Elements of Successful Franchising: Working Through Difficult ...

The 21st Annual
“Elements of Successful Franchising: Working Through
Difficult Economic Times”
Presented by John Hamburger,
Jon Luther, Dennis Wieczorek &
Philip Zeidman
Sunday, February 12, 2012 DLA Piper LLP (US)
1

Dennis Wieczorek
Partner | DLA Piper
2

Philip Zeidman
Partner | DLA Piper
3

Jon Luther
Chairman | Dunkin Brands / Arby's Restaurant Group
4

John Hamburger
President | Franchise Times Corp.
5

Philip Zeidman, Partner
DLA Piper LLP (US)
6

How is Franchising Affected by
the World Around us?
7

Disposable Personal Income
8

Women in the Workforce
11

“Child Care Franchises Boom”
12

US Population 65 and Older
13

THE WALL STREET JOURNAL.
WSJ.com
NOVEMBER 5, 2011
Aging Population Eases Jobless Rate
14

Americans With Healthcare Coverage
Source: U.S. Census Bureau report “Income, Poverty, and Health Insurance Coverage in the United States: 2010”
15

LIFESTYLE
• FITNESS
• ENVIRONMENTAL
• DIETARY
16

0 5 10 15 20 25 30
# of People speaking Spanish in 2000 (in millions)
# of People Speaking Spanish in 1990 (in millions)
17

Percent of U.S. Population By Race and
Hispanic Origin
Source: U.S. Census Bureau, Population Division
19

US Students Studying Chinese vs. Number of
Chinese Studying English
400
350
300
250
200
150
100
50
0
Unadjusted Adjusted
# of Students Studying Chinese in the US
# of Students Studying English in China
Key =
one
or =
200K
people
20

Migration
21

John Hamburger, President
Franchise Times
22

FRANCHISE TIMES 200
• The Top 200 U.S. franchise systems
• Annual worldwide sales
• Number of domestic and international
units
• 2010 versus 2000
23

REST FINANCE MONITOR 200
• The Top 200 U.S. restaurant franchisees
• Annual sales
• Number of units
24

DISCUSSION POINTS
• What have we learned?
• Franchising trends
• Development trends
• The future?
25

FRANCHISE TIMES 200
2010 VERSUS 2000
2010 2000
Revenue $500 Billion $303 Billion
Locations 450,523 325,882
Franchise % 87% 80%
International % 34% 27%
26

THE TOP 10 IN 2010—DOLLARS
Company Systemwide Sales
McDonald’s $77.3 B
7-Eleven $63.0 B
KFC $19.4 B
Subway $15.2 B
Burger King $14.8 B
Ace Hardware $12.5 B
Circle K $10.7 B
Pizza Hut $10.2 B
Wendy’s $9.1 B
Marriott Hotels $8.0 B
27

THE TOP 10 IN 2010—UNITS
Company Systemwide Units
7-Eleven 39,482
Subway 33,959
McDonald’s 32,737
KFC 16,853
Pizza Hut 13,432
H&R Block 13,149
Burger King 12,251
Jani-King 11,454
Dunkin Donuts 9,760
Coverall 9,416
28

THE TOP 10 IN 2000
Company Systemwide Sales
McDonald’s $40.2 B
7-Eleven $29.5 B
Carlson Travel $15.0 B
Burger King $11.5 B
KFC $8.9 B
Pizza Hut $8.0 B
Wendy’s $6.5 B
Marriott Hotels $5.5 B
Taco Bell $5.3 B
Holiday Inn $5.0 B
29

BIG NAMES IN 2010 NOT ON 2000
Company Systemwide Sales
Boston’s Pizza $953 M
Five Guys $721 M
Massage Envy $652 M
Pet Supplies Plus $549 M
Planet Fitness $521 M
Edible Arrangements $385 M
Wireless Zone $385 M
Comfort Keepers $323 M
Anytime Fitness $284 M
30

PERCENTAGE GAINERS
Company Systemwide Sales
Wingstop 3127 %
Plato’s Closet 3013 %
Goddard School 2085 %
Jimmy John’s 1908 %
Buffalo Wild Wings 984 %
Panera Bread 892 %
Hilton Garden Inn 590 %
McAlister’s Deli 586 %
Budget Blinds 522 %
Tim Horton’s 437 %
31

DOLLAR GAINERS
Company Systemwide Sales
McDonald’s $37.2 B
7-Eleven $33.5 B
Subway $11.2 B
KFC $10.5 B
Tim Horton’s $4.3 B
Hilton Hotels $4.0 B
Dunkin Donuts $3.4 B
Burger King $3.3 B
Holiday Inn $3.0 B
Panera Bread $2.8 B
32

UNIT GAINERS
Company Systemwide Units
Subway 19,277
7-Eleven 18,340
KFC 5,515
McDonald’s 5,015
ServiceMaster 4,701
Dunkin Donuts 4,603
Jani-King 3,683
Coverall 3,406
H&R Block 2,822
Domino’s 2,374
33

