working through difficult economic times” …...“the 20th annual elements of successful...

“The 20th Annual Elements of Successful Franchising:The 20th Annual Elements of Successful Franchising: Working Through Difficult Economic Times”

Presented by John Hamburger,Steve Romaniello Dennis Wieczorek &

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Steve Romaniello, Dennis Wieczorek &Philip Zeidman

Monday, February 14, 2011 DLA Piper LLP (US)

Dennis WieczorekPartner| DLA Piper

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Philip ZeidmanPartner| DLA Piper

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Steve RomanielloManaging Director| Roark Capital Group

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John HamburgerPresident| Franchise Times Corp.

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Phili Z id P tPhili Z id P tPhilip Zeidman, PartnerPhilip Zeidman, PartnerDLA Piper LLP (US)

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How is Franchising Affected by the World Around us?World Around us?

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•

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• INSERT FACBEOOK PAGE

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“Child Care Franchises Boom”

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LIFESTYLE

• FITNESSFITNESS

• ENVIRONMENTAL

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0 5 10 15 20 25 30

# of People speaking Spanish in 2000 (in millions)# of People speaking Spanish in 2000 (in millions)# of People Speaking Spanish in 1990 (in millions)

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US Students Studying Chinese vs. Number of Chinese Studying EnglishChinese Studying English

Key =one

or =200K

0 50 100 150 200 250 300 350 400

200Kpeople

# of Students Studying English in China# of Students Studying Chinese in the US

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FRANCHISE TIMES 200

• The Top 200 U.S. franchise systems

l ld d l• Annual worldwide sales

• Number of domestic and international units

• 2009 versus 1999

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REST FINANCE MONITOR 200

• The Top 200 U.S. restaurant franchisees

l l• Annual sales

• Number of units

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DISCUSSION POINTS

• What have we learned?

• Franchising trends

• Development trendsDevelopment trends

• The future?

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FRANCHISE TIMES 200

2009 VERSUS 1999

2009 1999

Revenue $468 Billion $270 Billion

Locations 440,000 306,000

Franchise % 85% 79%

International % 32% 24%

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THE TOP 10 IN 2009—DOLLARS

Company Systemwide Sales

McDonald’s $72.3 BMcDonald s $72.3 B

7‐Eleven $58.9 B

KFC $17.8 B

Burger King $14.7 B

Subway $13.8 B

$Ace Hardware $12.5 B

Circle K $9.9 B

Pizza Hut $9 6 BPizza Hut $9.6 B

Wendy’s $9.0 B

Marriott Hotels $7.6 B

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THE TOP 10 IN 2009—UNITS

Company Systemwide Sales

7‐Eleven 37,3577 Eleven 37,357

McDonald’s 32,478

Subway 32,076

KFC 16,264

Pizza Hut 13,281

H& R Block 13,149

Burger King 12,138

Jani‐King 11 537Jani‐King 11,537

Coverall 9,457

Dunkin Donuts 9,186

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THE TOP 10 IN 1999

Company Systemwide Sales

McDonald’s $38.5 BMcDonald s $38.5 B

7‐Eleven $27.0 B

Burger King $11.3 B

KFC $8.9 B

Pizza Hut $7.4 B

$Wendy’s $6.0 B

Marriott Hotels $5.5 B

Taco Bell $5 4 BTaco Bell $5.4 B

Blockbuster $5.4 B

Holiday Inn $5.0 B

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NAMES IN 2009 NOT ON 1999

Company Systemwide Sales

Jimmy John’s $602 MJimmy John s $602 M

Famous Dave’s $477 M

Jason’s Deli $476 M

Qdoba $450 M

McAlister’s Deli $351 M

$Wingstop $307 M

Batteries Plus $270 M

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PERCENTAGE GAINERS

Company Systemwide Sales

Wingstop 2358 %Wingstop 2358 %

Jimmy John’s 2150 %

Qdoba 1500 %

Panera Bread 1189 %

Buffalo Wild Wings 1166 %

Famous Dave’s 953 %

Hilton Garden Inn 948 %

Quizno’s 780 %Quizno s 780 %

McAlister’s Deli 763 %

Budget Blinds 569 %

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DOLLAR GAINERS

Company Systemwide Sales

McDonald’s $34 BMcDonald s $34 B

7‐Eleven $32 B

Subway $10.2 B

KFC $8.9 B

Tim Horton’s $4.2 B

$Hilton Hotels $3.8 B

Dunkin Donuts $3.7 B

Burger King $3 4 BBurger King $3.4 B

Wendy’s $3.4 B

Panera Bread $2.6 B

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UNIT GAINERS

Company Systemwide Sales

Subway 17,914Subway 17,914

7‐Eleven 17,879

KFC 6,056

McDonald’s 5,890

Coverall 4,356

Dunkin Donuts 4,251

Jani‐King 4,213

Quizno’s 3 511Quizno s 3,511

H & R Block 2,563

Domino’s 2,395

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INTERNATIONAL UNIT GAINERSCompany Systemwide Sales

