total, substantial improvement within this segment will not affect short to intermediate term overall results in a major way.

The single largest “elephant in the room”, supply chain margins at TH, was addressed when the question was asked relative to the Q1’18 decline at TH in supply chain revenues. Management responded that “we passed on some supply chain savings to our franchisees through a reduction in pricing in the second half of last year. We continued to maintain this pricing for franchisees, so margins in the first quarter of 2018 are relatively consistent sequentially with the margins from the second half of last year. Looking ahead…. we expect the organic growth profile at TIM’s to improve throughout the year.” Maybe.

Our conclusion regarding the prospects for QSR is provided at the beginning of this article.
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Franchise Your Business www.frangrow.com

2nd edition in our “Coach, Mentor & Grow®” video series for Franchisors

Here’s the 2nd edition in our “Coach, Mentor & Grow®” video series for Franchisors. The panel at the NY FBN/IFA meeting covered the topic of “Franchising and Private Equity- How to Position your Company” Panelist Oz Bengur, Lisa Oak, Grant Marcks and Roger Lipton. Hosted by David Azrin Esq.

If you’d like to receive the entire 1-hour session please contact us at [email protected]

Watch the video: https://www.linkedin.com/in/gary-occhiogrosso/detail/recent-activity/shares/

KEEPING A LEGACY BRAND RELEVANT

Lee’s Hoagie House, the Pennsylvania-based chain that has defined Philadelphia’s traditional sandwiches, the hoagie, and the cheesesteak, for over 60 years, has relaunched its long-established regional brand with a streamlined in-store layout and national franchise offering.

According to CEO Allan Lewin, “Through our franchise efforts, consumers across the country can now enjoy an authentic ‘taste of Philly,’ and experience the pride of place that Lee’s hoagies and cheesesteaks invoke.

Keeping a Legacy Brand Relevant
PHILADELPHIA (PRWEB) JUNE 15, 2018

LEE’S® HOAGIE HOUSE REBRANDS FOR IT’S NEXT 60 YEARS
Lee’s® Hoagie House, the Pennsylvania-based chain that has defined Philadelphia’s traditional sandwiches, the hoagie, and the cheesesteak, for over 60 years, has relaunched its long-established regional brand with a streamlined in-store layout and national franchise offering.

IN-STORE REDESIGN
Among Lee’s® Hoagie House’s planned in-store upgrades are a new floorplan and a redesign of the Lee’s® Hoagie House retail space. Lee’s® Hoagie House contracted with Mark Metzgar, CEO of Cornerstone Consulting to manage the engineering and architectural redesign. “Our experience working with other successful franchises helped Lee’s® Hoagie House redefine their store concept to improve the customer experience, differentiate from the competition and better monetize their menu,” Metzgar adds. “We wanted the new layout and design to streamline operations at the same time showcasing the authentic Philadelphia legacy of the Lee’s® brand.

The new, industrial-meets-rustic look from offers distressed wood, exposed brick, overhead ductwork, cement floors, pendant lighting and large front facing windows. Bold graphics and easy-order digital displays add to the modern vibe. Each location will also honor its Philadelphia heritage with colorful murals and historic posters depicting classic Philly moments. The inviting design and thoughtful floorplan add ambiance and efficiency with a more streamlined throughput for customer ordering, fulfillment, and enjoyment.

TURNKEY SYSTEMS
Meeting the same quality standards nationwide necessitated new thinking on the part of the Lee’s operational team, as well. To guarantee the consistent quality of Lee’s® Hoagie House signature fresh made bread, LHH Franchise Group partnered with Liscio’s Bakery of New Jersey. Franchisees can now maintain the taste and integrity of Lee’s Hoagie House’s distinctive sandwich bread, by finishing it fresh on site from par-baked rolls and loaves.

INCREASED EMPHASIS ON NATIONAL FRANCHISES
Lee’s Hoagie House has teamed with franchise industry expert, Gary Occhiogrosso, the founder of Franchise Growth Solutions, LLC, to expand the turnkey Lee’s® Hoagie House fast casual QSR (quick service restaurant) business model from 17 locations in 2018 to 25 locations by 2020. Lee’s® Hoagie House franchises are currently available in PA, NJ, NY, DE, and along the East Coast.

