| Broadly speaking, restaurants can be segmented | | | | which was based in Golden, Colorado. In 1993, |
| into a number of categories: | | | | when the company's stock was first offered to |
| 1- Chain or independent (indy) and franchise | | | | the public at $20 per share, it was eagerly bought, |
| restaurants. McDonald's, Union Square Cafe, or | | | | increasing the price to a high of $50 a share. In |
| KFC | | | | 1999, after the company declared bankruptcy, |
| 2- Quick service (QSR), sandwich. Burger, | | | | the share price sank to 75 cents. The contents of |
| chicken, and so on; convenience store, noodle, | | | | many of its stores were auctioned off ata |
| pizza | | | | fraction of their cost.7 Fortunes were made and |
| 3- Fast casual. Panera Bread, Atlanta Bread | | | | lost. One group that did not lose was the |
| Company, Au Bon Pain, and so on | | | | investment bankers who put together and sold |
| 4- Family. Bob Evans, Perkins, Friendly's, Steak 'n | | | | the stock offering and received a sizable fee for |
| Shake, Waffle House | | | | services. |
| 5- Casual. Applebee's, Hard Rock Caf´e, Chili's, | | | | The offering group also did well; they were able |
| TGI Friday's | | | | to sell their shares while the stocks were high. |
| 6- Fine dining. Charlie Trotter's, Morton's The | | | | Quick-service food chains as well-known as |
| Steakhouse, Flemming's, The Palm, Four Seasons | | | | Hardee's and Carl's Jr. have also gone through |
| 7- Other. Steakhouses, seafood, ethnic, dinner | | | | periods of red ink. Both companies, now under |
| houses, celebrity, and so on. Of course, some | | | | one owner called CKE, experienced periods as |
| restaurants fall into more than one category. For | | | | long as four years when real earnings, as a |
| example, an Italian restaurant could be casual and | | | | company, were negative. (Individual stores, |
| ethnic. Leading restaurant concepts in terms of | | | | company owned or franchised, however, may |
| sales have been tracked for years by the | | | | have done well during the down periods.) There is |
| magazine Restaurants and | | | | no assurance that a franchised chain will prosper. |
| Institutions. | | | | At one time in the mid-1970s, A&W Restaurants, |
| CHAIN OR INDEPENDENT | | | | Inc., of Farmington Hills, Michigan, had 2,400 units. |
| The impression that a few huge quick-service | | | | In 1995, the chain numbered a few more than |
| chains completely dominate the restaurant | | | | 600. After a buyout that year, the chain |
| business is misleading. Chain restaurants have | | | | expanded by 400 stores. Some of the |
| some advantages and some disadvantages over | | | | expansions took place in nontraditional locations, |
| independent restaurants. The advantages include: | | | | such as kiosks, truck stops, colleges, and |
| 1- Recognition in the marketplace | | | | convenience stores, where the full-service |
| 2- Greater advertising clout | | | | restaurant experience is not important. A |
| 3- Sophisticated systems development | | | | restaurant concept may do well in one region but |
| 4- Discounted purchasing | | | | not in another. The style of operation may be |
| When franchising, various kinds of assistance are | | | | highly compatible with the personality of one |
| available. Independent restaurants are relatively | | | | operator and not another. |
| easy to open. All you need is a few thousand | | | | Most franchised operations call for a lot of hard |
| dollars, a knowledge of restaurant operations, and | | | | work and long hours, which many people perceive |
| a strong desire tosucceed. The advantage for | | | | as drudgery. If the franchisee lacks sufficient |
| independent restaurateurs is that they can ''do | | | | capital and leases a building or land, there is the |
| their own thing'' in terms of concept development, | | | | risk of paying more for the lease than the |
| menus, decor, and so on. Unless our habits and | | | | business can support. Relations between |
| taste change drastically, there is plenty of room | | | | franchisers and the franchisees are often strained, |
| for independent restaurants in certain locations. | | | | even in the largest companies. The goals of each |
| Restaurants come and go. Some independent | | | | usually differ; franchisers want maximum fees, |
| restaurants will grow into small chains, and larger | | | | while franchisees want maximum support in |
| companies will buy out small chains. | | | | marketing and franchised service such as |
| Once small chains display growth and popularity, | | | | employee training. At times, franchise chains get |
| they are likely to be bought out by a larger | | | | involved in litigation with their franchisees. |
