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September 2007 |
Volume 9, Issue 9, Part 1 |
Show Me The Money
One of the most common questions prospective franchisees have when looking at a franchise opportunity is, how much money can you make in this business? It's a reasonable question, especially considering how much you're going to be risking with your investment. But it's not one that is easily answered. It's not as simple as being offered a yearly salary. Here are a few tips for getting to the bottom line.
1. Get professional help. You will need a good accountant to help you crunch the numbers. Make sure you find one that is familiar with franchising in general, and your type of business in particular.
2. Talk to current franchisees. Talk to a range of franchisees from newbies to older businesses. There's a big difference between potential profits from your first year and your 20th. Don't expect them to open their books for you, but if you ask the right questions you can get some good clues. For example, ask if there were any hidden costs or fees that the franchisor didn't tell them about up front or how long it really took to reach a certain profit point.
3. Look at the UFOC. Earnings statements are found in Item 19, but providing this information is optional for the franchisor. What kind of earnings figures might be included depends on the industry. Restaurant franchises, for example, typically state low annual sales, high annual sales, and median sales per franchise. Hotel franchises, typically list average room rate, average occupancy rate, and revenue per available room (RevPAR).
4. Calculate for yourself. When data from Item 19 is withheld, you can calculate average gross sales yourself. Find the total royalty payments a franchisor received in the UFOC (Item 21), then find the percentage of gross sales franchisees pay out as royalties. Calculate the number of fulltime operating franchises excluding company stores. Divide the total royalty payments by the number of franchisees to get an average per franchisee. Finally, divide this number by the royalty rate to calculate the average gross sales per franchisee.
RevPAR is the most important of all ratios used in the hotel industry. It divides revenue by the number of available rooms, not the number of occupied rooms. Because this measure incorporates both room rates and occupancy, it provides a convenient snapshot of how well a company is filling its rooms, as well as how much it is able to charge.
Hotels - Hotter Than Ever
Lodging is not only one of the largest industries with more than 5.5 million rooms worldwide, it's also one of the fastest-growing. In 2006, 150,000 new rooms were opened worldwide - that's an industry record for growth. In our recently released white paper on the lodging industry, Intercontinental Hotel Group (IHG) topped the charts in 2007 with a 3.5% increase in rooms. We talked to Bill Linehan, Global Vice President of Marketing/New Business Development to get his views on what's so hot about the hotel industry.
Q: The hotel industry has defied dire predictions of a downward trend. What's your opinion?
A: There are probably two main contributors to the industry being robust and strong. One is the continued growth of global travel and tourism, which is fueled by population. It's also fueled by global economies that require more and more travel. The second is the use of real estate. Hotels are a very smart use of real estate. There are two primary revenue sources from it - the valuation of the property itself and the ongoing operations.
Q: Is IHG's phenomenal growth as good as it looks?
A: About 2 years ago, our CEO, Andy Cosslett, announced a plan to grow our business by a net organic 50-60,000 rooms by the end of 2008. Net organic means aside from any changes in our inventory levels. We are well on track - in fact we are exceeding our pace on that. Our company is already the largest operator by rooms in the world and our pipeline is also the largest. Our pipeline represents roughly $12 billion of other people investing, because that's primarily all through license agreements, franchising and management contracts.
Q: Also in our white paper, we noticed the RevPAR has been increasing. Is that true for IHG?
A: Yes. As a global company, we're quite diversified in the performance of our brands, market segments, and global segments around the world. So we're seeing strength in RevPAR across the board in all segments and we do see that continuing. We expect more of a climb in occupancies and rates, but primarily rates because occupancies tend to fluctuate from varying changes in supply. Typically in our business, you drive occupancy and then rate, because rate is really where your margins are.
Q: Which IHG brands are performing the best?
A: We have 3800 hotels so that's like picking your favorite child. I think all of our brands have various strike zones. I attribute our growth momentum to a very strong operating system that drives consumer demand into our hotels and strong brands that are very well affiliated with specific consumer sets. Competing systems have a lot of brand blur, there's little difference between one brand to another. And that's not a concept that we believe in. We believe in aligning our consumer sets and consumer needs with consumer offerings with our brands. I think it's that strategy that makes all of them great. Download FranchiseHelp's Hotel White Papers .
