Franchising in Montana more profit for less risk?

Since the first settlers made their homes among the trees and upon the prairies, Montana's economy has relied on the entrepreneurial spirit. Today, entrepreneurs continue to change the face of Montana marketplaces, with franchised businesses joining--and oftentimes, replacing--the traditional morn-and-pop shops.

Chances are the new coffee and doughnut shop, dine-in restaurant, and

fitness center opening in your city are part of nationwide franchises. Montana Business Quarterly has watched this evolution and has talked with a number of entrepreneurs who invested in franchised businesses. How did they decide to contract with a particular franchisor? Are they succeeding? Is franchising worth the loss of managerial independence ?

A Safer Bet?

"People wonder why we don't see more of the franchises we see in other states," says Jeff Sha, a professor in The University of Montana's School of Business Administration. Because trends seen elsewhere are almost always precursors to eventual growth in Montana, expect new franchised businesses, he says. Be patient, Shay counsels. They're coming.

At UM, Shay teaches entrepreneurship at the undergraduate and graduate levels, and includes franchising in his coursework. Shay received his bachelor's degree in business from Babson College and earned his doctorate at Cornell. He also teaches during the summer at the London School of Economics.

"A lot of people don't consider franchising a form of entrepreneurship," Shay says. But it is, he insists. "It just takes some of the risk out."

In one of his UM entrepreneurship courses, Shay explains what franchising is and isn't. He quotes author William D. Bygrave, who defines a franchise as a "business opportunity by which the owner, producer, or distributor (franchisor) of a service or trademarked product grants exclusive rights to an individual (franchisee) for the local distribution of the product or service, and in return receives a payment or royalty and conformance to quality standards."

That one definition applies to two types of franchises: the business model franchise and the product distribution format. A "business format" model is by far the most common, offering the person buying into the franchise use of a trademark and logo, as well as access to a proven way of doing business.

In fact, it's Americans' love of recognized brands that has brought franchising to the pinnacle it occupies today. People like knowing that a Grand Slam Breakfast at Denny's tastes the same in Portland, Ore., as it does in Portland, Maine.

A business format franchisee receives assistance in selecting an appropriate, and acceptable, site for the business; hiring and training personnel; setting up the business; advertising; and product supply. For these services, the franchisee pays an upfront fee. Many are contracted to pay an on-going royalty that enables the franchisor to provide continuing training, research, and development.

Shay sees business format franchising as a safer bet for many investors because of the assistance provided from the start. "Why would you reinvent the wheel if someone else has already done that?" he asks.

The product distribution format allows a business owner to be identified with the manufacturer/supplier, such as an equipment dealer. The contracted arrangement is less strict and the franchisor provides far fewer services and less business development support. It is basically a way for an individual business to take advantage of brand recognition.

Montana Business Quarterly found that before the late 1950s, franchising was virtually nonexistent nationwide and in our state. Soft-drink bottlers and gas stations were a few of the first businesses to use the franchise format to sell their products and services.

Franchises Everywhere

The International Franchise Association, the industry's leading trade group, explains that franchising provides entrepreneurs with an affordable way to accelerate expansion and achieve goals more quickly. And all this is accomplished with the investor assuming far less risk. The IFA also points out that franchisees have a head start because of the support provided by the franchisor. Franchising is, the IFA says, "being in business for yourself, but not by yourself."

The IFA counts economic results both inside and outside of franchising, and reports that franchised businesses in the United States produced:

* 18,121,595 jobs, or 13.7 percent of private-sector employment;

* $506.6 billion in payroll, or 11.1 percent of private-sector payrolls, and;

* $1.53 trillion in output, or 9.5 percent of private-sector output.

The IFA Educational Foundation has completed further research showing that in 2000 most analysts estimated that franchises accounted for $1 trillion in annual U.S. retail sales from 320,000 small businesses in 75 industries. Moreover, they say franchising accounts for more than 40 percent of all U.S. retail sales. Those analysts estimate that franchising employs more than eight million people, a new franchise outlet opens somewhere in the United States every eight minutes, and about one in 12 retail business establishments is a franchise.

