Franchising beats the recession – includes articles on how to buy, and on reference materials – Franchising: Special Guide

Meg Whittemore

Running a business during a recession requires a special breed of entrepreneur–one who can adapt to a changing market, find creative solutions to problems, take risks cautiously, and demonstrate the courage to move forward.

Long-term economic pressures–such as those that this country has weathered for the past 18 months–can spell disaster for even the most tenacious business owners.

Nonetheless, amid the endless stories of corporate downsizing and business bankruptcies, many franchised businesses are thriving and growing.

“Franchising is one bright spot in a lagging economy,” says Gregg Reynolds, chairman of the International Franchise Association, in Washington D.C. “Last year, more than 18,500 new businesses were created, adding approximately 108,000 new jobs to the economy.”

It is no surprise that franchising continues to ride out the economic turmoil that has caused many less-resilient types of businesses to fail. Traditionally, franchising’s success over the past 30 years has been tied to its ability to identify and respond to rapid consumer and market changes, no matter how subtle or small.

Joseph Simone, executive vice president of Mamma Ilardo’s, an Italian-pizza franchise based in Baltimore, says that it will be entrepreneurs–franchisors in particular–who will drive what he calls “a renaissance in capitalism” in the United States.

“If there is a recession-proof mechanism within this economy,” it is entrepreneurship, says Simone, because entrepreneurs “embrace the philosophy of customer service, high quality, and fair price.”

Franchise companies that succeed during a recession, the experts say, appear to be those that are narrowly focused, deliver the product or service to the home, and offer an inexpensive luxury to the consumer or provide services at attractive prices.

Another healthy sign that franchising is running counter to the grain of the recession shows up in the results of a study on franchising conducted by the Gallup Organization, Inc., based in Princeton, N.J. In the study, 94 percent of the 994 franchise owners polled said they consider their franchise operations to be either very successful (47 percent) or somewhat successful (47 percent).

Mamma Ilardo’s is one franchise chain that has maintained high volume through the recession. In 1990, sales averaged $940,000 per unit for the franchise’s 10 units in Seattle; Birmingham, Ala.; Baltimore; and Washington, D.C.

Another franchise that has been growing steadily throughout the economic downturn is San Diego-based Mail Boxes Etc., which offers postal and other business services. “We continue to open one franchise a day in the U.S.,” says Tony DeSio, president of Mail Boxes. “I tend to think that the economic conditions have to get very bad before people start to avoid our place to go wait in line at a post office.” (Mail Boxes’ postage prices are slightly higher than the post office’s; stamp prices, for example, are about the same as those purchased from a vending machine, but they are sold at face value to customers with a mailbox at the store.)

Mail Boxes also provides an array of small-business support services such as telephone message service, typing, faxing, and a mailing address for the small-business owner.

“We have always been a sort of incubator for small businesses,” says DeSio, “a way for people to get started in a business without the overhead.”

The method is popular. Mail Boxes currently has 1,600 franchises in the United States, 40 in Mexico, and 40 in Canada. Start-up costs average $75,000 depending on location.

DeSio says that he finds “more and more independent operators are coming to us with requests to convert [to our franchise].” With annual systemwide sales of over $30 million in 1991, DeSio sees a bright future.

This year, Mail Boxes was designated an honoree of the Blue Chip Enterprise Initiative, sponsored by the Connecticut Mutual Life Insurance Co., the U.S. Chamber of Commerce, and Nation’s Business. The Blue Chip program recognizes and publicizes small companies’ achievements. (For a complete list of the 1992 Blue Chip honorees, see the story on Page 42.)

“No matter what happens in the economy, people still have to mail things,” DeSio says. “We deal primarily in services that are not impulse buys or discretionary purchases. We offer necessities.”

Another of life’s necessities–food–is what Mamma Ilardo’s sells customers. Estbalished in 1976, the 10-unit franchise uses authentic Sicilian recipes brought to the United States when the Ilardo family moved to Baltimore in 1958.

The meno at Mamma Ilardo’s offers pizza–New York style (thin crust) and pan style (thick crust)–calzone, spaghetti, salads, lasagna, and Italian sandwiches. The company’s stores are located in shopping malls and strip centers, and the franchise has grown slowly but selectively.

“Growth is a key element” for business success, says Harry Ilardo, president. “Grow too fast, and you lose focus; grow too slowly, and you lose [the customer’s] interest.”

Mamma Ilardo’s growth plans involve regional expansion without selling territories. “We have intentionally remained small and regional in order to provide support for our franchisees and develop high store volume,” says Ilardo.

Regionalizing the business is a tactic used by franchisors to contain costs and to ensure continued field support for their franchisees.

