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JULY 2024
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Industry Shift
The fast food franchising landscape has been transformed in recent years by a seismic shift toward concentration. As private equity firms have begun partnering with and owning franchises, we have seen franchisees acquire scale and secure financing through more sophisticated means. Franchisors have quietly pushed for concentration. One major system set a goal at one point — which they denied but was accidentally inserted into a PowerPoint presentation and seen by a large number of people at a meeting, I’ve been told — of going from thousands of franchisees down to 100. I represented a client years ago who had 98 stores, and we all considered that as a huge franchisee. The reaction from other people was, “Wow! I can’t believe the franchisor let them get that big! That’s insane!” Today, operators on the Franchise Times’ list of the top 200 restaurant franchisees average 167 restaurants, concentrated in six giant brands, including Pizza Hut, Taco Bell, and Wendy’s. The largest franchisee operates more than 2,300 stores. Size has advantages, of course. If you’re larger, it’s easier to borrow money and develop new stores. That is what franchisors want. Their attitude is open new stores and generate topline revenue. But as I see it, this raises two issues. First, professional managers are running the franchisor firms, and their careers have evolved during the time of “franchise lite.” Many have never operated or developed stores, and they don’t really understand how to do that. Taking over 400 stores from a franchisee who is not compliant is challenging, especially if you don’t have anybody at the office who knows how to run those stores. A franchisor can’t abruptly close 400 stores, then come back easily from that setback. The result is a situation where franchisees have an odd indirect sort of leverage. Big Fast-Food Franchisors Eclipse Small Owners
Some of these managers may realize that something is lost in not having smaller franchisees who live near their stores. Some of these franchisors — not all, but some — are starting to reverse course and work against consolidation. While it’s exciting to watch these large organizations operate, there is also something exciting about the opportunities franchising affords small businesses. A franchise is a local business with a national presence. And that’s cool. When I grew up in a small town, everybody knew who the franchisees were. You knew who the Dairy Queen family was, and you knew who the Burger King family was. They all sponsored sports teams, they had kids in the high school, and they employed people’s kids. There is something valuable and hard to quantify about that. People say this trend toward big franchisees is going to kill the small entrepreneurial operators. But I don’t see that happening. Ambition and drive don’t go away, they just get redirected. If getting into a giant brand is not going to work for them, they’ll just buy into a smaller one. I am interested to see whether all of those small-business people who are innovators, who are driven, who would have gotten into the brand at the one-, two-, or five-store level, are going to go into competing brands with a smaller presence, such as the California-based Mountain Mike’s Pizza chain, or perhaps Zaxby’s, a Georgia-based chicken chain that boasts of “building a franchisee community of entrepreneurs.” Will brands like those gain traction because they have that kind of small-business energy within them? It remains to be seen. But to me, it is an interesting point of tension to watch.
– Nate Riordan
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Unlock the Wonders of Chiang Mai Temples, Waterfalls, and Night Markets Await The beautiful Chiang Mai is the largest city in Northern Thailand. Known for its historic temples, lovely mountains, and cool weather, it has become one of the most popular tourist destinations in the country! Whether you seek cultural wonders, lush landscapes, or jungle experiences, there’s something for everyone in this enchanting city. Grab your passport and sense of adventure as we explore some of the best activities for your Chiang Mai vacation! Explore the temples. Impressive temples are all over Chiang Mai, and they are unbeatable outings. While larger temples, like Wat Phra Singh, have a small admission price, smaller temples are typically free. Remember to dress appropriately for your visit, covering your shoulders and removing your hat. Intricate structures and statues adorn many temples and are truly peaceful places. Walk up a waterfall. Have you ever walked on water? You can literally walk up the Bua Thong Waterfall, known as the Sticky Waterfall. This remarkable natural space is located just outside the city in the Namtok Bua Tong- Nam Phu Chet Si National Park and draws many visitors annually. The porous limestone rocks of Bua Thong are sticky and allow people to climb up the waterfall without slipping. You can find different paths with varying degrees of difficulty for adventurous explorers. Experience the Night Bazaar. If you’re looking for authentic food, great bargains on gifts, and an exciting scene, you have to visit the city’s famous Night Bazaar. This is one of the oldest night markets in the country, and the nearly 1-mile stretch is packed with vendors who sell art and delicious street food. Give yourself at least a few hours to take in the whole experience of this beloved destination. With its scenic views and lively culture, Chiang Mai blends traditional and unexpected adventures. Whether you’re feeding an elephant at one of the city’s sanctuaries, hiking in the mountains, or chowing down on local cuisine, this gem of Northern Thailand will surely enchant you!
