Finding Growth Opportunities Amid A Saturated Franchising Landscape

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While the overall foodservice landscape is getting crowded, operators still see gaps to fill in the marketplace, whether they’re opening healthy quick-service joints or neighbourhood-style pubs. And, since franchising is still an effective growth strategy, expansion is often fast and furious.
“Franchising still seems to be a positive way to grow one’s business if you’re organized or ready to grow,” confirms Doug Fisher, president of Toronto-based FHG International.

There’s a trend toward franchising in general, with many individuals looking to run single-unit franchises, adds Darren Tristano, EVP at Technomic Inc., a Chicago-based research and consulting firm.“For brands like Subway, that’s been a model for success,” Tristano says. “They have gotten enough individual franchisees and enough multi-unit franchisees to build a very large base in North America.”

Some businesses are even re-franchising company-owned stores to improve capital efficiency. For example, Burger King has sold the majority of its restaurants to franchisees, reducing overhead costs. “I think companies have struggled to run their own restaurants,” says Tristano. “But, beyond just trying to get out of operating restaurants, companies [re-franchise], because they don’t have the same passion to run the restaurants as they do [to grow the] brand.”

Fast-Casual Heats Up

Fast-casual chains in particular are increasingly appealing to franchisees, due in part to their strong unit economic models. Specifically, fast-casual concepts offer higher quality food at a higher price point than a typical quick-service restaurant — and on a smaller platform.

“Generally, the overhead remains the same, but the price versus the cost of food and labour is a premium,” says Tristano.
Moreover, fast-casual restaurants offer a lower cost of entry. They typically require a $250,000 to $400,000 investment and can generate food returns of 20 per cent to 25 per cent, says Tristano. “So, those [restaurants] tend to be where investors have been franchising and growing.”
Toronto-based Mexican chain Quesada is one fast-casual concept on a mission to grow. In 2013, the company signed new area developers in Quebec, Alberta, Saskatchewan and British Columbia. It plans to award development rights for the Maritimes and Manitoba this year, too.

There are 20 Quesada locations across Canada, and the company expects to double in size by June. Moving forward, it’s expected to double in size every 12 months until it comprises 300 locations. “We feel there is a very healthy opportunity for expansion in the Mexican segment right across the country,” says Tom O’Neill, president of Quesada Franchising of Canada Corp. “Mexican food in the U.S. is far more developed than it is in Canada — they’re probably 15 to 20 years ahead of us — and we expect that same potential exists in Canada.… People’s palates are more sophisticated, and they want to try different things.”

For Quesada, the biggest challenge is educating consumers about its fresh, high-quality products. According to O’Neill, many people still associate fast Mexican food with a certain unnamed chain. “The initial experience of a lot of people has been low quality, so they now associate Mexican food with that particular product,” he says. “We need to educate them to say ‘Holy cow, this can be really good.’”

 

The New Fast Food

Freshii is another franchisor proving fast food can be good — and good for you. Since opening in 2005, the Toronto-based chain is poised to become one of the global leaders in healthy fast food — an emerging sector with very little competition. “There’s an incredible amount of white space in the healthy segment,” says Matthew Corrin, founder and CEO.

Freshii, which sells made-to-order salads, wraps and rice bowls, added 50 locations globally in 2013 and plans to add another 70 in 2014. It also entered three new countries last year: Colombia, Switzerland and Sweden, and plans to open in eight more countries in 2014. In Canada, Freshii recently opened in two new markets: Regina and Moncton, N.B.; it has also finalized leases in Winnipeg and Halifax.

“What’s fuelling the new store development growth is a collective entrepreneurial spirit around health and wellness,” says Corrin. He adds that menu improvements are fuelling long lineups at Freshii stores, including the Green Wrap (made from a collard green leaf), which now accounts for up to 15 per cent of sales per store.

While Freshii aggressively expands its global footprint, its growth strategy doesn’t involve pinpointing specific cities. “We’ve never had a geographic real-estate strategy, much to the chagrin of our supply-chain team,” says Corrin. “Our growth strategy is [based] purely around where great franchise partners find us.”

Corrin says the only real challenge Freshii faces when entering new markets is raising brand awareness. “Most people don’t know who we are, so it always takes time… Once you get to three or four stores in a market, there’s enough brand goodwill where every time you open a store, it ramps up much faster.”

 

Full-Service Ahead

While fast-casual franchises are flourishing, Technomic’s Tristano says growth in the full-service market has been difficult. “Operators in full-service don’t have the capital from their operations, and investors aren’t willing to spend to open up a full-service restaurant, which can cost millions of dollars and not hundreds of thousands.”

