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Tight Times Don’t Stop Chain Growth
Chains seize opportunities for expansion even in the face of a recession.
Ritter's Frozen Custard will continue to expand, even in tough economic times

Despite a souring economy and tight credit markets, some quick-service restaurant chains are pushing forward with plans for growth.

Dickey's Barbecue Pit, a 95-unit, fast-casual barbecue concept based in Dallas, plans to increase by approximately 34 units by the end of 2008 and hopes to add 50 new restaurants in 2009. TRUFOODS, parent company of Wall Street Deli, Ritter's Frozen Custard, Arthur Treacher's Fish & Chips, and Pudgie's Famous Chicken, plans to expand all four of its brands during the next 12 months.

Though they and other quick-service chains looking to grow in the near future face formidable obstacles, there are opportunities as well. Sales in the quick-service segment remain strong as customers continue trading down from fine- and casual-dining establishments, and oil and food commodity prices are easing, bringing down operating costs. Though lenders are being more cautious, there's still money available for brands and franchisees with good credit standing, a solid concept, and a sound business plan, says Karen Spencer, CEO of Fran-Systems, an Atlanta-based franchise education and consultancy firm.

"I think for the right brand, this is the perfect time to be implementing a plan and growing," Spencer says. "There are a lot of opportunities."

For starters, the real estate market is beginning to soften, opening the door for restaurants to take advantage of better lease terms and rates for new locations.

"Landlords have finally gotten over their God complex," says Roland Dickey Jr., president of Dickey's Barbecue Pit. "We're seeing a lot less competition for spaces right now, and rents are good."

That, says TRUFOODS COO Stew Stolz, has allowed his company to enter into markets it couldn't afford before, including parts of the New York City metro area.

"We're being bombarded with offers from many different brokers," he says. "People are willing to listen to making a deal rather than have the space empty. It's definitely a renter's market."

Spencer says that trend should continue over the next six months.

Both Stolz and Dickey say they also anticipate that job cuts in other industries will increase the pool of potential restaurant franchisees.

"We have already signed a couple of people, particularly in the car business," Dickey says.

But just because more people are interested in opening a franchise business doesn't mean they have what it takes, Spencer cautions. Franchisors need to keep sales criteria strict so only those who can succeed come on board.

Brands that push forward with growth will also need to be flexible and creative. With 88 Dickey's Barbecue Pit restaurant projects in pre-construction or construction, 12 suddenly lost financing with the collapse of credit markets. To keep them on track, the company had to react quickly.

"We've switched from national lending programs to local and regional banks," Dickey says. "As we're signing new franchisees, we're starting out with smaller banks."

Stolz cites TRUFOODS CEO Andy Unanue's ties to Hispanic food manufacturer Goya Foods, which his grandfather founded, as helping give banks the confidence to continue lending to the company. He says TRUFOODS is also working with area developers who have deeper pockets than single-unit franchisees.

"With the mom-and-pops, it's going to be a little more difficult," he admits. "We're looking into financing them ourselves."

TRUFOODS will also open more Ritter's and Wall Street Deli locations as company-owned units.

With the mom-and-pops, it's going to be a little more difficult. We’re looking into financing them ourselves."

Both Dickey and Stolz say they hope the hoops they jump through now in order to grow will pay off when the economy improves. While it's likely that the going will get tougher, those brands that have what it takes to push forward will benefit, Spencer says.

Mid-level concepts with strong capitalization are especially poised to take advantage of the opportunities at hand, she says. Those that grow now could steal market share from more established competitors down the road.

"A lot of the mature brands have saturated their markets, they don't have a lot of places to go, and they're not attracting a lot of franchisees," she says. "That mid-level group is going to be able to gain a lot of ground."

Newer concepts, however, should grow with caution. Unless a new chain has a lot of money and a strong franchise sales team in place, Spencer says it's best to wait it out.

"I would say stop, get your ducks in a row, and come out franchising when the economy is better," she says.

Jamie Hartford is a regular contributor to QSRmagazine.com.