But franchising's reach extends well beyond the United States. Entrepreneur Magazine recently reported that franchising is now a global contender--even though it was virtually nonexistent when Entrepreneur published its first Franchise 500 list in 1980. The IFA notes that during the past decade, almost half of all units established by U.S. frachisors were opened outside of this country.

In Montana, 2,974 franchised businesses employed 31,370 people in 2001, with an annual payroll of $587 million. The IFA also estimates that more than 57,000 Montanans were employed as an indirect result of those franchises operating in the state. That equates to 15.5 percent of Montana's work force, which is higher than in many states. IFA research shows that jobs created by franchising account for at least 10 percent of a state's private-sector work force in 46 states.

PostNet

As his newly opened Missoula franchise, PostNet, John Yovetich is not counting employee numbers yet. The 1985 University of Montana graduate and his wife, Linda, are operating their packing, shipping, and printing business with just one part-time employee until volume increases. The couple recently returned to John's native Missoula after he was laid off from a high-tech job with IBM in Arizona.

"Since I hadn't run a business before, I thought a franchise was the answer," Yovetich explains. He first looked into fast-food franchises like sandwich shops or Mexican restaurants. The research showed him that those options would come with a tremendous task of work force management.

Shipping businesses then grabbed his interest. But his No. 1 competitor, The UPS Store (formerly Mail Boxes Etc.) was not for sale in Missoula. When he found that the PostNet franchise was available in Missoula, he inquired. PostNet is second only to The UPS Store in their business category. With The UPS Store offering limited shipping options, he thought PostNet could be a good competitor by offering Federal Express and U.S. Mail services. Copying and printing are also provided.

When investigating PostNet, the Yovetiches paid particular attention to the Uniform Franchise Offering Circular (UFOC). This document fulfills a federal mandate by requiring that franchisors provide a disclosure document for any prospective franchise purchaser before he or she buys a franchise. The UFOC discloses required fees, basic investment, bankruptcy and litigation history of the company, how long the franchise will be in effect, a financial statement of the franchisor, and earnings claims.

"It was overwhelming. There was just so much information," Yovetich says of the UFOC. "It really helped me fine-tune a budgeting process and my initial investment." After digesting the information, the couple was willing to comply with the corporate controls and procedures, and felt secure that they would receive the security, training, and marketing power of the franchised trademark. Since opening last May 27, PostNet's business is roughly 60 percent packing and shipping, 30 percent copying and printing, and 10 percent retail purchases. "I would prefer it to be at least 60 percent copying and printing," the 42-year-old entrepreneur admits. "That is the vision of PostNet as an entity."

Though the corporation does steer its 850-plus franchisees toward specific goals, Yovetich says it was essential in getting his business "on the ground" before it could get off the ground. PostNet assisted with finding an ideal location with high traffic volume. "I had to have North Reserve," Yovetich says. "This was absolutely my first choice." The franchisor then oversaw the "build-out" in which the 1,310-square-foot retail space was fully assimilated into a true PostNet location, right down to the signage, light fixtures, shelving, and floor covering.

Now that the store is open, it is up to the Yovetiches to bring in customers and keep them coming back. "We're finding that it's just taking time to get the name established," he says.

Great Clips

Across the state, in Billings, another couple has returned to Montana and turned to a franchised venture for investment. After 28 years operating a wholesale distribution business in Minneapolis, Dennis Stevens returned to his home base in Red Lodge with wife Nancy to ranch while looking for a business opportunity. It wasn't long before the couple began hearing "rumblings" that people were inquiring about opening a Great Clips franchise in Billings.

Great Clips Inc., headquartered in Minneapolis, is one of the largest franchisors in the nation's $50 billion-a-year hair-care industry. And the Stevenses were very familiar with the company, as Dennis Stevens' brother-in-law and sister established Great Clips in 1982.

"They are Great Clips," Dennis Stevens says with a laugh. They still own salons in Minnesota, while Stevens' brother owns 13 salons in St. Louis and Minneapolis. His niece also owns two salons in Minneapolis.

Competing with chains like Fantastic Sams and Cost Cutters, the founders perfected a system for delivering competitively priced, high-quality haircuts and perms to men, women, and children. The company began franchising in 1983, and today boasts more than 2,000 salons in 114 markets across the United States and Canada.