Discover Your Doppelgänger
Nearly every fast-food chain has a loyalty program to gather massive amounts of data on members. Chipotle Mexican Grill sparked nationwide attention by finding a unique way to use it. Marketers for the brand understand that its Chipotle Rewards Loyalty Program members feel strongly about ordering entrees with very specific ingredients and seasonings — almost to the point of identifying personally with particular menu options. The brand found a way to surprise and delight customers by simply notifying them by email that another anonymous customer just ordered exactly the same thing within the past two minutes at another restaurant nearby. Customers received no information about their food twin — only the time and date of their order, the restaurant where it was placed, and a listing of the customized ingredients. Loyalty members’ “Chipotle Doppelgänger” emails provided only the same information as shown on a receipt. Members were also offered a chance to order T-shirts printed with their entree preferences. The campaign was a home run. The 466,000 people who received Doppelgänger emails spent $4.8 million at Chipotle during the initial four weeks of the campaign. Loyalty program members are accustomed to receiving offers of exclusive discounts, special access to products, and preferential treatment. The Doppelgänger campaign was so unexpected, and so on- target in tone, that people clicked in to learn more. “The brand found a way to surprise and delight its fans, and even sparked many to share the marketing email on their social media,” Contagious.com, a marketing platform for brands and agencies, wrote in a case study on the campaign. “The key here is the brand understands its Loyalty Program members.” Chipotle’s ad partner in the campaign, Gale of New York, says most people receive about 150 emails a day and trash half of them unopened. However, the notion that everyone has a Doppelgänger is innately interesting, sparking enough curiosity to elevate email opening rates 44% above usual. All aspects of the campaign adhere to a key marketing principle at Chipotle, according to a marketing executive quoted by Contagious.com: Don’t be lame! Clever Email Campaign Sets New Highs in Customer Engagement
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“People say this trend toward big franchisees is going to kill the small entrepreneurial operators. But I don't see that happening. Ambition and drive don't go away, they just get redirected.”
Nate Riordan — WCFL Founder & Partner
Leasing costs must be within 6%–10% of a restaurant’s revenue, for the restaurant to operate profitably. Those ratios can shift suddenly if the economy hits the skids or consumer trends change. A growing number of multi-unit restaurant operators are turning to lease renegotiators for help managing existing leases on money- losing stores, according to Restaurant Finance Monitor, a monthly industry newsletter. Few business stories illustrate the significance of leasing costs more vividly than the recent bankruptcy filing of Red Lobster. Losses on real estate leases were a major cause of the 570-unit seafood chain’s troubles. Red Lobster had already closed almost 100 restaurants before filing for bankruptcy protection in May, and court documents showed that another 100 stores were slated for closure unless the company could renegotiate the leases. In line for closing was Red Lobster’s landmark Times Square location, where the landlord was seeking to double the rent to $2.2 million a year, according to the New York Post. If a restaurant continues to lose money after cost reductions and other turnaround moves, franchisees often to try to discuss the problem with their landlords on their own. A franchise hasn’t (hopefully) garnered significant experience re-negotiating leases and therefore doesn’t know the talking points. The result can be costly delays, according to Lewis Gelmon, a lease renegotiator and restaurant franchisee who spoke at a recent Restaurant Finance Hidden Threat Real Estate Costs Dent Fast Food’s Bottom Line
Monitor webinar series on renegotiating leases. Another approach is to grab landlords’ attention by shuttering losing stores, stopping rent payments, or negotiating a speedy settlement. One franchisee who Gelmon worked with needed to stop losses at three of the 19 restaurants he operated. Each was deep in the red because of annual rent increases and declining sales. Gelmon advised the operator to stop paying rent and shut the stores down, then open talks with the landlord to pay past-due rent and buy out the lease. Real-estate companies typically are represented by skilled lawyers and negotiators, and restaurant operators can level the playing field by employing a skilled renegotiator of their own, Gelmon says. The result in such cases, he says, can be a quick resolution that erases the restaurant operator’s default and enables both parties to move on.
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In This Issue 1
Hometown Franchisees Bring Local Flavor The Inside Story of Chipotle’s Doppelgänger Campaign A Must-Do Guide for Chiang Mai Negotiate Your Way Out of Money- Losing Restaurant Leases The Missing Fast-Food Ingredient: Better Service
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Many fast-food operators focus their employee training programs on technical skills such as processing orders and product knowledge, assuming new hires will have the common sense to treat customers well. New research on customer service suggests that this may be a mistake. Fast-food operators are more vulnerable than any other industry to losing customers because of poor customer treatment, according to Qualtrics, a customer experience research platform. A staggering 60% of fast-food diners who are annoyed by poor service react by cutting spending or abandoning the brand altogether, compared with only 22% for auto dealers and 6% for supermarkets, according to Qualtrics research. “In 2024, companies need to be more careful than ever not to mistreat customers, or they will dig themselves a long-term hole,” says a Qualtrics research executive. Frontline workers, including restaurant servers, have the lowest morale among employees studied and complain that they lack support to do their jobs, the research shows. Frontline fast- Poor Service Eats Away Fast- Food Profit Lost Revenue
food workers often must deal with rude or unfair treatment by customers, one fast-food restaurant shift manager wrote on Quora: “For anybody, it’s taxing. My burger is wrong, I’m missing my fries, etc.” Training and supporting employees in exercising soft skills is essential, says John R. DiJulius, a consultant on customer service to Chick-fil-A, Starbucks, and other companies. While many managers believe they can hire people who already have the “soft skills” and “common sense” required to please customers, most recruits actually have to be trained in those skills, DiJulius says. Critical abilities include showing compassion and empathy, reacting to customers with enthusiasm and warmth, assuming customers have good intentions, finding solutions to their problems, and building relationships and rapport, he says. An effective training program requires figuring out what types of interactions your employees need to handle well and developing descriptions and simulations to demonstrate desirable employee behavior. Beyond that, operators need to expand training beyond onboarding to include frequent refresher courses, gamification of skills to engage employees, and tracking staff progress through customer feedback forms and reviews. High-quality training pays off. Chick-fil-A consistently ranks high in industry surveys on quality of customer service, and the chain retains 81% of customers who dined there in the previous 12 months, according to Inmarket. And that percentage is continuing to rise.
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