Mr. Occhiogrosso has over 30 years’ experience in franchise development and sales and was integral to the success of nationally recognized brands including Ranch *1, Desert Moon Fresh Mexican Grille, SkinnyPizza, Acai Express and those found under the multi-brand franchisor, TRUFOODS, LLC.

Lee’s® Hoagie House also requires its franchisees to attend Hoagie University, an intensive internal training program on opening and operating a successful franchise business. During the three-week course, franchisees learn about store operations, recruitment and development of staff, customer service best practices, marketing and sales techniques, and basic administrative oversight. Following the training, franchisees receive weekly coaching and support.

A PHILADELPHIA FAVORITE
A staple in generations of Philadelphian’s diets, Lee’s® Hoagie House offers a complete menu of 6, 9 and 18 inch custom made hoagies (a regional term for a hero, grinder or submarine sandwich), Philly and chicken cheesesteaks, hot sandwiches, wraps, salads, as well as chicken wings and chicken fingers.

The Lee’s® Hoagie House concept was created in 1953 by Lee Seitchek, expanded locally in 1977, franchised regionally in 2014, and will expand their franchise effort nationally in 2018. By enlarging the franchise footprint, consumers across the country will able to get the same quality, consistency, and service of the original Lee’s Hoagie House at any franchised location in the U.S. The fast-casual restaurant concept is currently in 17 locations across 4 states.

Once hourly employees at Lee’s, today, LHH Franchise Group co-founders, Allan Lewin and John Connell, are committed to leveraging Lee’s® Hoagie House from a beloved regional brand into a nationally recognized brand. “In order to take the franchising of Lee’s® Hoagie House national, we have created a strong business plan for the franchises to follow.” Says Lewin. “In 2018, the Lee’s ® Hoagie House franchise holder will have the strength of a long-time, proven concept and also benefit from new operational upgrades, a redesigned store layout, and consultative advice from one of the country’s top franchising experts.”

ABOUT LEE’S® HOAGIE HOUSE
Lee’s Hoagie House was founded in 1953 by Lee Seitchek with a menu based around the “Official Sandwich of Philadelphia”, the hoagie served on fresh-baked bread. Today, Lee’s® Hoagie House offers a variety of sandwiches, salads, and wings, including the original Philly Cheesesteak. Lee’s began expanding regionally in the late 1970’s and franchising in 2014, based on the popularity of its concept. Lee’s® Hoagie House currently has 17 owned and operated locations in Philadelphia, New Jersey, North Carolina and South Carolina. A national franchise plan was put in place in 2018.

According to CEO Allan Lewin, “Although the flavor profile of Lee’s® Hoagie House’s is synonymous with the Philadelphia region, through our franchise efforts, consumers across the country can now enjoy an authentic ‘taste of Philly,’ and experience the pride of place that Lee’s hoagies and cheesesteaks invoke.

ABOUT FRANCHISE GROWTH SOLUTIONS, LLC
Franchise Growth Solutions, LLC is a strategic planning, franchise development and sales organization offering franchise sales, brand concept and development, strategic planning, real estate and architectural development, vendor management, lead generation, and advertising, marketing, and PR including social media. Franchise Growth Solutions’ proven “Coach, Mentor & Grow®” system puts both franchisors and potential franchisees on the fast track to growth. Membership in Franchise Growth Solutions’ client portfolio is by recommendation only.

For information:
CONTACT: Gary Occhiogrosso
Franchise Growth Solutions
917.991.2465
[email protected]

Restaurant Operators, Franchisors and Franchisees – Benefits of an Inventory and Theoretical Program

Today’s post is written by recognized restaurant operations expert Fred Kirvan. I’ve had the privilege of working with Fred (almost 20 years) on various projects building scores of franchised Fast Casual restaurants. Today Fred discusses the importance of creating an accurate, detailed and evolving inventory and theoretical Cost of Goods program. Franchised as well and independent restaurant operations should take the time to learn how to build an use such a program. It will not only help you save money but more importantly will create a better system for overall results with or without your daily participation in the operation.
– Gary Occhiogrosso
Founder and Manager – Franchise Growth Solutions, LLC. #howtofranchise
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Performing regular inventories will serve to organize your stores as attempting to perform an inventory in a disorganized store will take twice the amount of time. As part of the integration of this program, we will teach managers and franchisees how to perform accurate and effective inventories.