7‐Eleven 18,126

Subway 6,888

KFC 6,076

M D ld’ 4 537McDonald’s 4,537

Domino’s 2,097

Burger King 1 914Burger King 1,914

Pizza Hut 1,754

Baskin Robbins 1,490

Tim Horton’s 1,306

Dunkin Donuts 1,267

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UNIT DECLINERSCompany Systemwide Sales

Blimpie ‐1,141

Radio Shack ‐1,029

Hardee’s ‐887

D i Q 785Dairy Queen ‐785

Blockbuster ‐633

Schlotzky’s ‐402Schlotzky s 402

Kwik Kopy ‐341

Midas ‐316

Denny’s ‐233

Long John Silver’s ‐223

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FRANCHISE TIMES 200

FRANCHISE CONCENTRATION

2009 1999

100% 64/200 59/200

>90% 107/200 101/200

>80% 132/200 122/200

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FRANCHISE TIMES 200

INTERNATIONAL FRANCHISING

2009 1999

Overall 32% 24%

>50% 20/200 10/200

>25% 54/200 39/200

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WHAT HAVE WE LEARNED?

• Increase in franchise concentration

l d l• Increase in international development

• Sales growth rather than unit growth 

• Big name brands grow internationally

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REST FINANCE MONITOR 200

2009 VERSUS 1999

2009 1999

Revenue $21.8 Billion $14.9 Billion

Locations 16,715 15,490

Multi‐Concept 91/200 80/200

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THE TOP 10 IN 2009

Company Systemwide Sales

NPC International $845 MNPC International $845 M

Apple American $520 M

Bridgeman Foods $507 M

Carrols $384 M

Harman Management $379 M

$Strategic $376 M

Boddie Noell $365 M

Covelli $335 MCovelli $335 M

Briad Group $321 M

Pepper Dining $300 M

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WHAT HAVE WE LEARNED?

• Increase in multi‐concept franchisees

l b d• Primary concept is a large brand

• Willing to take risks with secondary brands

• Targeted by new franchisors

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WHAT’S THE FUTURE?

• More franchising concentration

f l• Even greater focus on international development

• Franchisees willing to operate multiple brands 

• Capital sources will focus on strong brandsp g

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D i Wi k P tD i Wi k P tDennis Wieczorek, PartnerDennis Wieczorek, PartnerDLA Piper LLP (US)

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Selling Franchises

The Paradigm Shift

“Who’s on Top?”Who s on Top?

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Selling Franchises

Who are the New Prospects?E i i f hi ddi i i– Existing franchises adding units or renewing

– Transferees

– Franchisees of other systems

– Other business owners including conversions

– Co‐brand/express (lower cost)

– Institutions

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Selling Franchises

Enticing New ProspectsL d h bl– Leads are not the problem

– If Mom ‘N Pop, internet is key – monitor your t tireputation

– If big and sophisticated, they will do own due diligencediligence

– What the prospect wants rather than what the franchisor offersfranchisor offers

– Item 19 more critical than ever (look at median)

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Selling Franchises

Sealing the Deal– Credit is #1 – banks are a key part of the sales process

M ‘N P b l l d i ( 401K) b bi• Mom ‘N Pop absolutely need it (e.g., 401K) but big operators too

• Must offer, enhance or supportMust offer, enhance or support

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Selling Franchises

Sealing the DealL k f hi– Look at franchise agreement

• Condense, soften, make readable and prepare to negotiatenegotiate

– Focus on equity appreciation; franchisee controls cash flow and netcas o a d et

– CRM programs, including social media

– Lower expectationsLower expectations

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Selling Franchises

Capital AccessL d f hi d h– Lenders act as franchisee advocate – they approve franchise for the borrower

• Lender buy in to franchise program is critical• Lender buy‐in to franchise program is critical

– Franchisor must assure franchisee is credit‐worthy• If several loans go bad lender is gone (and other• If several loans go bad, lender is gone (and other lenders too)