 How To Franchise Your Business
By: Mark Siebert
Many entrepreneurs find that franchising is an ideal way to expand their businesses. Because your franchisees are responsible for the investment of each operating unit, the franchisee bears the cost of expansion. And franchisees are highly-motivated because they have invested their own capital in the franchise business.
So are you ready to franchise your business? Here are a few tips:
1. Be sure your business is "franchisable." Before you start to franchise, be sure that your business is, in fact franchisable. First, your business first needs to be salable as a franchise. Ask yourself: Have I received legitimate inquiries? Is the business model unique? Do I have a point of difference? The business must also be replicable. That means it cannot rely too highly on your personal involvement. Finally, and most important, it needs to offer a potential financial return that will allow a franchisee to generate an adequate return even after paying the franchisor a royalty. If you are not comfortable in addressing these questions, speak to a franchise consultant about whether your business has what it takes.
2. Develop a strategy. Franchise success, like success in any business, does not happen by accident. Your goals and your resources will dictate the strategy you should employ and the structure of the franchise offering. Key questions to address will include how to position the opportunity versus franchise competitors, type of franchises offered (start-up, area development, etc.), services provided to franchisees, staffing to provide those services, fees, royalties, and other revenue sources. If these decisions are made without adequate forethought, the franchise may be doomed from the beginning.
3. Take control. Large scale franchise success is all about delivering a consistent consumer experience. In order to do that, you need to be sure that your systems are in place. That generally means comprehensive operations manuals, training programs, and perhaps even training videos. But be careful. The contents of these materials can help shield you from liability - or, if poorly crafted, can create liability.
4. Get Legal. In order to franchise, you need to develop the appropriate legal documents. In the United States, you will need to develop your franchise agreement and Uniform Franchise Offering Circular, and, depending on where you will be selling franchises, you may need to register your franchise offering with state agencies. Don't take shortcuts here. Hire an attorney who specializes exclusively in franchising.
5. Sell it. In order to be a franchisor, you must, of course, sell franchises. And franchise sales starts with lead generation. At a minimum, a new franchisor should budget between $5,000 and $7,000 per franchise sale on media alone. You will also need first class marketing materials such as brochures, videos, website, etc. to support your franchise sales efforts. While selling franchises certainly involves a sales effort, one of the most important rules in franchising is to be selective in the franchise sales process. If you are not confident that a prospect will succeed, take a pass.
6. Make them succeed. In franchising, nothing succeeds like success. If your franchisees are wildly successful, you will find that your franchises practically sell themselves. But if your franchisees fail, no amount of marketing and sales effort will rescue your system. So be sure that you do everything in your power to make your franchisees successful.
Mark Siebert is the CEO of the iFranchise Group, a Homewood, IL based franchise consulting firm.. Learn about the company and its services on www.ifranchisegroup.com or contact Mark Siebert at MSiebert@iFranchise.net.
McDonald's Sales Continue to Soar
 McDonald's Corp. again cited breakfast, beverages and new menu offerings as drivers of a global August same-store sales jump of 8.1 percent which doubled most analysts' expectations. The worldwide increase was fueled by a 7.4 percent same-store sales jump in the United States and a 12.4 percent increase in the company's Asia/Pacific, Middle East and Africa region. Same store-sales at restaurants in the United States, McDonald's largest market, increased 7.4 percent despite a difficult environment that faltered in late June as the sub-prime lending market imploded, leading to a weakened housing market, lowered consumer confidence and fears of recession.
Most analysts predicted that McDonald's would continue posting solid sales results despite these conditions, mainly because of new product launches like the introduction of a Chipotle BBQ Snack Wrap in August and expanded market tests of Angus Third Pound burgers and espresso and iced-coffee beverages. McDonald's singled out Japan, Australia and China as especially good performers and lauded the success of locally relevant menu promotions, extended late-night hours and breakfast in those regions. (Nation's Restaurant News, 9/11/07)
Hilton Expands Pipeline in Emerging Economies
 Hilton Hotel Corp. announced last month a development deal to bring 25 hotels to Russia and Central and Eastern Europe. Hilton struck its development deal with the United Kingdom-based Belgravia Asset Management Limited. Hilton, with Belgravia, will open and manage 25 midprice hotels, comprising 3,000 rooms, in the region under the Hampton by Hilton and Hilton Garden Inn brands.