Benefits of an Inventory and Theoretical Program

By Fred J. Kirvan
Founder FK Consulting
Cooperative Member – Franchise Growth Solutions, LLC

I deal with numerous franchisors and restaurant operators and still can’t understand why so many do not employ a good inventory system. In fact, the sad truth is some don’t even conduct a weekly or monthly inventory…Instead, they use purchases to somehow (and inaccurately) calculate their Cost of Goods (COG’s).
Today I will attempt to explain why it is critical for professional restaurant management that you have a detailed Inventory and Theoretical COG’s Program. A 3%-5% saving in COG’s can add up to tens of thousands of dollars. Remember, this saving goes directly to your bottom line, not to mention the increase in accountability of your operation whether you participate in the day to day operation or not.

Here are just a few benefits of using such a program

1. Provides the ability to conduct a monthly audit on your purchases when the program’s Master Inventory Sheet is updated each month by you or someone in your organization. These audits should be updated internally.

2. The process of developing this program serves to streamline your order guide by having to determine which products you will use moving forward as they are now tied to menu and recipes within the program. What that means is your order guide gets cleaned up by removing duplicate or unnecessary items.

3. In addition to a Theoretical Food Costing Program, it will also include Inventory Sheets for performing accurate physical inventories.

a. Performing regular inventories will serve to organize your stores as attempting to perform an inventory in a disorganized store will take twice the amount of time. As part of the integration of this program, we will teach managers and franchisees how to perform accurate and effective inventories.

b. By having theoretical and physical inventory in one program we can immediately identify down to the penny, the difference which should be accounted for discounts, employee meals, and waste. The unaccounted-for amount is then either over portioning, shrinkage or theft. Without this information your operating blind.

4. This process will streamline your Recipes, portioning must be solidified to achieve costing which serves to assist with the consistency of menu offering as well.

5. This process will streamline your Plate Builds, portioning must be solidified to achieve costing which serves to assist with the consistency of menu offering as well.

6. Once the program is completed:

a. You’ll immediately be able to identify higher and lower costed menu items.

*** i. With that information, you may elect to change the portioning and/or pricing to remedy the issue having an immediate impact on your costs.

*** ii. Additionally, repositioning lower cost items on the menu will also serve to immediately lower costs as well.

b. You’ll be able to see the immediate impact on your overall food cost as a percentage and dollar amount by changing costs from your distributor.

c. You’ll be able to see the immediate impact on your overall food cost as a percentage and dollar amount by changing portions on menu items.

d. You’ll be able to see the immediate impact on your overall food cost as a percentage and overall dollar amount by changing prices on your menu items.

Quite simply, no professionally managed restaurant group can or should operate without this level of information – certainly not having this level of detail on your menu offering will heavily impact your ability to recruit multi-unit franchisees in the future.

For more information on building and using an Inventory and Theoretical Program and for a FREE Consultation please contact [email protected] or call (917) 991-2465
Visit www.frangrow.com
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About the Author:
FRED KIRVAN
Founder FK Consulting

Fred started in the franchise business in 1991. Working with the founder of Desert Moon Fresh Mexican Grille he developed the operating systems and grew the company from a single unit into a multi state, 30 unit franchised brand. In 2008 he became President of Desert Moon remaining in that role until 2013

Mr. Kirvan was then recruited as the Chief Operating Officer for TRUFOODS, LLC. a 100 unit, multi brand franchise company that included Pudgie’s, Wall Street Deli, Ritter’s Frozen Custard and Arthur Treacher’s Fish and Chips.

Upon leaving TRUFOODS he became VP of Operations for Energy Kitchen; a NYC based fast casual chain which pioneered the “healthy alternative” space before leaving to launch an early learning & play center business “Moozie’s Play Cafe” with his wife.

Working in a variety of capacities in food and non food business’ Mr. Kirvan’s experience in systems development, writing manuals, brand connectivity, purchasing and construction project management have proven invaluable assets to start up & emerging brands.