| company or will be able to acquire financing for | | | | As franchise companies have set up hundreds of |
| expansion. A temptation for the beginning | | | | franchises across America, some regions are |
| restaurateur is to observe large restaurants in big | | | | saturated: More franchised units were built than |
| cities and to believe that their success can be | | | | the area can support. Current franchise holders |
| duplicated in secondary cities. Reading the | | | | complain that adding more franchises serves only |
| restaurant reviews in New York City, Las Vegas, | | | | to reduce sales of existing stores. Pizza Hut, for |
| Los Angeles, Chicago, Washington, D.C., or San | | | | example, stopped sellingfranchises except to |
| Francisco may give the impression that unusual | | | | well-heeled buyers who can take on a number of |
| restaurants can be replicated in Des Moines, | | | | units. Overseas markets constitute a large source |
| Kansas City, or Main Town, USA. Because of | | | | of the income of several quick-service chains. As |
| demographics, these high-style or ethnic | | | | might be expected, McDonald's has been the |
| restaurants will not click in small cities and towns. | | | | leader in overseas expansions, with units in 119 |
| 5- Will go for training from the bottom up and | | | | countries. |
| cover all areas of the restaurant's operation | | | | With its roughly 30,000 restaurants serving some |
| Franchising involves the least financial risk in that | | | | 50 million customers daily, about half of the |
| the restaurant format, including building design, | | | | company's profits come from outside the United |
| menu, and marketing plans, already have been | | | | States. A number of other quick-service chains |
| tested in the marketplace. Franchise restaurants | | | | also have large numbers of franchised units |
| are less likely to go belly up than independent | | | | abroad.While the beginning restaurateur quite |
| restaurants. The reason is that the concept is | | | | rightly concentrates on being successful here and |
| proven and the operating procedures are | | | | now, many bright, ambitious, and energetic |
| established with all (or most) of the kinks worked | | | | restaurateurs think of future possibilities abroad. |
| out. Training is provided, and marketing and | | | | Once a concept is established, the entrepreneur |
| management support are available. The increased | | | | may sell out to a franchiser or, with a lot of |
| likelihood of success does not come cheap, | | | | guidance, take the format overseas via the |
| however. | | | | franchise. (It is folly to build or buy in a foreign |
| There is a franchising fee, a royalty fee, | | | | country without a partner who is financially secure |
| advertising royalty, and requirements of | | | | and well versed in the local laws and culture.). |
| substantial personal net worth. For those lacking | | | | The McDonald's success story in the United |
| substantial restaurant experience, franchising may | | | | States and abroad illustrates the importance of |
| be a way to get into the restaurant | | | | adaptability to local conditions. The company |
| business-providing they are prepared to start at | | | | opens units in unlikely locations and closes those |
| the bottom and take a crash training course. | | | | that do not do well. Abroad, menus are tailored to |
| Restaurant franchisees are entrepreneurs who | | | | fit local customs. In the Indonesia crisis, for |
| prefer to own, operate, develop, and extend an | | | | example, french fries that had to be imported |
| existing business concept through a form of | | | | were taken off the menu, and rice was |
| contractual business arrangement called | | | | substituted. Reading the life stories of big |
| franchising.1 Several franchises have ended up | | | | franchise winners may suggest that once a |
| with multiple stores and made the big time. | | | | franchise is well established, the way is clear |
| Naturally, most aspiring restaurateurs want to do | | | | sailing. Thomas Monaghan, founder of Domino |
| their own thing-they have a concept in mind and | | | | Pizza, tells a different story. At one time, the |
| can't wait to go for it. | | | | chain had accumulated a debt of $500 million. |
| Here are samples of the costs involved in | | | | Monaghan, a devout Catholic, said that he changed |
| franchising: | | | | his life by renouncing his greatest sin, pride, and |
| 1- A Miami Subs traditional restaurant has a | | | | rededicating his life to ''God, family, and pizza.'' |
| $30,000 fee, a royalty of 4.5 percent, and | | | | A meeting with Pope John Paul II had changed his |