Lois Vana Marshall, president of The Marshall Group, a Salinas, Calif., firm that recruits executives for franchised companies, says franchisors increasingly are setting up regional offices staffed by hands-on operations consultants. She explains that “it saves on travel costs for the franchisors and gives the franchisees a local person to call on for advice and guidance.”

Says Simone: “People want to be able to touch the companies they deal with, and the only way [for a business] to reach the customer in that way is through regional growth.”

The average cost to open a Mamma Ilardo’s is $250,000, depending on the store location. Royalties are 6 percent of annual gross sales. Franchisees receive a six-week training program that includes food preparation, food handling, planning and cost controls, employee development, staff training, and customer relations.

The training and the ongoing franchisee support are essential, says Ilardo. “The consumer is a quick learner. Unless your business can meet exacting standards for quality, service, and cleanliness, the chances for success diminish.”

Taking pride in one’s work and paying attention to details are other tactics used by franchisors to attract customers. For Sharon and Kevin Cosper, Perma Glaze franchisees in Riverside, Calif., providing quality service is the foundation of their business. Perma Glaze offers repair and refinishing services for bathroom and kitchen tile and for fixtures such as sinks, tubs, and showers. “I take extra care with my work,” says Kevin Cosper, “making sure that the quality the customer seeks is there.”

It takes about three or four hours to refinish a shower, for example, and the average cost is $300. Completely renovating a bathroom and replacing all of its components can cost thousands of dollars more and require much more time to complete than a Perma Glaze refinishing, says Dale Young, founder and president of the company.

Since the start of the recession, in mid-1990, Perma Glaze has had a 12 percent increase in sales throughout its 138-unit system. “During this difficult economic climate, more individuals as well as commercial institutions are choosing to repair rather than replace,” says Young. “Also, fewer people relocate, so they opt to renovate and upgrade their present homes.”

Perma Glaze franchisees typically work from home, and all the equipment needed for a day’s work can be fitted easily into the trunk of a car. The business can be part time or full time, and the owner can specialize in antiques or commercial restoration, says Young.

Kevin Cosper does the refinishing work while Sharon Cosper holds down a full-time position in the credit and collection department of a company that manufactures electornic components. In the evening, she handles the marketing and advertising for the franchise.

The couple bought the franchise in 1988. Kevin says his experience as a painter for 11 years made the transition to the business easier. “It is helpful if you know how to do some repairs around the house,” he says.

“But it is not essential,” says Young. “We have people with computer and accounting backgrounds who hadn’t picked up a spray gun or a hammer” until they were trained to become Perma Glaze franchisees.

The Cosper’s gross sales in 1990 totaled $36,000, and in 1991 they increased to $55,000. They see their growth potential as unlimited, even during the recession. “People are cautious with spending,” says Kevin. “They want to repair, not replace, and they want value for the money, and that’s what we give them.”

The total investment for a Perma Glaze franchise such as the Cospers’ is $24,500 for a territory with a population of 300,000. There is an annual $1,600 licensing fee, and franchisees must purchase all refinishing products through Perma Glaze.

The Cospers agree that time are tough but that hard work does pay off. “Don’t expect too much too soon,” they say, and be prepared to work. “You really have to get out there and push it.”

Like the Cospers, many other franchise owners have discovered that today’s customer demands more than just a consistent product or service. Jim Ahern, vice president of franchise operations for Adia Personnel Services, says that “there is a renewed stress on customer satisfaction and account retention” among franchisors.

Adia Personnel Services, based in Menlo Park, Calif., is a franchised company that places both temporary and full-time personnel. The company has 570 franchised offices nationwide and offers its customers personnel with a range of skills, including clerical, secretarial, word-processing, and technical.

“Franchisors know that in an increasingly competitive market, quality must be central to what we do, not just something added on” says Ahern. He says that most franchisors are focused more on attaining bottom-line results than on conforming to the details of company policies.

“No one from Adia headquarters comes around [to the franchisee] and says, ‘Hey, you’re supposed to use a No. 3 pencil, not a No. 2,'” according to Ahern. “Instead, we may have suggestions based on results from a customer-priorities survey.”

Adia franchisees are trained to respond quickly to customers’ complaints. “When our franchisees receive a complaint or recognize a problem, they pull out all the stops to remedy it and prevent it from occurring in the future,” says Ahern.

Franchisors who focus on proving the quality of their customer service typically utilize one or more of what Ahern calls “quality processes,” such as relying on surveys that provide customer feedback.

While some franchisors’ sales-growth strategies are aimed at the consumer’s concern for saving money, a Silver Spring, Md., franchise has been growing steadily by targeting the consumer’s sweet tooth. Candy Express is a candy franchise that offers an inexpensive luxury.