INTERNATIONAL UNIT GAINERS
Company International Units
7-Eleven 18,380
Subway 7,681
KFC 5,824
McDonald’s 3,815
Century 21 2,664
Domino’s 2,263
Burger King 1,979
ServiceMaster 1,734
Pizza Hut 1,733
Baskin Robbins 1,714
34

UNIT DECLINERS
Company Systemwide Units
Blimpie -1,123
Hardee’s -758
Shakey’s -403
A&W -398
Schlotzky’s -360
Midas -354
Kwik Kopy -327
Holiday Inn -294
PIP Printing -283
35

FRANCHISE TIMES 200
FRANCHISE CONCENTRATION
2010 2000
100% 70/200 63/200
>90% 113/200 106/200
>80% 136/200 125/200
36

FRANCHISE TIMES 200
INTERNATIONAL FRANCHISING
2010 2000
Overall 34% 27%
>50% 20/200 14/200
>25% 52/200 46/200
37

WHAT HAVE WE LEARNED?
• Increase in franchise concentration
• Increase in international development
• Sales growth rather than unit growth
• Big name brands grow internationally
38

REST FINANCE MONITOR 200
2010 VERSUS 2000
2010 2000
Revenue $23.2 Billion $16.2 Billion
Locations 17,887 15,985
Multi-Concept 100/200 76/200
39

THE TOP 10 IN 2010
Company Systemwide Sales
NPC International $935 M
Apple American $671 M
Bridgeman Foods $508 M
Harman Management $416 M
Covelli $400 M
Strategic $380 M
Boddie Noell $373 M
Carrols $357 M
Briad Group $328 M
Pilot Travel $308 M
40

WHAT HAVE WE LEARNED?
• Increase in multi-concept franchisees
• Primary concept is a large brand
• Willing to take risks with secondary brands
• Targeted by new franchisors
• Large franchisors are finally embracing the
large mega-franchisee
41

WHAT’S THE FUTURE?
• More franchising concentration
• Greater emphasis on international
development
• Franchisees willing to operate multiple
brands
• Capital will move to the strong brands
• The economic model of the franchise is
key
42

Dennis Wieczorek, Partner
DLA Piper LLP (US)
43

Selling Franchises
What Has Changed?
44

Selling Franchises
Changes
• Who is buying
• The sales process
• Getting to a closing
45

Selling Franchises
Who are the New Prospects?
– Existing franchises adding units or renewing
– Transferees
– Franchisees of other systems
– Other business owners including conversions
– Co-brand/express (lower cost)
– Institutions
46

Selling Franchises
Enticing New Prospects
– Leads are not the problem
– Internet is key component
– Referrals and brokers are best resources
(Franchise Update report)
– Item 19 more critical than ever (look at
median)
47

Selling Franchises
Sealing the Deal
– Credit is a key part of the sales process
• Mom ‘N Pop absolutely need it (e.g., 401K) but big
operators too
• Must offer, enhance or support
48

Selling Franchises
Sealing the Deal
– Look at franchise agreement
• Condense, soften, make readable and prepare to
negotiate
– Focus on equity appreciation; franchisee
controls cash flow and net
– CRM programs, including social media
– Lower expectations
49

Selling Franchises
Capital Access
– Lenders act as franchisee advocate – they
approve franchise for the borrower
• Lender buy-in to franchise program is critical
– Franchisor must assure franchisee is creditworthy
• If several loans go bad, lender is gone (and other
lenders too)
50

Selling Franchises
Capital Access
– SBA – greater availability but hurdles in SBA
process that franchisor must overcome
– 401K – increased popularity but complicated
– Matching services
– Money is available but at what price
51

Selling Franchises
• But after all of this, getting to “yes” still a
problem
– Psychological barrier
– Concerns about economy
– NFIB – Small business wants sales, not credit
52

Social Media
• Key element of many franchise programs
– Most often to reach customers and create
loyalty (and consumer facing programs are
important to franchise sales)
– But broader uses too: jobs, franchise sales
53

Social Media
• Differences among franchise systems –
some love it, some tolerate it, but can’t
be ignored
• Need social media policy (ops manual,
agreements)
– Most common-franchisee can use social
media but subject to some overall
franchisor control
– Legal issues
• Truth-in-advertising
• Defamation
• Franchise laws
54

Social Media
• Importance to Franchise Sales
– Robust sites allow interaction with
candidates
– Blogs
– Validation from existing franchisees
(lessens need for phone intrusions)
55

Government Intrusion
Employment
– Health care
– Fast union elections (in lieu of card check)
– Wage hour laws
56

Intersection With Employment Law
Can a franchisee be an employee of
the franchisor?
• Massachusetts case – minimum wage
and other requirements
Can an employee of the franchisee also
be the franchisor’s employee?
• Kentucky case – franchisee didn’t pay
workers’ comp insurance and state fund
went after franchisor (recently resolved
favorably)
57

