How do you tell if an emerging regional chain is going to become a strong national brand?

May 24, 2013

I hear lots of local and regional concepts talk about becoming national brands, but the number of times I actually see it happen is much less common. You can probably count on one hand the number of new brands that actually become household names nationally each year. Yet I still I have see many, many people get caught up in the exciting dream of being their own boss without ever really asking the tough questions that can be very good predictors of the future. To my mind some if these questions might be:

  • How much of the current growth is being driven by exiting owners adding additional stores? Are exiting franchisees actively growing and adding new stores?
  • Are existing stores adding additional space to handle the increased volumes they are supposedly building from year to year? What are the comp stores sales trends store by store for existing units for the last few years?
  • What sets apart the successful from the unsuccessful stores? Every brand has both good and the bad stores, so find out what the difference is and how do you fit into that bell curve.
  • Look at the closures list and list of owners who have left the system, along with the lawsuits sections of the FDD. Are they onerous and were these people treated fairly by the company? Every company has some litigation to deal with as a matter of doing business in today’s world. The shear volume and nature of how these issues were resolved tells a lot about the business ethics of the company.
  • What are the actual revenue and cost trends for the brand over the previous few years? Have you taken them into account in your financial projections? How will they impact your future earnings expectations.
  • How does the franchisor make it’s money aside from the normal royalties? What subsidiary companies do they own or operate as profit centers?
  • Ho many company owned stores exist and how aggressively are they adding more? If it’s really a great business you should expect the company to own and build at least 10% of the brand ongoing.
  • How many current franchisees are in default of their development or operating agreements? What is the closure rate and how does it compare with your comfort  level with the risk involved?
  • Does the brand show clear revenue and or earnings claims for the brand? How dos it compare with your needs and expectations?
  • What is and how much has the break even point changed in the past few years and why? Will those trends continue? How many stores operate above the break even point of profitability? Are some markets particularly strong or weak from a revenue perspective?
  • How much upside is there to build revenues and profitability in the future as the brand enters highly competitive and potentially more expensive new markets?
  • Has the senior leadership team of the brand built other national companies, or are they learning as they go? Have they brought on board highly experienced and well respected  resources in all areas of operations, training, marketing, finance, development, D&C, technology, etc.. ?
  • Who is on the board of directors or advisory board for the brand? The top industry insiders are always looking to serve on the board of up and coming national brands and they often have the inside scoop.

Franchise companies like to talk about all of their new openings, but they don’t always talk about the organic growth being driven by the success of their existing franchise partners. I think one tell tale sign of a great company is one where the exiting base of owners is growing and expanding at a rapid pace. Even better is when you see the existing stores adding more space to handle their increased volumes, since this means that they are in reinvesting their profits and are very bullish about the future.

Since we bought Hurricane Grill & Wings just over 4 years ago, our average unit volumes have gone from about $750K/year to over $1.5 MM/year. This type of organic growth is almost unheard of in our industry and is a great sign of things to come for the brand. Because of this organic growth, many of our existing owners are opening new stores much faster than their development agreements require, and many more are adding more space to their exiting stores.

A number of years ago I served as a Senior VP of Brand Expansion for Quiznos Subs, which at our peak opened almost 1,000 new stores a year, we never saw that type of organic growth from within. I joined the brand in 1992 and became one of the largest franchisees and area developers in the country. When I first joined the brand they were just a Colorado based concept with about 25 restaurants. When I left the company in 2006 we had over 5,000 stores in 28 countries, and were still growing quickly. I had been brought on board corporately to help accelerate the growth of the brand to new heights, and we enjoyed unprecedented success over the years. We sold franchises and opened stores at some of the fastest rates the industry had ever seen for an emerging national brand. The vast majority of that growth was from new owners entering the system, but most owners never went beyond owning one or two stores at most. Unfortunately depending entirely on new people joining the system is unsustainable and unhealthy, and eventually catches up with the brand as it did with Quiznos a few years after I left. I and a number of my colleagues were asked to come back a few years later to try to relaunch the brand. Although we were able to re-open hundreds of stores and kick started substantial new growth, it was too late for the brand and I don’t think that Quiznos will ever reach it’s former status of being an industry leader.

Below is a photo of one of our Hurricane Grill & Wings that just added a new patio and is throwing a big Memorial Day weekend party to celebrate. An huge percentage of our brand has expanded their existing stores over the last 2 – 3 years, and they continue to open new stores at a rapid pace. We are now opening new stores nationwide at a pace of 2 – 3 a month, and expect to continue on the growth rate of around 35% or so for years to come. We believe that to be a very healthy and sustainable growth rate given the tremendous support we provide to each and every new and existing franchise partner in our system.