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Selling Franchises

Capital AccessSBA il bili b b k i– SBA – greater availability but are banks using to fund new businesses or to refinance bad real estate loansestate loans

– 401K – increased popularity but complicated

Money is available but at what price– Money is available but at what price

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WHAT’S HAPPENING IN THE WORLD OF FRANCHISING:

A CLOSER LOOKA CLOSER LOOK

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THE WALL STREET JOURNAL.WSJ comWSJ.comJANUARY 11, 2011, 3:05 P.M. ET

Franchise Industry Shows Glimmer of Recovery

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Trends, and What They Tell Us

800,000

790,000# of

780,000# ofFranchisedEstablishments

760,000

770,000

,2008 2009 2010 2011

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TrendsTrends

•• Unit GrowthUnit Growth

ll•• Unit ClosuresUnit Closures

•• Growing IndustriesGrowing Industries

•• Struggling IndustriesStruggling Industries

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Unit Growth TrendsUnit Growth Trends

450 000

Franchised Units by Year

400,000

425,000

450,000

325 000

350,000

375,000

300,000

325,000

2004 2005 2006 2007 2008*

*Estimated

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Unit ClosureUnit Closure

Franchised Unit* Closure by Year

27,500

20 000

22,500

25,000

15,000

17,500

20,000

2004 2005 2006 2007 2008**2004 2005 2006 2007 2008

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RefranchisingRefranchising

Company-Owned Unit Growth 2005 to 2008

84,000

86,000

78,000

80,000

82,000

72,000

74,000

76,000

70,000 2005 2006 2007 2008

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Social Media

K l t f f hi• Key element of many franchise programs– Most often to reach customers and create loyalty

– But broader uses too: jobs, franchise sales

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Social Media• Differences among franchise systems – some love it, some tolerate it, but can’t be ignored

• Need social media policy (ops manual, agreements)– Most common franchisee can use social– Most common‐franchisee can use social media but subject to some overall franchisor controlLegal issues– Legal issues

• Truth‐in‐advertising• Defamation• Franchise laws

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Social Media

• Groupon (and copycats) – a new form of social mediaof social media– Expensive but great exposure

f d b– If too good, may be overrun

– How to charge royalty?

– Local or national?

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Government Intrusion

EmploymentH l h– Health care

– Card check

– Wage hour laws

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Intersection With Employment Law

Can a franchisee be an employee ofh f hi ?the franchisor?

• Massachusetts case – minimum wage and other requirementsother requirements

Can an employee of the franchisee also be the franchisor’s employee?

• Kentucky case – franchisee didn’t pay k ’ i d t t f dworkers’ comp insurance and state fund 

went after franchisor

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Government Intrusion

OperationsM l b li– Menu labeling

– What you can sell

– Where you can locate

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TWITTERCHERRIESNYOMOUF: @talley4_LiFE yeah u right da menu islarger but the food is just more simple deliciousness lol 1 day ago via Twitter for BlackBerry®

I don’t even know why I went to John Doe’s yYuckola!6 minutes ago via Twitter for iPhone

trishakc10: Omg im goin thru this app to look @ calories from rest. The meal has 945 calories! # gross6 minutes ago via Twitter for iPhone

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Government Intrusion

Financial mattersC di– Credit

– Taxesd ill• Temporary standstill

• Blizzard of 1099’s

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“Nexus” – What Does It Mean?

• KFC v. Iowa – first high court holdingKFC v. Iowa  first high court holding that franchisor has nexus with a state for income tax purposesfor income tax purposes

• Income tax different from sales tax

N i t if t d k d i t t• Nexus exists if trademarks used in state

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Government Intrusion

FranchisingS i l i i l d– Some issues percolating in several states and Puerto Rico

A bit ti l biliti– Arbitration vulnerabilities

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Government Intrusion

• Franchisors and franchisees are on the same page on almost every issuethe same page on almost every issue

• IFA increasingly recognized as the f ll b ( d ll fvoice of small business (and all of 

franchising)

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THE GROWING INTERNATIONALIZATION OF FRANCHISING

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International Growth

The 200 Top Franchisors now have 32% of pTheir Units Outside the U.S.

Courtesy of Franchise Times

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International Growth

• The Larger the Franchise Network the HigherThe Larger the Franchise Network, the Higher the % Outside the U.S.

Courtesy of Franchise Times

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International Growth

• But Not Just the Giants. . .

d d• And Not Just Food Service. . .

• And Not Just Hotels. . .

• Service and Retail. . .

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Does your company currently either franchise or Does your company currently either franchise or operate locations in international markets?operate locations in international markets?