Offering the seven-day convenience of "no-appointment" services, Great Clips salons are primarily found in strip shopping centers. Each features a nautical motif environment designed for customer privacy. Salons employ professional stylists who receive advanced training at one of 56 Great Clips training centers.

"We thought we'd better throw our hats into the ring before someone else did," he explains. Montana has Great Clips salons in Billings, Bozeman, Helena, Butte, Missoula, Kalispell, and most recently Great Falls.

Though the Stevenses might have made a simple phone call to their family to guarantee themselves the Billings stores, they didn't. "I filled out the forms just like everybody else," says the 50-year-old entrepreneur, who acknowledges that his experience in the hair-care industry was limited.

"I had no knowledge of hair cutting or a salon," he notes. "Just getting our hair cut like everybody else." What Dennis Stevens did have was the management and personnel development skills essential for owning a business. At most Great Clips salons, day-to-day management is handled by certified managers--not by the stylists.

Once the couple had company approval, the franchisor helped with site selection, building-out the salons, operations, and arranging training sessions in Billings for the newly hired employees. "We had to find 20 stylists who had never heard of us," Stevens says. It is the Great Clips policy to have each stylist and manager attend training before beginning work.

"We did something very unique; we opened two stores the same day on the west end," Stevens explains. "We wanted market penetration. We made a big splash." Those first two Billings Great Clips stores opened on May 23, 2003. The third opened in the Heights the day after Thanksgiving last year.

Great Clips has about 25 employees in its three Billings locations. Each salon has a manager and two assistant managers, which ensures that one works each shift. "Because no one had heard of Great Clips, the first four or five months were more of an investment than we anticipated," Stevens admits.

Advertising expenses substantially exceeded expectations. Once the three stores were open, though, the Great Clips name took hold in Billings. "People started knowing about us," he explains. During the franchise's first 10 months in Billings, three other national-brand salons closed their doors.

"That is very good for being open one year, Stevens says. "In our salons, we are going to grow organically. We are going to keep bringing them back." His Billings stores combine for about 400 haircuts per week, which he says is a sign of success. "That's very good for being open a year," he says.

Fudruckers

Even if a franchise has proven successful in every market area, UM professor Shay says some investors shy away because they can't picture themselves actually running the business.

Shay explains the difference between "being in the business of running restaurants and being in the restaurant business." People in the business of running restaurants have usually invested in several stores and have hired capable managers to oversee the daily operation. Those in the restaurant business are generally on-site, greeting people and handling every aspect of business operations.

In Missoula, Russ Klare is a little of both. Eleven years ago, the restaurateur decided he was tired of working for other people's benefit. He and his wife of 23 years, Patsy, had the talent and dedication to break out on their own, but needed guidance.

Today, they own and operate a Fuddruckers restaurant and the adjacent Patsy's Casino on North Reserve Street in Missoula and the Fuddruckers in Southgate Mall. They also own the building where a Bozeman family operates another Fuddruckers franchise.

Klare started planning his future by reading books on franchising, all of which advised potential franchisees to find something they were familiar with. Klare immediately searched for a franchise committed to serving foods prepared with only fresh ingredients.

"I enjoy good cooking and good eating and good food," Klare says. For 16 years, he worked for a multi-unit, family-owned restaurant chain in western Montana. He worked at four stores in 16 years and spent his last 13 years managing one location. He had previously worked for a major grocery chain, as well.

He mailed 25 letters of interest to various companies and received few responses. However, one company that did respond personally within three days was Fuddruckers. "We didn't even know what it was," the Klares admit.

They quickly drove to Spokane to check out the store there, but couldn't find it. One week later, they headed to the Fuddruckers in Billings. "They didn't even know we were there," he says. "We just left."

In the following days, Klare kept thinking of the fresh ingredients he saw being used at Fuddruckers and knew the business format would work in Missoula.

"So back to Billings we go," he adds. They had a formal meeting with the owners and an official tour. He returned to Missoula where he spoke with his father, who was looking to invest. "My dad said, 'Let's just see how far we can go,'" Klare remembers. "We took our business plan to the bank and asked for $1 million, submitted a balance sheet, and were turned down."

But Klare was determined. He just knew a restaurant on North Reserve would work. "I saw stuff," he recalls. "When I saw five banks building [on North Reserve], I said, 'Something's going on. Banks don't just build anywhere.'"