But Vancouver-based Browns Restaurant Group, which has more than 20 Browns Socialhouse locations in B.C. and Saskatchewan, sees plenty of opportunity for growth. “There’s a huge gap for the concept right across the country,” says Bruce Fox, COO, who describes Browns Socialhouse as a premium casual restaurant with the feel of a neighbourhood pub.

With just 120 seats and an intimate atmosphere, the brand is built around the theme of socializing. “Chain restaurants tend to be really big, at least 5,000 square feet and up. We’re 3,000 to 3,500,” says Fox. “It’s just a very different experience.” Not only that, the smaller footprint means it’s less expensive to franchise compared to other full-service restaurants. Start-up capital is a minimum of $600,000, and total investment to build is between $1.9 million and $2.5 million.

After 10 years of operating primarily in B.C., Browns Socialhouse is expanding into Alberta and Ontario where there is a huge gap for the concept. The company is working with two multi-unit developers in Ontario, with plans to build approximately 20 locations, beginning in 2015. It also secured its first site in Erin Mills, Ont., where it’s building a fully operating restaurant that will also serve as a corporate training and development site. A regional expansion office will be run out of that facility as well.

Last year, Browns Socialhouse opened its first location in Alberta (Red Deer) and has signed major deals with multi-unit developers in Calgary and Edmonton. “We can fuel our growth through these multi-unit developers, and that’s the difference between trying to do this corporately,” says Fox. “It’s fairly aggressive, and it’s really contingent on how fast we can sign qualified developers and how fast we can find suitable real estate.”

 

The Americans Are Coming

A number of U.S. chains are also in a race to dominate the Canadian market. For example, Virginia-based Five Guys Burgers and Fries entered the Canadian market in 2010 and now has nearly 50 locations in the country; frozen-yogurt chain Menchie’s has approximately 80 units in Canada and Buffalo Wild Wings has 13 Canadian locations.

“U.S. chains have a far higher level of comfort with Canada than they do Mexico or abroad, because the consumer is more similar to Americans than most international consumers,” says Tristano.

But FHG’s Fisher warns many American restaurants struggle when they come to Canada, including Krispy Kreme, TGIFriday’s and Fuddruckers. The main problem, he says, is U.S. chains assume Canada is a mere extension of the U.S. But consumer demographics, as well as the cost of doing business, are different. “We’re a better educated society, and we’re a more health-conscious society,” says Fisher. “We’re a more protected society, especially in terms of our food supply, so the profitability of restaurants in Canada is significantly less than in the U.S.… Our staffing costs are at least 30-per-cent higher.”

Another problem is many chains sell territorial rights in Canada without testing the concept here first. “The idea that the franchisors are coming up and putting all the burden of success on the Canadian franchisees to me is absurd and is not a winning strategy,” says Fisher.
That said, some U.S. chains are thriving on this side of the border. Menchie’s, for example, has been embraced by Canadians in part because of its brand focus.

“We are selling an experience, and that includes everything from our sampling policy to the music selection to the chalkboards [customers can draw on],” says Michael Shneer, master franchisor of Menchie’s Canada and president of Toronto-based Yogurtworld Franchising Corp. He adds that the brand is also thriving here due to its good celebrity following and engagement in local communities.

 

What’s Next?

As competition for the consumer dollar heats up, many wonder what the next hot restaurant franchise will be. Fisher expects to see more movement on the Middle Eastern concept front. “We’re going to see a lot of that food coming into the market,” he says. “It’s inexpensive, it’s very tasty, it’s much less processed, and it’s very fresh.” For example, Dubai-based Just Falafel is opening 200 stores in the U.K. over the next five years and is also looking to expand into Canada and the U.S.

Generally speaking, there’s a movement toward fresher, healthier food, adds Fisher. And, Tristano notes that the U.S. is seeing a lot of growth in made-to-order fast-casual pizza. Chains such as PizzaRev, Pieology and 800 Degrees Neapolitan Pizzeria have an interactive service model similar to Subway’s that allows customers to pick their own toppings before the pizza is cooked in minutes in exceptionally high heat. “It’s customized, fresh and made-to-order at a price point that is very reasonable — $8 to $10 with a beverage,” says Tristano.

Whatever the next hot concept will be, the overall trend toward franchising is a good thing for the industry, says Tristano. “The old school way of thinking was that the company reserved the best territories for themselves and franchised in less opportunistic regions.” As a result, corporate stores performed better than franchised stores. “Today, many brands are opening the doors on all of their company stores and markets. And franchisees whose livelihoods are at stake are more passionate and work harder to generate better results.”

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