Currently FK Consulting works to develop a full suite of Confidential Franchise Manuals which include Operations, Managing the Business, C&D and other critical Job Aids and Training Tools necessary to grow and enhance the process of devloping successful franchisees.

Small Franchise Systems Can Go International Too

He also signed a development agreement for 10 locations in Saudi Arabia. After his success in the Middle East, he decided to target Western Europe where he had already exhibited in France and Spain.

Small Franchise Systems Can Go International Too

By Ed Teixeira
Chief Operating Officer of Franchise Grade

Just because a franchisor operates a small or emerging franchise network, it shouldn’t exclude them from exporting their franchise brand to other countries, providing they meet certain basic requirements. In fact, there are large franchisors that based upon their performance and product are unqualified for international expansion. In some cases, a small franchise system may find the market in the U.S. so competitive, it might be in their interest to consider expanding into foreign markets. There are certain attributes that qualify a franchisor for international expansion but size alone shouldn’t be the determining factor.
Russo’s Restaurant Franchise

To gain some perspective on this subject, I spoke with Chef Anthony Russo, CEO of Russo’s New York Pizzeria and Russo’s Coal Fired Italian Kitchen. Based in Houston, Texas Russo’s began franchising in 1998 and operates 30 franchise locations in Texas, Oklahoma, Arkansas, Tennessee, Florida and Hawaii.

I asked CEO Anthony Russo, how he came to take his franchise overseas. He explained that true New York style pizza wasn’t available in many U.S. markets and foreign countries. He told me how the two restaurant concepts have built their reputations on being undeniably authentic in every way. While still franchising in the United States, Anthony started his foray in other countries by engaging the services of a broker. After one year, without success from the broker, he decided to personally exhibit at a franchise show in the Middle East, where he presented his pizza. He received a great response and currently has seven franchise units in Dubai with two more under construction. He also signed a development agreement for 10 locations in Saudi Arabia. After his success in the Middle East, he decided to target Western Europe where he had already exhibited in France and Spain. Unlike other franchisors, he uses a development agreement franchise model in each country rather than a Master Franchise agreement. He feels this approach is less costly for the franchisee and he doesn’t risk giving up franchise rights to an entire country. As Anthony works on international expansion, he continues to franchise in the U.S.
I asked Anthony Russo what he considers the most important requirements for a smaller franchise to go International. His response: “Minimum 20 locations, a good system, strong corporate staff and sufficient working capital.”

Regardless of size, the following are important qualifying factors for international expansion:
• Suitable financial resources for an international project.
• The franchise has a successful operation in the U.S.
• Strong potential for expansion in other countries.
• Franchisor staff is available and capable of training, servicing and supporting a franchisee in another country.
• Franchisor leadership is engaged and committed to international expansion.
• The franchisor can provide the operational and marketing knowhow
• Operations and marketing manuals are current and up to date and marketing materials that can be adapted and translated for use in other countries.
• The franchisor acquires or has familiarity with target countries.

When a franchisor considers taking their franchise concept to other countries, an important factor to consider is whether their franchise is qualified to expand to other countries. One factor, that should not disqualify a franchisor, is its’ size. This doesn’t mean that any franchisor regardless of system size is qualified to go overseas, but rather that smaller franchisors shouldn’t rule out going international simply because of their size.

About the Author

Ed Teixeira is Chief Operating Officer of Franchise Grade and is the founder and President of FranchiseKnowHow, L.L.C. a franchise consulting firm. Ed has over 35 years’ experience as a Senior Executive for franchisors in the retail, healthcare, manufacturing and software industries and was also a franchisee. Ed has consulted clients to franchise their existing business and those seeking strategic solutions to operational, marketing and franchise relations issues. He has transacted international licensing in Europe, Asia and South America. Ed is the author of Franchising from the Inside Out and The Franchise Buyers Manual and has spoken at a number of venues including the International Franchise Expo and the Chinese Franchise Association in Shanghai, China. He has conducted seminars, written numerous articles on the subject of franchising and has been interviewed on TV and radio and has testified as an expert witness on franchising.

Strategies for Effective Performance Management

When establishing the goals for a position, you need to make sure your people leaders have what they need to clearly communicate and review the goals and expectations of the position to the employee. This should include job descriptions, policies, procedures, and performance program documentation.