He contacted Fuddruckers' corporate offices again, and they sent a representative to Missoula to look at two North Reserve sites. Together, they decided upon an acceptable location. The franchisor provided a business plan outline, which Klare fine-tuned with his information. The second time he went to the bank, the application was reviewed at a Billings branch, which also worked with the Fuddruckers there.

"Within three weeks, we were good to go," Klare says. He and his father worked as general contractors and built the 4,800-square-foot North Reserve restaurant with an additional 620 square feet for a bar. In December of 1995, they received their full liquor license, which only took six weeks to be approved. It came in the mail on Friday before their Monday opening.

Patsy Klare admits: "It was tough at times. We were scared to death." Her husband adds: "It still is. We knew what we were getting into."

Fuddruckers sent a representative to be on-site during the first week of operations. On the seventh day when the trainer left, Klare remembers, "That was the worst day of my life." Though he had managed restaurants, he lacked experience with purchasing contracts, vendor relations, and marketing.

"The biggest challenge was learning how to market," he notes. "I never had to worry about any of that. And budgeting? To this day, it is a challenge."

But with the high brand recognition and corporate support, the Klares have come out on top. He is especially grateful that the franchisor handles all purchasing, which is negotiated directly with high-quality, name-brand manufacturers for nationwide delivery through a local provider.

Franchisor support also comes each year during the franchise convention, where Klare takes part in a one-on-one meeting with the head of corporate marketing. "I tell them what I want, and they furnish the materials," he says. One of the ways he learned to market was through schools and local community groups.

But not all of Klare's management decisions can be swayed by corporate preference. A few years ago, the corporation started to use a bread mix for its large, chewy signature burger buns. Klare didn't like it, so he continued in his original, early morning method of mixing flour and yeast. He finally switched when the mix was refined to his standards.

In 1998, the Fuddruckers corporation was purchased by Michael Cannon and Bryce King, who had a vision to invigorate the Fuddruckers appeal. The $43 million deal offered franchisees the option to purchase an interior design package that included neon signs, Hollywood memorabilia, and sporting items--all reminiscent of a British pub.

Klare embraced the innovative design for his Missoula stores; the Bozeman franchise has yet to make the switch. Corporate-wide, the switch brought a 20 percent increase in sales. Klare saw a nearly 25 percent increase at his stores. "It adds so much excitement to this place," he says of the design package, which initially cost franchisees between $10,000 and $30,000 depending on the items bought.

Another milestone came three years ago when the Klares added a second store in Missoula's Southgate Mall. The move was meant to "divide and conquer," Klare says. He didn't immediately conquer, however. He spent the first year-and-a-half looking for the right management mix for the mall store while Patsy stayed on North Reserve. Last spring, he came back to manage his first store and is "letting the mall run itself with hourly managers."

Last April, the Klares made another expansion by taking their bar area adjacent to the restaurant and turning it into "Patsy's Casino." Though the bar is separated from the restaurant seating and accessed through one interior and another exterior door, he didn't want it to affect the restaurant's family atmosphere. Klare was hesitant to add gambling machines for many years, until other businesses began to approach him about leasing the space for a casino. "You don't know what you've got until somebody else wants to buy it," he explains. He knew he had to finally make a decision to keep the full liquor license and add gambling, or sell that license and stick with a strictly beer-and-wine "cabaret" license. He is happy with his final decision. "It's actually making money since it's been open," he said.

The Klares' business divisions in Missoula have a combined work force of about 40 people ranging in age from 16 to 60. Klare is known for always asking student employees about their grades and knowing when too much work is taking away from school responsibilities.

Flip Side

Though government entities like the Federal Trade Commission are seeing less fraud and deception within the franchise industry, franchisees remain leery. Franchisors are also showing more caution in determining who will be a good fit to own a part of their company. They find it far more efficient to grant franchises only to sophisticated corporations or to existing franchisees whose experience suggests future success.

In his UM courses, Shay lists several reasons for franchise failure, from bad location and inadequate capital to weak organizational structure and changing consumer tastes.

