Testing what you do wrong
Franchisees looking to buy new brands should ask what types of internal examination a franchisor is putting itself through. A brand that frequently turns itself, figuratively, inside out to find hidden weaknesses will be in a position to adapt deftly to the economic climate. In doing due diligence, franchisees need to see how their own business model and self-scrutiny practices mesh with the brand they’re investigating.
An in-depth analysis needs to include studying data from company-owned stores as well as franchised units. If a franchisor can’t break those numbers out separately, then find out why; any significant difference in operating performance needs to be accounted for. Likewise, if a brand has sharply changed the ratio of franchised to company-owned stores, find out why.
“I believe the business model itself is like an eight-cylinder engine,” Slavin says, explaining the process of self-scrutiny. “You’ve got all these working parts that have to be harmonious.
“We don’t have a dashboard. We don’t have warning lights. In foodservice, by the time we see those signs, it’s too late.”
Slavin says 2009 will be a test of what restaurants do wrong—not what they do right.
“Anything right now that demonstrates excessiveness is incongruent with the mind of the customer,” Slavin says. “Gluttony and excess are over. Customers are going to be focusing on smaller menu items.”
An example he lists as a no-frills performer: Huddle House. It’s got a small building, meaning it needs little real estate. It’s got a limited menu and a steady clientele that feels comfortable dropping around $5 a day, every day, for a meal. That price point means a Huddle House doesn’t have to go in a trendy, newly developed area that, until recently, had been a boiler of over-leveraged real estate. The ingredients on menu items readily interchange from one dish to the next, meaning simple preparation and fewer supply losses to spoilage or poor preparation.
The back-to-basics approach is more than just a restaurant genre based on the price of a meal. Some industry analysts say the simple meat-n-three will appeal in 2009 to a public reeling from bad economic news. About 2 million jobs were lost in 2008. Consumer confidence fell to record lows. When the National Restaurant Association surveyed households in November 2008, it found that 86 percent were more concerned about the economy than they were a year before, and half were worried about their family’s finances.
“Anything American—simple—will be hot,” Slavin says. “We are going to a point in ’09 where it’s not just back to basics. We are in survival mode.”
Chris Cheek says values are among the reasons Bruegger’s bakery has posted 18 consecutive quarters of same-store sales growth. In 2008 the brand added more franchisees than it did in 2007, and it’s projected to open about 20 stores this year, says Cheek, Bruegger’s vice president of franchising.
“Customers have still found a way to visit,” he says. “They want a better, fresher, healthier choice.”
Financing and real estate
Cheek says when the economic storm started to brew in 2007, Bruegger’s decided it needed to find a way to help interested franchisees secure financing. What was seen at the time as a proactive move has become a model other brands are trying to follow.
The reality of 2009 is that the banking crisis and credit crunch have sharply altered who can get a franchise, expand their franchise holdings, or wait until the financial tide turns.
“We realized at that time that we needed to begin augmenting and adding as many financial relationships as we could for franchisees,” Cheek says. “We knew it would dry up.”
It didn’t just dry up. It vaporized.
Slavin, who’s been in the business 35 years, says he hasn’t seen it this bad since the early 1980s and the era of double-digit interest rates. Johnson, an economist by trade, says this recession is particularly troubling, because it’s affected so many segments of the economy and no one can chart a clear path to recovery.
In 2001, it was clear what caused a recession, he says, and economists could target what would have to happen for recovery. Now, however, the underpinning of the economy isn’t there, and the fundamentals of the world economy are off kilter because of it.
“We simply have to digest the amount of debt we’ve consumed,” he says. “We’re going to have to slowly climb out of this.
“We’re all guilty of it.”