Long-Time Area Developers TELL ALL(most)

Being a big fish always helps, especially in a big pond. But big fish still have problems-or opportunities as the more optimistic prefer to call them. And it certainly helps to have a positive outlook when you become an area developer. Topping the list of problems/opportunities are the usual items: location, hiring and retention, financing, etc.-but magnified by the number of units, as well as the number of concepts operating under one umbrella. Area Developer magazine asked four successful "Big Fish" to weigh in on what's tipping their scales as 2005 approaches.

For Bill Welter, Wild Buffalo Wings area developer in Las Vegas, two items top his list: hiring and retaining good people, and having a sense of direction for his company. "You need people to run your business, and you need to figure out where you're going with the business-and you've got to have a plan to get there," he says. "It's pretty simple."

Gary Grace, a longtime Supercuts area developer, who today operates 33 salons in Los Angeles, also has two items high on his list. "We have to be worried about getting the right location, and then we have to worry about getting the right manager," he says. "I would say the right manager will get the right staff."

Rocco Fiorentino, a Krispy Kreme area developer based in Philadelphia, also thinks a lot about real estate and hiring the right managers for his 16-going-on-27 sites. Another concern he has is how to keep the single-unit owner's personal touch as his doughnut empire expands. But he has a solution. "As long as there is someone local in the marketplace, an area developer or a multi-unit franchisee with an infrastructure, you can have a concept that is just as personal as each franchisee. I can hire a manager who has the same charisma a franchisee would have."

The challenge for John Prince, a multi-unit, multi-concept area developer (Applebee's, Aaron's, Famous Dave's, Hooters), is the same faced by any parent with more than one child: How do you give each concept the attention it needs-and have them work together for the good of the entire family? Like any good parent, he's got that handled.

If you start with one concept, he explains, you have a team that is solidly behind that concept. "When you open up a second concept you have the potential of opening up some problems that you may not have thought through, but you'd better think through," he says. "And that is, How do you make everyone on the original team feel some part of the second concept?"

If you don't, he cautions, there's a tendency for people to fight the new concept. An owner can't expect everyone to be happy because he's got several different concepts that are all thriving, while they have a vested interest in only one. "You've got to figure out a way that you can talk about all the concepts with your key people," he says. "And the only way I can figure out you can do that, is to have all the key people have some ownership interest, or income interest, in every concept, even if they're not actively involved in it. If you don't do that you're going to get in a trap in a million different ways."

Prince has two key people, and both derive income from all of his concepts. And although each owns 10% of the organization, compared with Prince's 80%, when it comes to making decisions, each has an equal vote. And all three possess a veto, so that any new major venture must be unanimous for the company to go ahead. Really, says Prince.

"At some level every manager of every concept doesn't have income from every other concept, but that sort of founding group that oversees everything has to have some income from all of these concepts so that they can genuinely smile when things are going well," he says. "Unless you set that up you're going to have real problems introducing multiple concepts. You can pretend that everybody's just there rooting for the good of the club, but they're rooting for themselves, as everybody is."

Says Prince, "It all translates down to the idea that because I'm doing well you're happy for me in the office. I'm not utterly convinced that everybody in the business is entirely happy if you buy a new toy or you have a this or a that. It's all about helping them buy their hopes and wishes and dreams."

Parking Your Concept

Real estate is an ongoing problem for these multi-unit operators, as it is for all franchisees. Having many units, however, confers certain advantages.

"It's kind of nice as an area developer. Landlords, brokers, the real estate community tend to want to work with you to do a number of deals instead of one at a time," says Fiorentino. "In some respects, a lot of us get the inside track on sites that are forecast to be developed and not necessarily publicized."

He's done 10 site deals for his Krispy Kremes. "A number of developers will call me now and say, 'We're thinking about a project here. Would you have interest?' You develop relationships, which is really what it's all about," he says.

Or you can go even bigger, by bringing in the resources of your franchisor. How does 10,000 locations and a staff of real estate and legal specialists sound for shopping with clout? That's the approach taken by Grace for finding new locations for his Supercuts stores. While he stays on top of real estate himself, Grace takes full advantage of the support and resources provided by his franchisor, Regis Corp., which also owns Regis Salons, MasterCuts, Trade Secret, Cost Cutters, and SmartStyle in the United States.

"I deal with the corporate real estate people, and I find they're more on top of the market than I am. They have good contacts, especially with larger developers, because they do so many deals," he says. Regis, he says, ranks in the top five for the number of site deals done every year.

Money Matters

Financing is always challenging, especially on the food service side, says Fiorentino. Being an area developer for a nearly 70-year-old corporate legend makes finding money a little easier.

"From the multi-unit perspective, there's some advantage we may have in leveraging our cash flow from certain units to get financing for additional units. In a single-unit environment, you may not have cash flow to leverage," he says. "If you've got a good operator and a good system there is financing available. There's a lot of money around. How much is available and at what rate is up to the operator and the concept," he says.

