Franchising Fever

By Janice Castro

It is a time-tested way to build a big company. First come up with a good product or service and give it a catchy name. Then recruit an army of entrepreneurs to carry that name into cities and towns all across the U.S., or even the world. The phenomenon is known as franchising, and it has created millionaires galore and made empires of McDonald's, Holiday Inn and Baskin- Robbins.

Franchising may be a century-old idea, but it has never seemed fresher or hotter than in the U.S. of 1987. The business strategy that peppered the land with Golden Arches is in the midst of an unprecedented boom. Never have so many would-be tycoons turned to franchising, and never have they found so many would-be store owners lined up to buy a franchise. No longer limited mainly to fast-food outlets, auto dealerships and motels, the chain-store concept is spreading to an amazing array of goods and services. Consumers in a growing number of cities can get a haircut at Hair Performers, buy hearing aids at Miracle-Ear, do their laundry at Duds 'N Suds, have their homes cleaned by Maids International and get an auto "engine shampoo" at Tidy Car, seek business advice at Priority Management Systems or lose weight at Suddenly Slender and Designer Body spas.

As new franchise operations have popped up, many established chains have been enjoying explosive expansion. The number of Meineke muffler shops has jumped from 390 to 541 since the end of 1985, while Domino's Pizza has increased the size of its chain by 38%, from 2,839 to 3,921 restaurants. The Super 8 Motel network has grown from 323 locations to 446 during the same period.

Commerce Department figures show that franchising is growing at an extraordinarily fast pace. Franchises will do $591 billion in business this year, a 77% increase over their sales volume in 1980. Employment in franchising, which was an estimated 4.7 million in 1980, will top 7 million this year, or 6.3% of the U.S. work force. The trend is fueled by legions of workers who see myriad opportunities to start their own business and be their own boss. Says Robert Kushell, a Glen Cove, N.Y., franchising consultant: "The accountant who doesn't want to work with numbers all day, the businessman who's tired of traveling three weeks out of the month, the woman who has stayed home and raised a family and now wants a career -- all these people can find that franchising offers them a process for learning a new career."

Prominent among the ranks of the franchisees are hundreds who have lost their jobs in the recent wave of retrenchment in American corporations. Says John Campbell, chief executive of Franchise Masters, a consulting firm with offices in San Francisco, Los Angeles and Tampa: "Some people want to buy a job. A lot of middle-management people are being displaced, and they've often got a good bit of money from severance pay."

The phenomenon is accelerating so rapidly, says Andrew Kostecka, a Commerce Department analyst, that "franchising will be the leading method of doing business in the 21st century." John Naisbitt, author of the best-selling Megatrends, has estimated that franchising, which now accounts for just over a third of retail sales, will generate $1 trillion annually, or half of all sales, within 20 years.

The successful franchiser and franchisee form a symbiotic relationship that enriches them both. The franchiser can expand a new company without having to borrow huge amounts of capital. Franchisees pay an up-front fee, which usually covers certain training and furnishings, to become part of a chain. The cost is typically lower for companies that do not require much equipment or for chains that are just starting up. The fee can be as little as $9,750 for the business cards and other materials needed to open a Coustic-Glo franchise, which specializes in cleaning ceilings, or as much as $350,000 to open a McDonald's. Some franchisers assist with the start-up financing.

Once they are established, the owners of the outlets represent a regular source of income to the parent company, since they generally pay it a percentage of gross revenues and often share advertising and promotion costs as well. A Super 8 franchisee, for example, pays the firm a royalty of 4% of gross room revenues and contributes an additional 2% toward system-wide advertising.

In return, the franchisees often get a slew of benefits. They may buy not only a product or a name but a whole image and way of doing business. Many companies help their franchisees with almost every aspect of the operation. Says Stanley Williams, assistant director of communications for the Washington-based International Franchise Association: "The typical person starting a small business may be a good mechanic, cook or barber, but he doesn't know how to pick a location, buy supplies, hire and train workers and do his taxes. Franchising supplies this expertise."

The parent company may provide the architectural plans for the construction of the store, the uniforms for the workers and prizes to be used in promotional giveaways. Perhaps most important, many franchisers offer name recognition backed by advertising razzle-dazzle. Each of the 2,600 Taco Bell outlets in the U.S. has benefited from the chain's national TV campaign starring Chicago Bears Quarterback Jim McMahon.

Behind every thriving chain, of course, is an innovative, or at least appealing, idea. Daniel Bishop and five other commercial cleaners founded Omaha-based Maids International in 1979 to provide housecleaning services to busy working couples. The partners devised a team-cleaning approach in which four people can complete 25 basic jobs, from vacuuming and dusting to changing linens and washing windows, in less than an hour. Average charge: $55. Maids International teams working for 197 franchises now clean more than 10,000 homes in 33 states, the District of Columbia and Canada every month.

