Franchises can be match made in heaven

Want to start a business but don’t know how? The franchisors are looking for you…The associations suggest that franchising is the royal road to success, and it has been for many, but the full truth about franchising is hard to get.

The Toronto Star
May 21, 1998

Franchises can be match made in heaven
Big corporations wed independent small business
John Deverell


BEST OF FRIENDS: Jeff Mooney, chairman of A&W Food Services Canada Inc., and the Root Bear are pushing franchise growth in Ontario.

Want to start a business but don’t know how? The franchisors are looking for you.

All across North America franchising has become a dynamic and dominant corporate form, marrying the virtues of big corporations with the nimbleness and commitment of independent small business.

The big chains such as McDonald’s, Tim Horton’s, Century 21, Ramada Inn, Swiss Chalet, Canadian Tire and Esso are household names, but there are thousands more in the game including many just getting started – some of which will fail.

The International Franchise Association, a gathering of successful operators, tells us that 4,000 franchisors employ 8 million Americans and make sales of nearly $1 trillion (U.S.) each year.

In Canada, says Richard Cunningham, of the Canadian Franchise Association, there are about 1,200 franchisors with 65,000 franchisees making annual sales of around $90 billion (Canadian).

The associations suggest that franchising is the royal road to success, and it has been for many, but the full truth about franchising is hard to get.

“There are no reliable statistics on the success rate in franchising,” says Ted Dixon, of St. Catharines. He’s a long time industry-watcher who publishes The Franchise Annual Directory and a monthly newsletter, the Info Franchise News Inc.

In Ontario, there is no legal requirement that franchisors make full disclosure of their business history when pitching to prospective franchisees.

Dixon’s directory has listed as many as 5,000 North American franchisors, but what he observes is 400 to 500 new entries each year and 300 to 400 franchisors dropping out of sight.

“It’s a reminder to me that a franchise doesn’t guarantee success,” he says. “At best, a franchise can reduce business risk, but there is still risk.”

Cunningham of the CFA hopes Ontario will catch up with Alberta this fall and require franchisors to make full disclosure to prospective franchisees.

The most significant improvement, he says, would be a requirement to provide a list of all current franchisees and a record of franchise turnover going back at least two years.

“Full disclosure brings a lot of problems to the forefront.”

The most common problems in franchising are created by franchisors who grow too fast without sufficient management capacity in place, and franchisees who don’t investigate before investing, he says. There is no substitute for diligent investigation before writing any cheques.

Still, the transformation of North American business by franchising recent decades has been astounding.

Among the newer Ontario movers is A&W Food Services Canada Inc., which under chairman Jeff Mooney is bringing its burgers and root beer out of the shopping centers and into gas stations and other street locations.

The Great A&W Root Bear may be cute and cuddly, and the burger may be called a Teen, but it has “a full-flavoured adult taste profile,” Mooney says. “The market is aging, and the market is coming to us.”

A&W Canada’s 500-restaurant chain is second only to McDonald’s in burger volume and Mooney plans to add 250 stores to the system over the next five years. The Ontario network of 100 stores is the main focus for growth.

The franchise fee is $50,000 with royalty set at 5 per cent of sales plus 3.5 per cent to the advertising pool. Total startup cost to a franchise ranges from $200,000 to $550,000 depending on setup and location “and that’s among the lowest in the whole industry,” says Mooney. “We have very few outright failures.”

Another fast-growing food franchisor is the Great Canadian Bagel, which started in 1993 and already boasts 160 stores with system sales of $73 million.

Brian Leon, the bagel chain’s president, attributes its rapid growth to public concerns about fat and cholesterol. A dozen bagels contain less fat than a single donut or muffin, he says.

“And our bagel is versatile, just as good in a lunch-time sandwich as it is with cream cheese at breakfast.”

The key to successful franchise growth, he says, is an active advisory council of franchisee representatives elected by secret ballot. They help shape the company’s strategy – currently it’s adding soups and a few pastries to the menu – and maintain franchisee confidence in the fairness of head office rulings.

The franchise fee is $30,000 and nobody owns more than four stores “because we prefer hands-on operators,” he says. The royalty is 6 per cent, plus 1.5 per cent for central advertising and 2 per cent for local advertising.

Leon says stores cost about $250,000 to build, and the company can arrange $2 in credit for every $1 in equity provided by the franchisee.

In a business marked by turf warfare among several new chains, the Great Canadian Bagel has suffered only five store failures.

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