| requires at least five years' experience as a | | | | life and his feeling about good and evil as ''personal |
| multi-unit operator, a personal/business equity of | | | | and abiding.'' Fortunately, in Mr. Monaghan's case, |
| $1 million, and a personal/businessnet worth of $5 | | | | the rededication worked well. There are 7,096 |
| million. | | | | Domino Pizza outlets worldwide, with sales of |
| 2- Chili's requires a monthly fee based on the | | | | about $3.78 billion a year. Monaghan sold most of |
| restaurant's sales performance (currently a | | | | his interest in the company for a reported $1 |
| service fee of 4 percent of monthly sales) plus | | | | billion and announced that he would use his fortune |
| the greater of (a) monthly base rent or (b) | | | | to further Catholic church causes. In the recent |
| percentage rent that is at least 8.5 percent of | | | | past, most food-service millionaires have been |
| monthly sales. | | | | franchisers, yet a large number of would-be |
| 3- McDonald's requires $200,000 of nonborrowed | | | | restaurateurs, especially those enrolled in |
| personal resources and an initial fee of $45,000, | | | | university degree courses in hotel and restaurant |
| plus a monthly service fee based on the | | | | management, are not very excited about being a |
| restaurant's sales performance (about 4 percent) | | | | quick-service franchisee. |
| and rent, which is amonthly base rent or a | | | | They prefer owning or managing a full-service |
| percentage of monthly sales. Equipment and | | | | restaurant. Prospective franchisees should review |
| preopening costs range from $461,000 to | | | | their food experience and their access to money |
| $788,500. | | | | and decide which franchise would be appropriate |
| 4- Pizza Factory Express Units (200 to 999 | | | | for them. If they have little or no food |
| square feet) require a $5,000 franchise fee, a | | | | experience, they can consider starting their |
| royalty of 5 percent, and an advertising fee of 2 | | | | restaurant career with a less expensive franchise, |
| percent. Equipment costs range from $25,000 to | | | | one that provides start-up training. For those with |
| $90,000, with miscellaneous costs of $3,200 to | | | | some experience who want a proven concept, |
| $9,000 and opening inventory of $6,000. | | | | the Friendly's chain, which began franchising in |
| 5- Earl of Sandwich has options for one unit with | | | | 1999, may be a good choice. The chain has more |
| a net worth requirement of $750,000 and liquidity | | | | than 700 units. The restaurants are considered |
| of $300,000; for 5 units, a net worth of $1 million | | | | family dining and feature ice cream specialties, |
| and liquidity of $500,000 is required; for 10 units, | | | | sandwiches, soups, and quickservice meals. |
| net worthof $2 million and liquidity of $800,000. | | | | Let's emphasize this point again: Work in a |
| The franchise fee is $25,000 per location, and the | | | | restaurant you enjoy and perhaps would like to |
| royalty is 6 percent. | | | | emulate in your own restaurant. If you have |
| What do you get for all this money? Franchisors | | | | enough experience and money, you can strike out |
| will provide: | | | | on your own. Better yet, work in a successful |
| 1- Help with site selection and a review of any | | | | restaurant where a partnership or proprietorship |
| proposed sites | | | | might be possible or where the owner is thinking |
| 2- Assistance with the design and building | | | | about retiring and, for tax or other reasons, may |
| preparation | | | | be willing to take payments over time. |
| 3- Help with preparation for opening | | | | Franchisees are, in effect, entrepreneurs, many of |
| 4- Training of managers and staff | | | | whom create chains within chains. |
| 5- Planning and implementation of pre-opening | | | | McDonald's had the highest system-wide sales of |
| marketing strategies | | | | a quick-service chain, followed by Burger King. |
| 6- Unit visits and ongoing operating advice | | | | Wendy's, Taco Bell, Pizza Hut, and KFC came |
| There are hundreds of restaurant franchise | | | | next. Subway, as one among hundreds of |
| concepts, and they are not without risks. The | | | | franchisers, gained total sales of $3.9 billion. There |
| restaurant owned or leased by a franchisee may | | | | is no doubt that 10 years from now, a listing of |
| fail even though it is part of a well-known chain | | | | the companies with the highest sales will be |
| that is highly successful. Franchisers also fail. A | | | | different. |
| case in point is the highly touted Boston Market, | | | | |