Grace, who continues to add to his hair-cutting salons in the Los Angeles market, is in the enviable position of using his own money to fund expansion most of the time. He's opened two stores in the last 12 months, has another opening in December or January, has bought five stores from other franchisees, and is actively working on a couple of new deals.

"What I'm trying to do is expand without any financing," he says. "I just try to expand from internal cash flow." He's been successful with that, other than with the five stores he bought recently. Most were successful stores that required a larger outlay than needed to open a new store. So he borrowed some money from the bank on a short-term basis, rather than stretch his own resources too tight.

"My preference is to grow primarily with some restraints of internal cash flow, as opposed to going to banks and leveraging myself. I made an exception this year to buy these stores," he says. "It's a steady, deliberate growth based on expansion in the markets I'm in. I'm not looking for new markets."

Retention by Proxy

Grace has managed to retain his early managers for an extraordinarily long time. Five senior people (three operational and two administrative) in his organization have been with him more than 20 years. "They really run the operations on a day-to-day basis," he says.

Prior to his current operation in Los Angeles, he's owned salons in Hawaii, and worked with corporate to open 86 company stores in the New York metro area. Throughout, he says, "The leverage point in our business is the manager." Today, after years of living in northern California with stores in southern California, he's delegating more to his managers than in the past.

While it's imperative to have a great location, once you've selected it, you're going to be there for 5, 10, or 20 years. "You've made that decision and you're there. So now what's the leverage point?" he asks. "The leverage point is the staff, and the leverage point for the staff is the manager. So I do everything I can to keep those people happy, enjoying their job, feeling satisfied with what they're doing, and rewarding them for improvement."

Says Grace, "There was a point in my career with this where I actually knew every employee. I haven't tried to keep that up," he says. He leverages his time by working with his managers. "Several times a year I try to have interactions with the group of managers, and individual interactions in between with some. I like to think I'm semi-retired."

Despite his success at employee retention, he says, "Staffing is always a problem. You never overcome it. The way I battle it, however, is by treating people right so they stay with me. Through retention, you don't have to recruit as much."

Finding Keepers

Hiring and retaining good people, especially his managers, is a key goal for Welter as he develops the Las Vegas area. "You need to identify the kind of people you want to grow with, and then provide a nurturing environment for them to challenge them, and make them feel like they're learning every day and contributing," says Welter. "Give them as much support as you can but also make sure you have safety nets for them, too. You can't let them out there by themselves. That's kind of a balancing act you play."

Welter, who has a long history in fast food franchising from a marketing and advertising perspective, has a set of criteria for the people he hires. Mostly he looks for "common sense, a willingness to appreciate other people's talents and opinions, and an outgoing kind of personality."

That's because he considers the restaurant business an entertainment business. "You have to get people to feel comfortable and enter-tained-not only the guests, but also the other workers. That person's like a ringmaster almost. I think it's important to understand that, and I'd rather have that in a person than have someone who has a wonderful financial statement, a degree, or experience, but who doesn't have any personality."

Infra/Structure

After figuring out what you want to do with your franchise life, and where you want to do it, "The critical thing is determining what the appropriate overhead and management structure is for your multi-unit business," says Grace. The problem in saying that, he quickly adds, is that it's not the same for anybody. Ever. One key factor is the area developer-not only their personality and philosophy, but the specific skills and approach they bring to the party.

Grace, for example, comes from a financial background, and is able to carry a certain amount of the financial load. Someone like Welter, who was executive vice president of marketing for Wendy's and ran his own agency for 18 years, has no need to hire a marketing person.

Then there's the "shirtsleeve" factor. Some larger developers like to be their own GM and manage 10 stores themselves, while others prefer to hire. "It becomes a question of whether you think you're going to be doing that much better a job, and/or whether you want to say, 'Well, I don't want to pay someone else to do it,'" says Grace.

Another viable path for an area developer, he says, is to build a large infrastructure early, in anticipation of planned future growth. This creates a solid foundation, but is expensive until critical mass is attained. And if the concept doesn't grow as much or as quickly as anticipated, that money is not recouped over time and the developer will have to restructure, probably by cutting back on personnel, creating a new set of problems as remaining staff struggle to pick up the load.

Yet, as economists are famous for pointing out, there's always another hand. For instance, spending a lot up front is a cash drain and cutting back staff hurts morale, so it could be argued that it's better to build up slowly and have people experience the excitement of growth, rather than overstaff and cut back.

Raising that other hand, Grace counters that there's a point at which you must have your structure in place to facilitate growth. "While it's expensive to have it up front, it's much more effective than being understaffed and scrambling all the time and causing a lot of problems. Those kinds of mistakes can be more expensive than slightly overstaffing as you're ramping up."

Then there the "death box": a zone-often 4-6 units, though it varies by concept-in which the number of units is too small to justify the overhead, yet is too large not to have the overhead in place. (See "Surviving Growth" in this issue.) Why death box? If overhead outstrips revenues too quickly it's trouble on the financial side; but if growth outpaces the developer's ability to manage and support it, it's operational suicide, which quickly leads to financial trouble.