In June, Hilton announced a similar deal with London and Regional Properties Limited to develop 25 hotels - including the two midprice brands and upscale Hilton, Conrad and Doubletree hotels - in the region. Hilton aims to have 70 of its hotels open in Russia over the next 10 years. (Business Travel News, 9/25/07)
 Carlisle Corp., a nearly 100-unit Wendy's franchisee based in Memphis, has become the fourth entity to express interest in acquiring the Dublin, Ohio-based Wendy's. The company indicated in a local newspaper report that it might team up with an unidentified equity firm to make a bid because the wrong buyer would harm Wendy's through cost cutting. Carlisle, which is developing the $175 million One Beale mixed-use project in Memphis, operates Wendy's units in Mississippi, North Carolina, Louisiana and Arkansas.
Only Arby's parent Triarc Cos. previously had been connected with a proposed price for Wendy's, for as much as $3.6 billion. The 134-unit Wendy's franchisee Cedar Enterprises of Columbus recently expressed interest in acquiring the chain, as did a consortium of four investment firms. That group includes Fidelity National Financial, led by William Foley, a former chairman and CEO of CKE Restaurants; Thomas H. Lee Partners LP; Oaktree Capital Management LP; and Ares Management LLC. Thomas H. Lee Partners earlier participated in the acquisitions of Dunkin' Brands and Aramark. (Nation's Restaurant News, 10/4/07)
Casual-Dining Upgrades Continue Despite Cost Pressures
 Even as more casual dining chains dress up their restaurant and menus to lure greater numbers of affluent customers, there is no consensus on whether the strategy still works. While such chains as Ruby Tuesday, O'Charley's, The Cheesecake Factory and Red Lobster remain committed to broadening their appeal beyond the lower-income guests that have been adversely affected by high gas prices and the subprime mortgage crisis, some upscaling casual dining operators still suffer from slowed sales that have plagued the segment for the past few years despite efforts to do upgrades.
For example, Maryville, Tenn.- based Ruby Tuesday, which began upgrading its burger offerings and adding steaks and seafood entrees to its menu in 2005, recently reported a 4.8 percent drop in same-store sales at U.S. corporate locations for the first quarter ended Sept. 4, while same-store sales at U.S. franchised units fell by 2.9 percent. In response, the company has adjusted its "promotion, value and advertising equation" for the rest of the year. Nonetheless, plans to upgrade the chain's image are moving forward. In addition to more upscale menu offerings, Ruby Tuesday, which has 680 company-owned and 253 franchised locations, is remodeling both the interiors and exteriors of its units. Upgrades to all company-owned units are expected to be finished by March 2008. (Nation's Restaurant News, 10/15/07)
 The franchising business in Singapore continues to be promising with more than 30,000 franchisees operating in the country. The sector currently has more than 420 franchise systems with an annual turnover of 5.48 billion Singapore dollars (about 3.63 billion U.S. dollars). Although a large number of franchised brands are still related to the food and beverage industry, other sectors such as education and childcare are fast catching up.
Singapore's strategic location, with its pro-business environment, offers a vantage point for existing and new franchisors, locally and overseas, who are seeking to expand into the fast growing Asian economies such as China, India, and Vietnam. Through franchising, a growing number of Singapore companies, like Apex-Pal Holdings Ltd which owns Sakae Sushi, the BreadTalk Group, OSIM International Ltd., have successfully exported their entire business and brand concepts outside of Singapore and built a network of several hundred outlets in many cities across the world.
NBA Star Teams Up to Enter Pretzel Business
 Miami Heat center Shaquille O'Neal is entering the soft-pretzel business with Milwaukee's V & J Foods which over the past 23 years has built one of the nation's largest African-American-owned fast-food chains. V & J has formed a partnership with the O'Neal Franchise Group of Miami to run Auntie Anne's soft pretzel shops in Michigan, New York, the Caribbean and possibly South Africa.
V & J opened its first Burger King in 1984 and has been ranked as the largest female minority-owned franchisee in the country. By the end of 2007, a new entity known as VJ & O'Neal Enterprises will open six Auntie Anne's in the Detroit area and is purchasing eight of the pretzel shops in the Buffalo, NY area. The company is also looking at Minnesota, Virginia and Wisconsin. Auntie Anne's of Gap, Pennsylvania was founded in 1988 and has 750 shops in the United States and 950 worldwide. Systemwide sales in 2006 were $293 million. (Mlive.com, 10/12/07)
 
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