Franchising Can Win in a Downturn
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The key ingredient in a difficult economy – whether you’re looking at a franchise, a stand-alone establishment or joining a chain – is affordability, says Rex Ibanez, director of operations for Genki Sushi in Hawaii. Though the Japan-based company is not a franchise, it already has 12 Hawaii stores, will open another this fall, and plans several more next year.
For Ibanez, success in this economy is NOT about franchising – he’s definitely happy not to be paying the fees – it’s about product and price.
“This is the best time to open up a business around affordability,” says Ibanez. “It’s not like people don’t have money. They do. They’re just spending more wisely. They’re stretching.”
Franchises have often centered on affordability and speed. Think McDonald’s, Taco Bell, Pizza Hut, Subway and L&L.
In fact, in building an empire that’s heading toward a landmark 200 outlets in the next year, the L&L team has learned that the worst economic meltdown in half a century need not ruin your cash flow. With gross sales of $93.5 million last year (up $3.5 million from 2007), L&L’s success is both a testament to the ability and hard work of founder Eddie Flores Jr. and his franchisees, and to the power of low prices.
Nonetheless, the franchise business is still complicated, expensive, slow and littered with upfront costs – for everyone. Craft says he has spent $10,000 to $15,000, and taken two to three months just to file the legal paperwork with the state.
Flores notes that franchising takes a critical mass to make things profitable.
“If you don’t have 50 to 100 stores, you’re not going to make money,” says Flores. “Franchising is very complicated with state and federal law. In order for me to sell a franchise in California I have to register with the state and it’s a long process. You have to have an audited financial statement and it costs about $10,000 just for that. And each state has a different set of rules. So you need a support staff,” he says. “And even lawyers don’t always know exactly what has to be done.”
For the franchisee, a single store can be a success. With hard work, says Flores, the Pangs will be able to buy a family home in a few years.
Andaya says L&L doesn’t advertise for franchisees. They first research L&L on the Web, make e-mail contact and then fill out an application. Both sides also do financial disclosures, as required by law. “One of the worst things you can do is be undercapitalized,” says Andaya.
But L&L also invests in its own workers – like the Pangs, who have been in Hawaii barely a year after waiting 11 years to emigrate from China.
With cooking and cashiering at the Kahala L&L under their belts – and a $35,000 loan from Flores’ partner, Kwock Yum “Johnson” Kam, once an immigrant himself – the Pangs opened their franchise. Their location had been a restaurant, so it needed only modest changes.
“It is kind of like an American dream,” says Vivi, whose bright smile welcomes customers who pass through the UH athletic complex on their way to and from classes. But their American dream also requires 11-hour days, English-language classes after work, and the help of relatives. Their father, Yuan Pang, cooks alongside Tim, and their auntie, Zhen Pang, is there daily to help serve.
“They (our parents) are happy, but they will see if we can do the job,” says Vivi.
“We hope we can do it,” adds Tim.
Customer Bryce Iwata appears to think they can, and his reasoning is based on the value offered by the restaurant. Though he usually brings a home lunch, Iwata recently stopped in to try the new L&L, where a hamburger goes for $2.10 and you can land a mahi burger for $3.35.
“I look at what’s in the area, the price and also it depends on what I feel like eating,” says Iwata.
The same goes for Clement Zhang, both a student and a UH employee.
“The price,” says Zhang, “has to be between $4 and $6.”
Recession or not, at L&L, the training of new franchisees is going forward full steam, with new owners coming to Hawaii for intensive instruction on how to dish up the aloha spirit along with chicken katsu. That means trying poi, according to executive chef Raymond Cheng, who is in charge of a new franchisee’s full immersion, local style.
“I say, ‘You have to eat that to understand,’ ” says Cheng of the mandatory poi tasting for Mainland franchisees. “If you open the store and people ask, ‘What is poi?’ what if you don’t understand?”
Poi couldn’t be further from Richard Craft’s consciousness. What he does think about are the half-dozen new locations he’s looking at for Blazin’ Steaks.
The recession has offered Craft powerful opportunities, especially in finding good locations. His success at each has led to offers of others. “I started in a trailer by the 99-cent store on Ward Street with steak only. That was maybe four-and-a-half years ago.” Seeing Craft’s success, General Growth Properties, manager of the Ward complex, offered him a location at Windward Mall.
“From there they kept offering me spaces,” he says.
In the beginning, he turned to friends for partners, such as Sean Ah Yen, who runs the Kailua restaurant.
“Rich signs all the leases and gets the stores going,” says Ah Yen. “He finds owners and we jump in there and run it. … If you’re in a high-traffic area you should be able to do pretty well.”
But Ah Yen also warns anyone getting into business, whether for themselves, or as part of a franchise, that overhead costs can be difficult to control. “The money goes out as fast as it comes in,” he says. “People don’t realize all these things – the upfront expenses like gas, electricity, your insurance, getting accountants, meeting payroll. Initially for new owners it’s a learning experience.”
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