Performance Management Avoidance

There is a plethora of reasons performance management programs are less than successful in meeting their intended outcomes. One significant factor contributing to this problem is the reluctance or hesitation of people leaders in conducting the performance review. Over time we have observed a variety of contributing variables that inhibit a people leader from engaging the employee to provide feedback.

Supervisors who:
• were never properly trained to deliver feedback
• are new and lack both the training and experience
• are unclear of what the expectations of the employee and position are
• inherently are uncomfortable with conflict
• have a personal relationship with the employee
• don’t want to upset the employee
• would rather do the work themselves compare to holding the employee accountable

As a business owner or leader, it is critical to understand these challenges of your people leaders and develop training programs, guidance documents, clear job descriptions and position goals to prepare these individuals for success. Give your people leaders the tools, resources and support to measure, manage, and improve the workforce effectively.

Five Key Factors to Effective Performance Management

Once your people leaders have been properly prepared to execute performance management in your organization, there are five key factors that lead to success for the workforce that we are going to review here.

1. Setting the Right Expectations from the Start

When establishing the goals for a position, you need to make sure your people leaders have what they need to clearly communicate and review the goals and expectations of the position to the employee. This should include job descriptions, policies, procedures, and performance program documentation.
Do not neglect other key components in this process that go well beyond paper. This includes your company culture (the actions and behavioral norms of the organization), the work environment, and the modeled behavior of the managers and leadership team.

2. Crucial Conversations

Recognize that discussions about performance are often challenging and require patience, trust, and mutual respect. Establishing a comfortable environment where honest feedback can take place and is received as a tool to support the employee’s success is easier said than done. Special attention should be given in the training and support of your people leaders to have crucial conversation with their staff to achieve success.

3. Listening as a Powerful Tool

Here is your chance to demonstrate diversity of thought and an inclusive behavior. If you do all the talking it is not a conversation, it is a lecture. Think about how you could possibly demonstrate care for the employee if you refuse to listen to their thoughts and ideas, as well as their feedback. You can be confident in knowing that you will learn something from the employee if you only take the time to listen. Empower the employee to provide you feedback, and this means teaching them how to share with you what they need from youin order to be successful in their respective roles.

4. Accountability is not Punitive

If the only time you provide an employee feedback is when they do something wrong, the entire system of performance management will be perceived as punitive. Instead, ensure your conversations are consistent and relay constructive feedback regarding when the employee if both meeting or falling short of established expectations. If you are building trust and engagement with the employee, you must be sincere in your communication about performance. Positive accountability leads to improved performance, professional development, the closure of skill gaps, and enhancement of capabilities. Even your best employee has room to develop and grow, and you should take advantage of your performance management program to support their continued success in this manner.

5. Recognizing the ROI of a Successful Performance Management Program

How does the business benefit from building and executing an effective performance management program? Of primary importance should be the validation that you as an employer are getting what you pay for. If employees are not meeting expectations, you are not getting what you pay them to do. That, alone, should motivate any employer to take performance management seriously. Other benefits for the business are increases productivity, maximizing workforce capabilities to deliver your products and services, improved trust and engagement with management, effective communication, professional development, and opportunity for succession planning. When executed well the organization is also informed as to the creation of effective training and development programs for the workforce.

Why is the Employee’s Perspective of
Performance Management is Important?

In creating a workforce in which communication is effective and mutually beneficial, resulting in trust and engagement, an employee must believe confidently that the business has their best interest at heart in achieving success.

When an employee doesn’t trust their supervisor cares about their success in the company, engagement breaks down as does communication and job performance. Employees are observing the behaviors of the management team all the time.

When they see actions not matching words, they lose faith in the leadership of the company and can become disengaged and they lose trust in those guiding the business.

If the employee is only receiving feedback when something is wrong, they will perceive the program as punitive and avoid sharing their ideas for the business. The environment will become disconnected and morale will deteriorate, leading to gossiping and lack of engagement.

Ensure your people leaders are trained effectively to engage their staff, build trust, and communicate all forms of feedback in a consistent and fair manner to establish positive relationships with the workforce.