Government Intrusion
Operations
– Menu labeling
– What you can sell
– Where you can locate
58

Government Intrusion
Financial matters
– Credit
– Taxes
• Impasse in Congress
59

“Nexus” – What Does It Mean?
• KFC v. Iowa – first high court holding
that franchisor has nexus with a
state for income tax purposes
• Income tax different from sales tax
• Nexus exists if trademarks used in
state
60

Government Intrusion
Franchising
– Some issues percolating in several states and
Puerto Rico
– Arbitration vulnerabilities
61

Government Intrusion
• Franchisors and franchisees are
on the same page on almost every
issue
• IFA increasingly recognized as the
voice of small business (and all of
franchising)
62

THE GROWING
INTERNATIONALIZATION OF
FRANCHISING
63

International Growth
The 200 Top Franchisors now have 34%
of Their Units Outside the U.S.
Courtesy of Franchise Times
64

International Growth
• The Larger the Franchise Network, the
Higher the % Outside the U.S.
Courtesy of Franchise Times
65

International Growth
• But Not Just the Giants. . .
• And Not Just Food Service. . .
• And Not Just Hotels. . .
• Service and Retail. . .
66

Does your company currently either franchise or
operate locations in international markets?
67

Does your company plan to accelerate or start new
franchise operations in international markets?
68

How important is international to your
company’s future success?
69

WHY IS THIS HAPPENING, AND
WHY IS IT HAPPENING NOW?
70

Franchise Laws Around the World:
Beginning of the 1970’s
Copyright © 2011 DLA Piper. All rights reserved.
71

Franchise Laws Around the World:
Beginning of the 1980’s
Copyright © 2011 DLA Piper. All rights reserved.
72

Laws Applicable to Franchising
February 2012
Blue = Disclosure Law
Green = Relationship Law
Red = Disclosure & Relationship Laws
Black = Other
The Americas
Barbados
Brazil
Canada
Alberta
New Brunswick
Ontario
Prince Edward Island
Mexico
United States
Federal
Several States
Venezuela (competition law)
Does Not Include:
Europe
EU
(competition
law)
Within EU
Belgium
Estonia
France
Lithuania
Italy
Romania
Spain
Sweden
Non-EU
Albania
Belarus
Georgia
Moldova
Russia
Ukraine
The Middle East
Saudi Arabia
(commercial
agency law)
Africa
South Africa
Tunisia
Central Asia
Mongolia
Kazakhstan
Kyrgyzstan
South Pacific
Australia
Indonesia
Malaysia
• Codes of conduct which do not provide for governmental or private enforcement, even if promulgated under governmental authority.
• Bodies of law (e.g. competition, intellectual property, etc.) which also cover franchising, unless explicitly mentioned.
Asia
China
Japan
Macau
South Korea
Taiwan
Vietnam
73

Moments of Opportunity…Moments of Peril
74

Programs or rights not included at outset will
prove difficult to initiate later.
75

Establish objective
criteria, or
self-executing
mechanisms
or events that
eliminate need to
take confrontational
position with franchisees.
76

Use appropriate occasions to require franchisee
to update or improve.
77

Preserve right at renewal to require
franchisee to –
– Sign a current franchise agreement
– Upgrade its facility to current standards
78

What if you’re wrong?
79

WHEN TROUBLES COME…
80

Number of Franchise Brands Added Each Year
450
400
350
300
250
200
150
100
50
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
81

Percentage by Year of New Brands with 0
Company Units at Start (Frandata)
40%
35%
30%
25%
20%
15%
10%
5%
0%
2004 2005 2006 2007 2008 2009 2010
82

Percentage of Brands with Previous
Years of Business Experience (Frandata)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
0-1 Y R
2-5 Y R
>5 Y R
2009
2010
2011
83

“Majority of US Franchises Now
Owned by Multi-Unit Franchisees”
84

The Institutionalization of Franchising

Characteristics of “Institutionalization”
• Public awareness
• Popular culture
• Size and consumer impact
• Infrastructure
86

Indicators... and Where There is a Lag
• Attention of financing institutions
– Commercial banking
– Financial markets
– Private equity
• Attention of government
• Attention of educational institutions
87

Legal Aspects of Institutionalization
• Is franchising “different”
• And is that good or bad?
• Some recent straws in the wind
• Some divergence between US, Europe
• The legal profession itself
88

Why is this potentially important?
89

Q & A
90

Contact Information Lena to update
John M. Hamburger
Email: jhamburger@franchisetimes.com
T: 612-767-3201
Jon Luther
Email: jon.luther@dunkinbrands.com
T: 781-737-3663
Philip F. Zeidman
Email: philip.zeidman@dlapiper.com
T: 202-799-4272
Dennis E. Wieczorek
Email: dennis.wieczorek@dlapiper.com
T: 312-368-4087
91

DLA Piper LLP (US) gratefully acknowledges
the following:
93