In many cases, personal experience or frustrations give franchisers their golden ideas. Women at Large, a chain of gyms for larger-size women, was started three years ago by Sharlyne Powell and Sharon McConnell, two athletic women of ample proportions themselves. Both had felt uncomfortable taking aerobics classes full of skinny people and being taught by equally slender instructors. At the ten Women at Large salons, from Canada to Tennessee, customers are encouraged to relax and think positive. Clients weigh an average of 175 lbs., and the instructors are equally full framed. Each Women at Large gym sells a line of stylish leotards and leg warmers in hot pink and other fashionable colors. The sizes, of course, are suited to women who weigh up to 450 lbs. The company is now marketing a one-hour workout video featuring heavier women. Price: $39.95

Sometimes franchisers launch a company simply by making an old product better. In 1982 Ted Rice, a Kansas City TV cameraman, brought home a cinnamon roll he had bought from a vendor and asked his wife Joyce, a schoolteacher, if she could make a tastier one. After she came up with a delicious specimen topped with streusel and a thin layer of vanilla icing, they tried selling her rolls at state fairs and arts-and-crafts shows. When long lines started to form, they knew they had a hit. The Rices opened their first T.J. Cinnamons shop in Kansas City 2 1/2 years ago, and have since opened seven more in the area and sold 133 franchises in 42 states.

Often it is not the basic product or service that is appealing but the atmosphere in which it is provided. Phil Akin was working his way through Iowa State University in 1983 by installing coin-operated machines on campus when he decided to start his kind of launderette, a place where people could get a cold beer or play a hot game of eight ball while they waited for their clothes to dry. Akin opened the first Duds 'N Suds store, complete with pool table and bar, with a $120,000 loan from an Ames, Iowa, bank. Since then, Akin has added eight launderettes of his own and sold 56 Duds 'N Suds franchises in 27 states. The entertainment features are left to the tastes of the franchisees. Several Duds 'N Suds outlets show movies, and the three in Nevada have slot machines, naturally.

No matter how good the concept, it must be well executed. Experienced franchisers warn that the potential franchisees must be carefully screened, since the future success of the company depends on their reliability and hard work. Says Victoria Morton, founder of Denver-based Victory International, which franchises the Suddenly Slender and Designer Body weight-loss centers: "It's like marriage. We have to like and trust them, and they have to like and trust us." Dan Stamp, founder of Priority Management Systems, a Vancouver-based chain that helps executives organize their time, says he looks for "high self-esteem" in his franchisees.

To ensure consistent quality, some franchisers set up elaborate training programs. I Can't Believe It's Yogurt, a chain that will soon have 115 yogurt parlors in 25 states, has set up Yogurt University at the company's Dallas headquarters. Similar to McDonald's Hamburger U., the school gives new franchisees a ten-day indoctrination into every aspect of the business, from how to choose a good location for a store to how to make yogurt the company way. During the final stage of training, students go into franchise stores where instructors observe as some prospective franchisees play the parts of salespeople while others act as temperamental customers. The object: to show the students how to handle unexpected demands.

Still, efforts to impose too rigid a formula can backfire. Says the Commerce Department's Kostecka: "Some of the biggest disputes arise because a franchisee doesn't want to follow the system." To foster creativity and diversity, Hair Performers, a 240-shop chain, encourages its franchisees to fashion their own hairstyles. Owners like Bill and Peggy Howard, who run a Hair Performers shop in Atlanta, take pride in the awards that their stylists have won in hairdressing competitions.

Just as the franchiser should check out the potential franchisees, the reverse also applies. Consultant Kushell gives this advice to would-be shop owners: "Talk to existing franchisees who have lived with the system for a period of time, and make very sure that the franchiser loves them as much in June as he did in January. Talk to people who have been in the system three, five or ten years." Kushell also suggests working in an established outlet for a day or two.

For all the potential profits, running a franchise is arduous work and not a task for a halfhearted investor. Donita and Bill Rachell worked twelve to 14 hours a day for months while establishing a Maids International operation in St. Louis, training the cleaning teams and soliciting clients. Says she: "It's a lot of headaches, I wouldn't kid you about that, and it tries your patience some days. You're giving up the security of a paycheck, and you put everything you worked for on the line."

Franchisers show no signs of running out of ideas. The newest hot concept is piggyback franchising, in which stores operated by one chain also sell the products of another franchised firm. Baskin-Robbins ice-cream counters, for example, can now be found in 15 Wendy's restaurants. Three Dairy Queens sell Mister Donut products. 7-Eleven stores, which already peddle their own sandwiches and hot dogs, now feature Church's Fried Chicken at five locations and Hardee's hamburgers at three other stores. The ultimate strategy in this sort of marketing may be to transform a single franchised store into a micromall.

With reporting by Michele Donley/Chicago and Jane Van Tassel/New York, with other bureaus .