“In recessionary times, when we can’t afford to buy expensive things, candy is something that makes us feel better but doesn’t cost a lot,” says Joel Rosenberg, president of Candy Express. “Candy is one of the most stable industries,” he says.

Unlike franchises that rely on customers’ considered decisions to make a purchase, Candy Express is “an impulse business,” says Rosenberg. “We thrive on the walk-in traffic,” which is why all of the company’s franchises are in shopping malls. “Shopping malls are the new ‘Main Street’ of America,” says Rosenberg.

Candy Express’ 31 franchises nationwide sell European gourmet chocolates, sugar-free candy, 35 differnt flavors of licorice, 40 varieties of “gummy” candies, and 60 varieties of jelly beans. The hottest item? “Tear-jerker gum,” says Rosenberg. love it, he says. “It’s so sour, their faces contort and they actually start crying.”

Lorrie and Tom Krawcyk sold 500 pounds of tear-jerker gum each week during the Christmas shopping season at their Candy Express franchise in Waterford, Mich.

In spite of the recession, says Lorrie, “business is wonderful.” On a typical Saturday, she says, more than 800 people will make a purchase at the Krawczyks’ store, and “during Christmas, we once had over 1,300 customers on one Saturday.”

Since the average sale is $3.50, the key to profitability is high volume. “Location is the single most important element in our business,” says Rosenberg, “because we depend so heavily on walk-in traffic.”

The Krawczyks opened their franchise in September 1991 and had fourth-quarter gross sales of $180,000.

For the Krawczyks, customer service is most important. “Every customer is greeted upon entering the store,” says Lorrie, “and we treat everybody–including little kids–like kings.”

Rosenberg says the franchise’s training program helps the franchisee learn the benefits of good customer relations.

“Our store will draw in the customer,” says Lorrie, “but it’s our service that will get them to come back.”

Start-up costs for a Candy Express run just under $200,000. The franchisor helps with site selection and lease negotiation. The business is so location-sensitive, Rosenberg says, that “it is essential to help the franchisee with that area.”

Top-notch customer service, quality products and services, and reasonable prices are behind the success of most franchises. In addition, some companies have highly specialized tactics for prospering in the recession. One such tactic is capitalizing on consumers’ love of nostalgia and hobbies.

“Aging baby boomers and their love of crafts and demand for home-decor products prompted us to move in that direction,” says John Menzer, executive vice president of Ben Franklin Retail Stores, Inc.

Based in Carol Stream, Ill., Ben Franklin has more than 225 franchise craft stores, and the company plans to grow by 20 more franchised stores and six company-owned stores this year.

Other franchised firms that zero in on baby boomers’ interests are Wild Bird Centers and Great Golf Learning Centers.

Wild Bird Centers, based in Cabin John., Md., specializes in selling products and food for wild birds. Says founder George Petrides: “If the birds don’t like [the products], we don’t sell them.”

Great Golf Learning Centers, headquartered in Blackwood, N.J., gives weekend golfers a leg up on their games. Customers undergo a personal analysis of their golf swings and then choose the kind of training program that best fits their needs.

Meeting an emerging trend head-on is Dan Rhode’s approach to franchising success. Last year, Rhode started Hometown Auto Service, in Jeffersonville, Pa., after spending 26 years in franchised businesses specializing in automobile painting and refinishing.

The corner gasoline stations that offered everything from an oil change to a brake job have been disappearing, Rhode says. “There were 220,000 full-service stations [nationwide] back in the ’70s. Today there are fewer than 40,000.”

Hometown Auto Service is a return to the old days of one-stop automobile maintenance. “People want value for their dollar,” says Rhode, “We want to be the ‘family doctor’ for our customers’ cars.”

Behind each franchisee’s efforts to attract and retain customers is increased attention by the franchisor to programs aimed at helping franchisees meet their goals.

Attention to details is a trend throughout franchising–and one that appears to enhance a business’s chances for survival and success in an economic downturn.

Moreover, when the franchisee receives substantial support from the franchisor, the ultimate beneficiary is the customer.

Businesses that do best when the economy is n a recession appear to be those that adhere to the fundamentals of sensible retailing–particularly the rule that you must pay attention to the customer.

Says Mamma Ilardo’s Joseph Simone: “Our competition is any company that sets no limit on satisfying the customer and puts out a superior product.”

More and more franchisors are beginning to share a view similar to Simone’s, and the notion that “the customer is always right” may prove to be one of the most important survival tactics of this recession.

COPYRIGHT 1992 U.S. Chamber of Commerce

COPYRIGHT 2004 Gale Group

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