‘Casual’ investors serious about niche franchising

‘Casual’ investors serious about niche franchising

Dina Berta

A sour economy and unstable stock market are driving an increase in franchise interest in regional and smaller casual-dining restaurant chains as investors look for sounder places to put their money.

“The rhythm is picking up, not going down,” said Ray Cabana, president and chief executive of Buffalo’s Franchising Concepts Inc., the Marietta, Ga.-based owner of Buffalo’s Southwest Cafe.

“We’ve seen this happen in previous time frames when companies restructured. There’s a core of quality people who have the attitude of ‘I want more control over my life.'”

Buffalo’s, which started franchising in the 1990s after opening its first store, has 10 company-owned stores and 43 franchised stores.

“Right now there seems to be a lot of interest, and I think it’s driven by people moving money, although I can’t support that empirically,” said Bill Taylor, Buffalo’s vice president of franchising. “We saw this in the early ’90s, with people taking early retirement from companies like AT&T and IBM. In the beginning we had an early mix of nonfoodservice people.”

Although many franchising territories for national casual-dining chains are sold out, smaller, regional companies still offer an avenue for the investor, industry observers said.

While casual dining may have fewer franchising opportunities than the fast-food segment has, and it requires a greater financial investment, such concepts can be a steadier investment, said Joel Holsinger, senior engagement manager for Navigant Consulting Inc., an economic and consulting firm in Atlanta.

“Casual dining is still probably the safer option,” Holsinger said. “What no one knows right now is who is going to shake out with fast-casual. There are a lot of great concepts now in that category — Mexican, Asian and bakery. It’s like back in the 1950s, when all the fast food was starting. Who’s to say who’s going to be the Arctic Circle and who’s going to be the McDonald’s?”

The casual-dining chains that are most actively franchising are those with fewer than 100 units, he said.

“When you get to 250, 300 units, those companies pretty much have their franchisees,” Holsinger said. “It’s very hard to get into those concepts. There are limited opportunities.”

Among the more active franchising chains are Johnny Rockets, CiCi’s Pizza, Buffalo’s and Johnny Carino’s, according to operators and observers.

Louisville, Colo.-based Old Chicago would also like to join that list, said Buck Warfield, the chain’s vice president of franchising.

Old Chicago, owned by Rock Bottom Restaurants Inc., has 50 company-owned stores and six franchised units and plans to open at least eight more franchised eateries this year, including three by new franchisee Restech Partners Inc. in Willmar, Minn.

“After a year of research, we felt Old Chicago had the best opportunity for us in franchise territory and bottom-line success,” said Joe Cody, who heads up Restech, which operates a unit in Fargo, N.D.

Most of the established, larger casual-dinnerhouse brands, such as Applebee’s, T. G. I. Friday’s and Chili’s, have sold out of their franchise territories or fully developed their existing agreements, said Cody, who also is a T.G.I. Friday’s franchisee.

Smaller markets also present potential avenues for casual-restaurant franchisees, said Don DeBolt, executive director of the International Franchising Association in Washington, D.C.

“Look at what [a retail concept like] Wal-Mart has done with smaller markets,” DeBolt said. “For some it’s being the right concept in the right place at the right time. A lot of regional [chains] fit into that kind of category.”

Old Chicago is a 26-year-old concept that can be located in either urban or rural settings, Warfield said.

“The brand is identified by traditional design elements — trademark, menu — not by architectural styles, so it can be built from the ground up or retrofitted into an existing space,” he said.

Old Chicago opened franchise units in such smaller communities as Mesa, Ariz., and Coralville, Iowa, in 2002. Restech, which bought out a franchisee in Fargo, also has an agreement to develop parts of North Dakota, South Dakota, Minnesota and Iowa.

Warfield, who had been a Western regional vice president for Darden Restaurants Inc. and helped to open Bahama Breeze branches, returned to Rock Bottom last May. He had worked for the Colorado company for about six years and replaced Bill Hoppe, who initiated Old Chicago’s franchising efforts in 2000. Hoppe is now chief financial officer at Vicorp Inc. in Denver.

Old Chicago’s average unit volume increased some 25 percent in the past four years, Warfield said. Units reportedly average about $2.2 million in sales, according to the Nation’s Restaurant News Top 200 survey in 2002.

For years Old Chicago quietly improved but received less attention than its more visible sister restaurant, Rock Bottom, Warfield said. Rock Bottom was an NRN Hot Concepts! winner in 1995.

“They’re like two sisters; one is a bathing suit model you see all the time,” Warfield explained. “The other is a classic ’50s librarian who takes her glasses off and shakes her hair out. The breweries need great sites and need for a lot of things to come together for them to compete. Old Chicago is very adaptable.”

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