Franchises are a proven, practical model for rapidly expanding a business concept without massive capital investment. For the franchisee, it's a way to buy a business without starting from scratch. However, it's not all sunshine and Happy Meals. Last week, I wrote about the general concepts of the franchise model and the appeal for both the company franchising the concept and the franchisee. This week, though, I'm going to give you the negatives of this arrangement from my personal life to highlight the downsides.
I apologize in advance for this image of a disguise haunting you for the rest of your life.
A Man and His Sandwiches
As my loyal readers know, my professional sandwich-making career started and ended with Subway. I worked for two different franchises in high school and college over the course of six years in the late 90's and early 2000's (you can do the math on how old I am!). I learned so much from my experience at Subway - especially the pitfalls of the franchise model.
The owner of the franchise I worked at in high school, let's call him Jeff, opened his store in 1997 in my hometown. At this time, Subway was a growing, but nowhere near the size it is today. Jeff's store was the only one in the city - and even larger surrounding communities did not have a franchise yet. I started working for Jeff shortly after the store opened, with moderate foot traffic in the store. Then, an odd man named Jared Fogle surfaced. Much like the Teenie Beanie craze I wrote about previously , the world fell off its dang axis again. People learned of how a young man lost 245 lbs. by eating Subway twice a day, and thought these miracle subs could help them meet their weight-loss goals. Side note - Jared also walked several miles each day and ate low-calorie sandwiches. This detail was often glossed over. No joke - I made a foot-long meatball sub with extra cheese for a guy who thought it would help him lose weight. I'm not a health expert, but 1,000-calorie sandwiches won't help you shed the pounds.
Back at Jeff's store, the lunch lines were out the door. We tracked the sandwiches sold per hour, and we regularly broke the 100 sub/hour mark. I recall one lunch shift where we sold over 250 subs! Jeff always worked the register, tallying up the sales and orchestrating the crew of sandwich artists. While business was booming, I could see the stress building up in Jeff. He was always panicked about the store being clean, chips being stocked, and having enough (but not too much) bread ready to go. It was a constant battle to keep up. Jeff would come in at 6 AM, and most days not leave until 6 PM. His work ethic was admirable, and I worked hard to do what I could to help make Jeff's store successful.
Sub School
After some time, I earned the trust of Jeff. He started allowing me to open and close the store alone. In the summer after my senior year of high school, he let me handle the managerial task in the store like placing the bulk food orders. He even allowed me to develop and execute a marketing campaign where I distributed weekly coupons of descending value (free sandwiches down to 10% off your order) to local businesses. I am eternally grateful for this experience.
With this new exposure, I started seeing some concerning signs about this business. I knew his food costs, and out of pure curiosity, I ran some basic numbers using the bulk food costs and estimated labor to see that we were barely breaking even on a gross margin basis - in fact, depending on how many toppings, some subs actually lost money! This doesn't even include the fixed costs of the store, utilities, equipment, etc. As is true with most restaurants, the real money is made in beverages - soda or alcohol. However, even those prices were lower than local competitors like McDonald's and Burger King. I shared with Jeff what I found and asked if he considered raising his pricing. With the new-found momentum from Jared, Jeff was afraid he would lose customers if prices went up. Any good businessperson knows if you can make the same net with higher prices, but fewer customers, you do so. However, Jeff kept his prices the same, and business maintained.
While I can't say for sure two decades ago, Subway's franchise agreements are heavily weighted on low cost of entry with higher on-going revenue sharing. Factoring in equipment and store set up, opening a new Subway may only cost $150,000. This model encouraged those who wanted a piece of a major food franchise but couldn't afford a McDonald's (over $1 million to start one today). Instead, Subway charges a substantial percentage of revenue (8% plus 4.5% for marketing).
Stress and Talking Turkey
As time went on, Jeff maintained his low prices. The peak Jared mania subsided, and the sub shop's popularity had plateaued. However, Subway was now a major brand, and everyone wanted a piece of the action. New locations had popped up in neighboring towns - Jeff's store was no longer a destination. With no territory assurances in Subway franchise agreements, someone could literally open up shop next door. Jeff was worried about losing out to his rival franchisees, and was even pressured into opening a second location in town - in a rural strip mall without much foot traffic. Now with two stores to run, Jeff was forced to hire a full-time store manager as I went off to college.
Now let's talk turkey. As in, how much three slices of turkey on a six-inch sub cost. In my time at Subway, it was about a dollar, and of course the meat was the most expensive component of a sandwich. My dear brother Andy (yes, the same one who wrote a guest spot a few weeks back) followed my path as a Sandwich Artist. It was a relatively busy lunch, and Andy was working the lead-off spot on the assembly line. His job: greet customer, get sandwich order, assemble bread/meat/cheese/sauce, and slide the sub down to the next Artist. A customer requested a turkey sub with yellow mustard. With ninja-like agility, Andy composed the sub as requested. The customer, having a change of heart, requested mayonnaise instead of mustard. Ever the dutiful customer agent, Andy decided it would be easier to swap out the yellow-stained turkey for some "fresh" slices. Jeff witnessed the disregard for margin. Andy might as well have stolen from the register.
I could picture the vein in his forehead bulging from his shiny, balding top. Jeff was so overcome with emotion at such an assault on his profits, he removed himself from customer view into the prep area. His passive-aggressive rage was taken out on boxes, veggie storage containers, and whatever inanimate objects, loud enough for his staff and customers to hear at the front counter. Unable to properly channel this stress, he removed himself from the store muttering a phrase I cannot quote directly here. I can only say "(that guy) threw out the turkey".
Now, Jeff was not a mellow guy. For all of his good qualities, he was easily wound up and stressed by the day-to-day challenges of the restaurant business. And, knowing you are giving up 12.5% of your revenue to corporate, can you blame him? Trying to support a young family, I cannot imagine the anxiety that came with allowing 16-year-olds to dictate your viability as a business. My brother is incredibly intelligent, ethical, and hard-working... but a questionable decision from one of his best employees in the best interest of the customer, costing him only a dollar, was enough to set him off. If I took anything away from Andy's story, it's that the food service business is not for me. Is it for you?
Given my personal experiences with the franchise model, I would stress a few key considerations. First and foremost, know the financing model - what are upfront vs. ongoing fees, what kind of marketing will be done, etc. Second, are you sure it will succeed? Were you riding a Jared Fogle wave that will eventually crash? Was it a good business in the first place or a flash in the pan? Finally, I strongly recommend you do your research on the brand itself before jumping into the next Sbarro. There is one more consideration with the franchise model I haven't discussed - legal and contractual implications. For this topic, I'm bringing in a ringer.. yes, you guessed it. Brother Andy will be laying down the law next week to share his in-depth legal know-how. Have a wonderful week!
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