Franchise Growth Solutions Expands at the International Franchise Expo

“We’ll be showcasing some of the most innovative and exciting franchise brands of the year.” Gary Occhiogrosso – Founder, Franchise Growth Solutions

Franchise Growth Solutions to Showcase Innovative Franchise Brands

New York, NY (RestaurantNews.com) Franchise Growth Solutions LLC, the New York-based strategic planning, franchise development and sales organization, headed by franchise industry expert, Gary Occhiogrosso, will exhibit at the International Franchise Expo, May 31-June 02, 2018, at the Jacob K. Javits Convention Center in New York City.

Mr. Occhiogrosso , a 30-year veteran of single and multi-unit franchise development and sales, was instrumental in the launch and growth of nationally recognized franchises including Ranch *1, Desert Moon Fresh Mexican Grille, and brands found under the multi-brand franchisor, TRUFOODS, LLC.

From booth #340, Franchise Growth Solutions will showcase some of 2018’s hottest franchise opportunities: Acai Express®, Taboonette®, Planet Wings®, YeloSpa®, SkinnyPizza®, and Snow Days® to an estimated 10,000 entrepreneurs and future business owners. Occhiogrosso revealed, “We’ll be showcasing some of the most innovative and exciting franchise brands of the year.”

With additional credentials as an in demand public speaker on franchise success, and as an adjunct instructor at NYU, Occhiogrosso will also moderate a panel discussion entitled, Private Equity and Franchising. As moderator, Occhiogrosso will host a discussion between franchisors and private equity investment professionals on how to find capital, the best ways to position franchises for growth/investment, and a checklist of what it required for strategic partnership in the eyes of the investment community. “This is my favorite venue to present this panel, we bring together Emerging Brands and Private Equity Investors to discuss ways to capitalize on the fired-up equity markets in Franchising” added Occhiogrosso. The event is scheduled for Friday June 1st at 10am.

The International Franchise Expo in New York City is the largest franchise show of its kind in the country. The three-day show traditionally attracts over 10,000 attendees and over 400 national and international franchise opportunities.

About Franchise Growth Solutions, LLC

Franchise Growth Solutions, LLC is a strategic planning, franchise development and sales organization offering franchise sales, brand concept and development, strategic planning, real estate and architectural development, vendor management, lead generation, and advertising, marketing and PR including social media. Franchise Growth Solutions’ proven “Coach, Mentor & Grow®” system puts both franchisors and potential franchisees on the fast track to growth. Membership in Franchise Growth Solutions’ client portfolio is by recommendation only.

For information on Franchise Growth Solutions or any of its franchise opportunities, please contact Gary Occhiogrosso at (917) 991-2465 OR email at [email protected]

Franchising Your Business? Don’t Let Dreams Of Success Influence The Process

A study of startup franchises was done by Franchise Grade.com www.franchisegrade.com over a ten- year period from 2007 to 2017. The franchises were divided into eight groups comprised of 0 to 100 locations, beginning with the year first franchised. The data showed that it took significant time for many startups to achieve even modest growth.

Franchising Your Business? Don’t Let Dreams Of Success Influence The Process

By Ed Teixeira, Co-operative member with Franchise Growth Solutions,LLC.

The dream of building and developing a successful franchise company continues to motivate independent business owners, many of whom operate small businesses. They are encouraged by numerous success stories about how small business owners grew their franchise into regional or national brands by utilizing the franchise model as a pathway to increased growth and financial success. However, many of these new franchisors may find their results falling short of expectations. The metrics pertaining to franchise startup performance, despite the hype from certain sources, reveals how challenging it can be to build a successful new franchise. Research reveals that a disproportionate percentage of businesses that launch a new franchise brand fail to achieve favorable growth during the first four years. Many cease franchising after failing to add a single franchisee, ultimately returning to operating their original business. One reason for this outcome is that some startup franchisors share the same expectations as a new franchisee. Namely, both see future franchise success as a smooth road, neglecting any potential potholes.

A study of startup franchises was done by Franchise Grade.com over a ten- year period from 2007 to 2017. The franchises were divided into eight groups comprised of 0 to 100 locations, beginning with the year first franchised. The data showed that, it took significant time for many startups to achieve even modest growth.