Yes61%

No39%

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Does your company plan to accelerate or start new franchiseDoes your company plan to accelerate or start new franchiseoperations in international markets?operations in international markets?

Yes74%

NoNo26%

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How important is international to your How important is international to your company’s future success?company’s future success?

Not Important15%

Extremely Important

34%

Somewhat Important

19%

Important19%

Very Important13%

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WHY IS THIS HAPPENING, ANDWHY IS THIS HAPPENING, AND 

WHY IS IT HAPPENING NOW?

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Franchise Laws Around the World: Beginning of the 1970’s

73Copyright © 2011 DLA Piper. All rights reserved.

Franchise Laws Around the World: Beginning of the 1980’s

74Copyright © 2011 DLA Piper. All rights reserved.

Laws Applicable to FranchisingFebruary 2011

Blue = Disclosure LawGreen = Relationship Law Red = Disclosure & Relationship Laws Black = Other

The AmericasBarbadosBrazil

EuropeEU

Within EUBelgium

Central AsiaMongoliaKazakhstanKyrgyzstan Asia

ChinaCanada

AlbertaNew Brunswick (February 2011)OntarioPrince Edward Island

MexicoUnited States

Federal

BelgiumEstonia FranceLithuaniaItalyRomaniaSpain

JapanMacauSouth KoreaTaiwanVietnamThe Middle East

Saudi Arabia

Several StatesVenezuela

pSweden

Non-EUAlbaniaBelarusGeorgiaMoldova

South PacificAustraliaIndonesiaMalaysia

RussiaUkraine Africa

South AfricaTunisiaDoes Not Include:

• Codes of conduct which do not provide for governmental or private enforcement, even if promulgated under governmental authority.

• Bodies of law (e g competition intellectual property etc ) which also cover franchising unless explicitly mentioned

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• Bodies of law (e.g. competition, intellectual property, etc.) which also cover franchising, unless explicitly mentioned.

Copyright © 2011 DLA Piper. All rights reserved.

Moments of Opportunity…Moments of Peril

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Programs or rights not included at outset will prove difficult to initiate later.

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Establish objective criteria, or,

self‐executing mechanismsmechanismsor events that

eliminate need toeliminate need totake confrontational 

position with franchiseesposition with franchisees.

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Use appropriate occasions to require franchisee to update or improvefranchisee to update or improve.

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Preserve right at renewal to require franchisee to –

– Sign a current franchise agreement

Upgrade its facility to current standards– Upgrade its facility to current standards

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What if you’re wrong?

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WHEN TROUBLES COME…

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• WHEN FRANCHISEES CANNOT PAYB k– Bankruptcy

– Restructuring

– Haircuts / reductions

– Relationship tools

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• WHEN NOTHING ELSE WORKS:–Disputes and Their Resolution

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• AN EXAMPLE OF A HIGH PROFILE ISSUE AND A HIGH PROFILE FRANCHISOR–Maximum and Minimum Pricing

B Ki Liti ti–Burger King LitigationWhat Can We Learn?

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Dispute ResolutionDispute Resolution

The peer group of 24 franchisors decreased initiated litigation against US franchisees between 2007 and 2008 from 777 suits to 693.

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New Franchise Brands per Year

350

400

200

250

300

100

150

200

0

50

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010*

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Percentage of Brands with Previous Years of Business ExperiencePercentage of Brands with Previous Years of Business Experience

88

Percentage by Year of New Brands with 0 Company Units at StartPercentage by Year of New Brands with 0 Company Units at Start

16%

10%

12%

14%

4%

6%

8%

0%

2%

4%

2004 2005 2006 2007 2008*

*Estimated

89

“Majority of US Franchises NowMajority of US Franchises Now Owned by Multi-Unit y

Franchisees”

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Q & A 

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Contact InformationJohn M. Hamburger

Email: jhamburger@franchisetimes.com T: 612‐767‐3201

Steve RomanielloEmail: sromaniello@roarkcapital.comEmail: sromaniello@roarkcapital.comT: 404‐705‐2050

Philip F ZeidmanPhilip F. ZeidmanEmail: philip.zeidman@dlapiper.comT: 202‐799‐4272

Dennis E. WieczorekEmail: dennis.wieczorek@dlapiper.comT: 312‐368‐4087

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Acknowledgements

DLA Piper LLP (US) gratefully acknowledgesthe following:the following:

(Slides:  48, 49‐52)

(Slides: 69 71 and 86 89)(Slides:  69‐71 and 86‐89)

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