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Franchising in a Recovery
How the recession and slow economic recovery are changing quick-serve franchising.
Inquiries by potential franchisees are on the uptick.

One year since the economic collapse brought restaurant growth to a standstill, some quick serves have started to see signs of recovery.

The burst of the housing bubble last September, which sent the world economy crashing, made expansion nearly impossible. Businesses stopped investing and banks stopped lending. The fallout at Sandella’s Flatbread Café was typical.

“The pipeline didn’t just stop getting filled,” says CEO Mike Stimola. “The whole thing basically flew apart.”

Sandella’s, which is based in West Redding, Connecticut, and has more than 100 locations, averaged 50 franchise applications in each of the first three quarters of 2008. In the next two quarters, the company received close to zero.

“Things just fell off the table,” Stimola says.

But prospective franchisees have recently started knocking on Sandella’s door again. The company received about 30 applications in the last six months, and Stimola says he has “definitely sensed a change.”

But today’s applicants are different. For one thing, fewer are looking to open several locations, Stimola says. Instead, they want to start with a single unit.

“Today we have people who dream about opening multiple locations, but they are much more realistic,” Stimola says.

As for established restaurateurs looking to diversify their portfolios, Stimola says, “We’re not getting any of those guys. Those guys aren’t back in the business today.”

Nonetheless, Stimola predicts Sandella’s will be back averaging 50 quarterly franchise applications within a year.

Craig Dunaway, president of Penn Station East Coast Subs, shares this optimism cautiously. While he expects a 40 percent drop in franchise inquiries in 2009—down to 600 from 1,000 in 2008—he has noticed a late rally.

“From April forward, franchisees started to become aggressive again,” Dunaway says. “I think franchisees reached a conclusion that the worst was behind us.”

Dunaway attributes the mood swing to rising consumer confidence, low real estate prices, and a slight thaw in credit lines. Even with business picking up, he remains leery about the near future.

“I have mixed emotions about the economy,” Dunaway says. “I think the trend upward will continue between now and the end of the year, but the economy right now is so sensitive that one major negative could have a significant impact.”

I think the trend upward will continue between now and the end of the year, but the economy right now is so sensitive that one major negative could have a significant impact.”

A popular theory for the recent uptick in prospective franchisees is that, in the wake of financial calamity, people are looking to seize control of their economic wellbeing.

“They’re saying to themselves, ‘Now’s a good time to be my own boss,’” says Les Winograd, a spokesman for Subway, whose global franchise inquiries in 2009 have already outpaced last year’s.

“What people are doing,” says Dennis Lombardi, executive vice president of foodservice strategies for WD Partners, “is they’re trying to find a job, an income and looking to put their destiny in their own hands.”

And while opening a restaurant remains risky, people seem drawn to a business based on simple logic.

“Because you need to eat every day, the restaurant business, which was always seen as risky, suddenly became seen as a good business,” says Philip Schram, president of Buffalo Wings & Rings, where inquiries have also rebounded.

After launching 23 new restaurants in 2008, Schram started this year averaging just one opening per month. But in April the ratio crawled back to about two per month, another sign the industry might be recovering.

photo courtesy of ©istockphoto.com/Lilli Day
Jordan Melnick is QSR's online exclusives reporter.