Franchise less risky venture for many
Entrepreneurs pay for product recognition and marketing resources

The Herald-Sun, Sunday, May 19, 2002
By ANNE FAWCETT afawcett@heraldsun.com; 419-6642

Four years ago Joe Bastian had no idea that he would end up owning seven Panera Bread Co. restaurants in the Triangle.

Bastian already was planning to move to North Carolina after retiring as the chief financial officer for a Detroit electronic components company.

Then he noticed a new Panera Bread Co. franchise opening in the Motor City. Bastian made some inquiries, and today he holds the rights to all of the Panera restaurants in the Triangle with his wife, Diane.

"I thought it was a great concept. I loved the food, I got intrigued and here I am," the Chapel Hill resident said.

For the Bastians - neither of whom had any restaurant experience - opening a franchise seemed like the safe way to go.

"From a risk standpoint, restaurants are a very risky business and the failure rate is very high," Bastian said. "It's a lot less from the franchise standpoint."

Franchisees own and operate their business using a well-known company's brand - including its name, products and marketing resources. The strategy offers individuals the chance to be entrepreneurs without the struggle to build a business from scratch.

McDonald's is a franchise, as are Choice Hotels International, General Nutrition Centers and Coldwell Banker Real Estate Corp.

Franchise owners must pay not only for the company name, but also for the building and all of the equipment it takes to run the business. Total investments can run into the hundreds of thousands of dollars, with some proven franchises - such as McDonald's - costing more than $1 million to start.

But franchises also can produce hefty revenues.

A McDonald's franchise probably could generate $3 million to $4 million a year, Tillman said. And each of the three Triangle Red Hot & Blue franchises brings in sales of $1.5 million or more annually, said Jim Groot, president of Red Hot & Blue in North Carolina.

Selling franchises is attractive to established corporations because it allows their brands to spread quickly without the company making a large financial investment, said Rollie Tillman, director of the Center for Entrepreneurship and Technology Venturing at UNC's Kenan-Flagler Business School.

Oil companies such as Gulf and Shell built their empires by franchising gas stations, Tillman noted. Last year, lower-cost franchising allowed Subway to pass McDonald's as the largest fast-food chain in the United States.

But not every chain - such as Wal-Mart, Whole Foods or Gap - is a franchise. Some companies choose to own all of their stores themselves. Cookie maker Mrs. Field's decided not to franchise while Marriott International Inc. both franchises and operates hotels bearing its name.

And not every franchise is a national chain.

Amante Gourmet Pizza Corp., a 10-year-old Carrboro-based chain with locations in Durham, Carrboro and Morrisville, plans to sell eight to 10 franchises in the Triangle over the next two years.

"We want to expand and grow and we feel that with the three stores we have now, I'm spread as far as I can be spread," said owner Michael Villopoto.

Villopoto was attracted to franchising because it will allow the restaurants to be owned by people who are active in their communities - whether in Durham, Raleigh, Apex or Wake Forest.

But restaurant experience isn't necessary. Villopoto is looking for energetic people-oriented applicants who can make the businesses thrive. Amante will train franchisees for six weeks in other Amante restaurants and give them materials to help them get a good start. Trainers also will help with each franchise's opening week.

"Considering that we're selling franchises right in our own back yard, we're going to be very selective in how we choose [franchisees]," he said. "In essence, they'll be pampered."

Regular restaurants may have only a 10 percent chance of succeeding, but franchises have a 70 to 80 percent chance, Tillman said. Franchising therefore offers a proven concept for entrepreneurs who aren't familiar with the business they're getting into, he said.

"The main thing you get for a franchise - other than the name and advertising support - is you get an operating manual that teaches you not to make the mistakes other people made before the manual was written," Tillman said.

In addition, franchisees can receive help from the parent company's architect and designer, central purchasing department, accounting system and product development.

Amante's corporate office will help franchisees design their stores, choose their sites and choose their contractors, Villopoto said. Amante will require that the franchises buy from certain food vendors.

Corporate offices also may monitor the quality of their franchises to ensure consistency of products and service.

"I didn't spend 10 years building goodwill and our name to have it destroyed by someone who isn't being careful," Villopoto said.

But franchises don't come cheap.

Total investments can run from the $50,000 necessary to begin a Window Gang window washing franchise to $500,000 to start a restaurant such as Red Hot & Blue. Investments include real estate, fixtures and the one-time franchise fee. In addition, franchisees pay annual royalties based on sales.

Amante's franchise fee will be $20,000, plus royalties of 4 percent and marketing fees of 2 percent of sales, Villopoto said.

Despite the expense, it would cost more to attempt to start from scratch, Tillman said.

"They're getting first-quality design for everything down to the hats the people at the counter wear. They couldn't do the same quality for the money," he said.

Each Panera store costs between $700,000 and $1 million to start, including the $30,000 franchise fee, Bastian said. His company, Breadwinners at the Triangle, just opened stores on Franklin Street in Chapel Hill and at The Streets at Southpoint mall in Durham. He plans three more in the Triangle.

Some franchises come with more support than others, Groot said. With past restaurant experience, he bought his Red Hot & Blue franchise mainly for the name, but he doesn't begrudge the corporation its royalties.

"10-15-20 years ago, the people who bought McDonald's might have griped about royalties, but look at where they are today," he said.

COPYRIGHT 2002 by The Durham Herald Company. All rights reserved.