Franchising Can Win in a Downturn

October, 2009

If you’ve been dreaming about expanding your small business, there are options even in a recession. In fact, this is a great time to franchise, according to both a longtime Hawaii franchiser and a newcomer.

L&L Hawaiian Barbecue, the state’s franchise king, with restaurants stretching from New York to New Zealand, opened five more in the midst of this summer’s downturn. That’s despite as much as $300,000 to $400,000 in build-out costs, $35,000 for franchise rights and another 4 percent to L&L monthly (including 1 percent for advertising).

“Quick-service restaurants, they’ve weathered it,” says L&L Chief Operating Officer Bryan Andaya.

California’s Redondo Beach, Santa Ana, San Diego and Fullerton, and Honolulu all have new L&Ls. It’s a testament to price point, brand recognition and the way some opportunities crop up in a poor economy.

“It’s a fabulous time for franchising,” Andaya says, “IF you’ve got the capital. … And that’s a big if. But if you do, it’s an excellent time to look for opportunities. For franchises like ours, because we’ve developed a brand, we offer a sense of security. Franchises are doing well, especially on the lower end with fast food and quick service.”

The newest local L&L, run by brother and sister Tim and Vivi Pang, opened in the lower campus just a week before fall classes began at the University of Hawaii-Manoa.

One customer, Elaine Chun, says the economic slump limited her to one lunch out a week, and price was a major factor.

“If I buy something out I try to stay within $5, but it definitely has to taste good,” says Chun, who chose L&L that day because she knows and trusts the brand.

That was good news for co-owner Vivi Pang.

“Because L&L is a brand name, we felt confident, even in a down economy, that we’ll do good,” says the young franchisee.

The recession is a great opportunity for another new kid on the block, Richard Craft, Jr., who is franchising his “Blazin’ Steaks” restaurants for Mainland expansion.

“My product is so much cheaper than everyone else’s, so I can survive,” says Craft, who in less than three years has opened 17 restaurants in Hawaii, some just steps away from an L&L. Another five local outlets are in the works.

“That’s why McDonald’s is so busy,” says Craft. “People just don’t have the money to go out and eat at an expensive place.”

Craft started Blazin’ Steaks (named after his 9-year-old son, Blazin) as a series of partnerships, with many proprietors. But, he says, he moved toward franchising because partnerships left him vulnerable to losses his partners incurred.

“The benefit of franchising (for me) is really about liability,” says Craft. “Right now, as a partner with every person, it means I own every store, so every store is in my name. So if they don’t pay the rent, I’m on the hook. But if you’re franchising, the liability is a lot lower.”

 

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.”

 

While Blazin Steaks’ Hawaii stores will remain partnerships, additional expansion, especially on the Mainland, will be through franchise agreements.

But long before he can do that, Craft must also apply to every state where he hopes to expand. Since agreements are similar and all can be patterned after the first, the costs should drop, he says.

With more than 20 years of franchising under his belt, Flores has long since finished applications in the other states where he has restaurants. But he still has to renew every year – one of the continuing expenses the franchiser must factor in.

“Franchising is a dream of every business,” says Flores.

“When you run one or two successful businesses you say, ‘Hey, I’m going to franchise and make lots of money.’ It’s not that simple. It involves having the operation. You need a staff to sell your franchise, a corporate staff to understand the paperwork, marketing people, buyers to start negotiating for contracts, so you’ve got to understand a lot of aspects and have a whole corporate staff to run it.

“It’s the fastest way to build your business,” he continues. “But the downside is it can get out of control. I have more than 180 franchises. That means I have 180 people to take care of.”

Bad economy can be ‘good news’

L&L Chief Operating Officer Bryan Andaya points to three strengths behind franchising in a bad economy:

  1. “Some of the ‘A’ locations we would never be able to touch are now vacant. And landlords are much more motivated in talking to us and giving us a good deal.
  2. “Landlords are much more willing to renegotiate rent. In this business, it’s the fixed costs that end up killing you. So locations with reasonable rent, those are the ones that survive and continue to thrive.
  3. “With existing restaurants closing down or willing to sell, instead of ‘building out’ an empty shell, you can pick up an existing establishment at a very reasonable cost. That can cut the initial investment down to one-quarter or one-third of what it might have been – maybe down to around $100,000.”

 

12 Steps to Finding a Franchise:

  • Look at the segment, services or products that a particular franchise offers.
  • Look at the health of that industry.
  • Try to project where that industry is going: up, down or stable.
  • Analyze how the economy and other factors play into its future.
  • Look at the general location and whether the economy there is going to rebound in the next three years.
  • Do a market analysis of the franchise’s products.
  • Add up what it takes to buy in, and what the fixed and continuing costs are.
  • Look at the support you will get from the brand or franchiser.
  • Consider the strength of the brand.
  • Look at competing choices.
  • Set up a business plan to see if you have a viable model.
  • Once you’ve made a choice, enter formal discussions with the franchiser and look for a specific site.

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