Fiorentino has signed up to build 27 Krispy Kremes and has 11 open. Each has a general manager who reports to a district manager, who reports to a vice president of operations. "Those general managers, for all intents and purposes, are my little franchisees," he says. "I work with each of my managers, and make sure they are the type of person I would want running that ship." Accordingly, when he opens a new store, Fiorentino gives each new manager a captain's hat, "Because they are the captain of their ship. They basically are the franchisee of that world, and they get consistent direction from my infrastructure."

When he gets to 12 stores, he'll probably break that up and have two district managers with six stores each. When each grows to eight or nine, he'll cut back to six and add another district manager. His goal is to remain in the six to nine range for each district manager. "It depends on the managers. We've got some stronger managers who may not need as much supervision, so we can put more stores on that district manager with stronger managers."

Then there are the area developers who like to operate close to the bone. "My goal is to have as few people as possible who are not involved in the store operations involved in any sort of infrastructure," says Welter. The fewer the better, he says, because more people just get in the way of communication and create layers and obstacles between the franchise and the customer.

"I'm a really big believer in keeping your infrastructure down and keeping your contacts with the people who are closest to the guests," says Welter. If you can get by with one person or two, that's plenty, he says. "Outsource as much as you can-accounting, finance, all the stuff that you can buy on the side, because you end up being an administrator, opposed to an operator-and we're operators, not administrators."

So what is Welter's infrastructure? In addition to himself, Welter has just one person, a director of operations who runs the stores. Okay, his wife helps out with some basic office work, but that's it. And his son, just out of school, is also involved in the business, but in more of a mentored role.

Getting the Word Out

For marketing and advertising, two key components of building his brand, Welter relies on his own experience in marketing. (See Area Developer, Summer 2004, page 36.) His advice to "know who you are as a multi-unit operator," also applies to his approach to building brand and being competitive in your market.

"You have to know who you are, and what you want to be in the market. That's the most important thing. Develop that niche and stick to it, and do everything you can to protect it," he says. "The most important thing you need to do is be single-minded. You need to stay on focus. You can't allow yourself to try to be all things to all people and be in all different types of media. You really need to pick something and stick with it, and make sure that you keep it fresh and in front of the customer all the time."

Because of the lively, entertainment-oriented aspect of his restaurants, Welter uses broadcast media primarily-cable TV, regular spot TV, and radio, for 1) its ability to reach as many people as efficiently as possible; and 2) "its effectiveness at portraying the characteristics of our brand in terms of the appetite appeal of the food and the fun aspect of it."

Behind the Scenes

As a consequence of Grace's financial acumen, his company not only does its own accounting, but also takes in work, doing the books and administration for several other, smaller Supercuts franchisees. "It's good to have more business to spread the cost over," says Grace. "It's good for us, and it's good for the other franchisees, because they generally couldn't do it for the price we charge, and we can still spread the overhead."

A strong back office operation is critical to an area developer's success. "Information is extremely important. Without information you just can't run a business," says Fiorentino. Through a point-of-sale system that provides real-time information from every register in every store, he is able not only to monitor every detail of his stores' performance, but to use that information in several different ways to improve the organization as a whole. "It helps us manage our cash flow and manage our business from a financial perspective-not so much the organization, but the actual business itself," he says.

Another benefit of having so many restaurants is that he can use that information to develop best practices across the organization, rapidly applying the lessons of one store to every other store. All of Fiorentino's general managers have access to all the information from all the other stores, including P&Ls.

When Is Enough?

Some people look forward to retirement, some work until the day they drop. Some are content to build an empire and pursue one of several lucrative exit strategies (see "Exit Strategies for Multi-Unit Operators" in this issue). You might think any of the four area developers in this story could retire if they wanted to, or just let their operation hum along, producing cash flow and allowing the key people to accumulate wealth and everyone from upper management to the newest hires to bring home the bacon. Think again.

"I'm 62 years old, so I'm not looking the way I was in my 40s to create an empire," says Grace. "I'm not trying to do the most stores I can do. I'm just doing what I consider to be necessary and sensible growth within the areas I'm already in. When there are new shopping centers being built and areas that are growing, it only makes sense to protect our brand and protect my market by putting it in myself."

Prince adds a different twist. "My 91, totally healthy mother has often, in effect, said, 'Why do you keep expanding? Why do you keep growing? Why don't you slow down and go play golf like a normal guy?' And I say, 'Mom, this may sound crazy, but it's actually safer to keep growing.' It's not safe to stop growing because you can say, 'Oh, I have all the money I need now, no problem.' But it isn't about that. It's about all the people with you who don't have all the money they need."

Says Prince, "If you're not growing, people at some level have to know that growth is their ability to move up to another slot, to another income level, to another satisfaction level. If they don't see growth then they're going to go to some company that is growing. I just think that reasonable growth is the only safe way, the safest thing."

- Eddy Goldberg is a business and technology writer from Amherst, MA.