According to Entrepreneur Magazine, the average rate of failure for new businesses is 65 percent during their first five years. A recent study prepared by the IFA reveals that a little more than 3 percent of franchised units (varying by industry segment) suffer "turnover" in any given year. They define "turnover" as closure of the store or sale to a non-franchised purchaser. And even these low figures may be inflated, since a franchised unit may be closed or sold for reasons other than "failure," such as death or retirement.

In another survey conducted by The Gallup Organization in 1997, 92 percent of all franchise owners said they consider their franchises to be either somewhat or very successful, and 65 percent said they would repeat the investment in the same franchise if given the chance.

Future Franchising

Read Entrepreneur and Forbes magazines and it is apparent that as long as a business caters to today's busy consumer, success is nearly certain. A hurried and harried working morn or dad will happily spend their money on any product or service that makes their complicated lives a little easier. Endeavors aimed at easing daily tasks for the aging population are just as promising.

According to the IFA Educational Foundation, franchise-industry categories expected to continue to experience rapid growth for the start of the new century are service-related fields such as home repair and remodeling, carpet cleaning, household furnishings, and other maintenance and cleaning services. The IFA also expects growth in support services, including accounting, mail processing, advertising service, package wrapping and shipping, personnel and temporary help services, and printing and copying services; automotive repairs and services such as quick-lube and tune-up; and other areas such as environmental services, hair salons, health aids and services, computers, clothing, children's services, educational products and services, and telecommunications services.

In a report last January, Entrepreneur Magazine looked at what the next 25 years may hold for franchising. In addition to the continued growth in service sectors, they foretold several dramatic developments, including the expansion of multi-branding, in which one franchised unit sells many branded products or services.

For instance, Yum! Brands Inc., which owns A&W, KFC, Long John Silver's, Pizza Hut, and Taco Bell, has more than 2,000 multi-brand restaurants worldwide, generating more than $2 billion in annual sales.

Entrepreneur also expects to see some business segments turning to franchising for the first time, including hospitals, health-care providers, investment advisers, the retail bedding industry, and specialized health-care facilities such as detox clinics and weight-loss outlets.

Franchise Facts

* There are 767,483 franchised business establishments in the United States. Franchised businesses provide 9,797,117 jobs and employ 7.4 percent of the national private-sector work force.

* Franchised businesses supply an annual payroll of $229.1 billion, or 5 percent of all private-sector payrolls in the United States.

* Franchised businesses produce goods and services worth $624.6 billion per year, or 3.9 percent of private-sector output in the United States.

* In every line of business, there are more establishments that are owned by franchisees than by the franchisor.

* Business Services accounted for more establishments, met a greater payroll, and generated more output than any other single line of business. Quick Service Restaurants hired more people.

* Franchised establishments are the greatest percentage of all line-of-business establishments in Quick Service Restaurants, Lodging, and Retail Food.

Source: 2004 IFA Educational Foundation.

Best Performing Francises

Here's a look at franchising's All Stars, based on how often they've been ranked in Entrepreneur Magazine's annual Franchise 500 listings.

1. McDonald's

2. Subway

3. Burger King

4. 7-Eleven

5. Domino's Pizza

6. Hardee's

7. The UPS Store (formerly known as Mail Boxes Etc.)

8. KFC

9. Jani-King

10. Baskin-Robbins

Fastest Growing Franchises

These are the fastest-growing franchises, according to the February 2004 edition of Entrepreneur Magazine. The rankings are based on growth in the number of franchises from 2002 to 2003, as verified in Entrepreneur's 25th Annual Franchise 500.

1. Subway: submarine sandwiches and salads

2. Curves: women's fitness and weight-loss centers

3. 7-Eleven: convenience stores

4. Kumon Math & Reading Centers: supplemental education

5. Jan-Pro Franchising Int'l. Inc.: commercial cleaning

6. Quiznos: submarine sandwiches and soups

7. Jani-King: commercial cleaning

8. Coverall Cleaning Concepts: commercial cleaning

9. Liberty Tax Service: income tax preparation

10. Jazzercise Inc.: dance and exercise classes

11. RE/MAX Int'l: real estate services

12. Jackson Hewitt tax Service: Income tax preparation

13. Choice Hotels: hotels, inns, suites, resorts

14. WSI Internet: Internet services

15. Dunkin' Donuts: donuts and baked goods

Amy Joyner is a reporter for the Montana Business Quarterly.