30.6 % of franchises that started four years before had zero to one franchise locations.
After ten years from launch 52.4% of the group had 50 or less franchise locations.
I’ve met with startup franchisors who had such unbridled optimism, they couldn’t foresee the smallest possibility of failure.

A Process to help arrive at a successful outcome

Build a strong foundation of franchising knowledge:

Business owners considering franchising their business should acquire a knowledge base on franchising from various sources including trade associations, Federal and State agencies, successful franchise executives as well as franchise attorneys and consultants. Don’t rely on a workshop at a franchise trade show to provide all you need to know. In the age of the Internet there are countless sources of information regarding franchising. A strong understanding of the franchise business sector, pertaining to independent and franchise brand competitors, is critical.
Focus on understanding what’s needed to develop a successful franchise system. Above all, don’t be overwhelmed by franchise success stories. Put ego aside. Unless you’re a franchise expert, listen to those who have a strong understanding of franchising. Think walking before running.
Develop a potential franchise market development study to identify the markets and regions that offer the best opportunity for success. Many startup franchisors will sell franchises throughout the country without ever considering the importance of brand building and franchisee support. This is a flawed strategy.
Avoid devoting the bulk of your franchise investment capital to building the franchise. Legal, consulting and marketing fees can add up very quickly. Some business owners exhaust the bulk of the project capital on building the new franchise with little left for franchise staff, marketing and other activities without knowing how costly and difficult it can be to sell that first franchise and more.
Whenever possible, make sure you have advice from people who have operated and developed a franchise system.
Just like the advice provided to prospective franchisees “Don’t allow yourself to be sold.” Rather be cautious, guarded and seek confirmation of important facts and representations.
Although, some new franchises get off to a fast start this is the exception not the rule. Be sure to temper your expectations and spend your franchise capital wisely.

Avoid these pitfalls of franchise startup failure:

Despite the advice of some franchise consultants, not every business is suitable for franchising and can’t be built into a successful franchise model. This may be because at the beginning of the franchise evaluation process there was a lack of objectivity when evaluating the business for a franchise.
Failing to utilize and follow the analysis and opinion of financial and legal advisors and request them to provide you unfiltered feedback.
The business owner and staff lack the required business skills to operate a franchise system. This situation can manifest itself in several ways including the inability to lead or manage a multi-unit organization. There is a lack of existing or available management staff that can operate the new franchise plus the existing business. Too many franchises start up as a two-three person operation.
The business owner doesn’t fully understand the implications of franchising a business and what it takes to be successful. Developing and launching a successful franchise program, requires the right ingredients. Unfortunately, a good deal of emphasis is placed upon building the franchise and not the launch and development of the system.
There is insufficient capital necessary to build, develop and operate a new franchise. A major reason why many startup franchisors fail, is a lack of capital needed to launch the new franchise brand. Just the cost of building a new franchise program including consulting and legal fees, can range from $100,000 to $200,000 or more.Many startup franchisors exhaust their franchise investment capital on the building stage and when it comes to staffing, marketing and supporting new franchises the franchisor lacks the required funds to execute the proper launch.
Business owners considering franchising their business need to be cautious, become franchise savvy and understand what it takes to build a successful franchise program.

There is a relationship between overly optimistic franchise system growth on the part of many new franchisors who lack the necessary business skills, capital and an attractive franchise investment model that appeals to consumers and franchise investors alike.
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About the Author:
Ed Teixeira is Chief Operating Officer of Franchise Grade www.franchisegrade.com and is the founder and President of FranchiseKnowHow, L.L.C. a franchise consulting firm. Ed has over 35 years’ experience as a Senior Executive for franchisors in the retail, healthcare, manufacturing and software industries and was also a franchisee. Ed has consulted clients to franchise their existing business and those seeking strategic solutions to operational, marketing and franchise relations issues. He has transacted international licensing in Europe, Asia and South America. Ed is the author of Franchising from the Inside Out and The Franchise Buyers Manual and has spoken at a number of venues including the International Franchise Expo and the Chinese Franchise Association in Shanghai, China. He has conducted seminars, written numerous articles on the subject of franchising and has been interviewed on TV and radio and has testified as an expert witness on franchising.

The opinions expressed are those of the writer.