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Presented by: Jim Amos, Jack Earle, John Hamburger,
Dennis Wieczorek & Philip Zeidman
Monday, February 18th, 2013 DLA Piper LLP (US)
The 22nd Annual
―Elements of Successful Franchising: Working Through
Difficult Economic Times‖
1
Partner | DLA Piper Dennis Wieczorek
2
Philip Zeidman Partner | DLA Piper
3
Jim Amos
4
Chairman | Tasti D Lite and Planet Smoothie
5
Managing Partner | Earle Enterprises Jack Earle
John Hamburger President | Franchise Times Corp.
6
Philip Zeidman, Partner
DLA Piper LLP (US)
7
How is Franchising Affected by
the World Around us?
8
FOCUS ON VALUE
9
Disposable Personal Income
10
11
Wendy’s, Domino’s ring in new year
with aggressive value plans
12
Top 10 Franchises Focus on Value
• Price/Value – #1 Hampton “…it’s value that has kicked Hampton’s
Domestic and international growth into overdrive.”
– #3 Jiffy Lube “the company continued to expand, in part because it charges no franchise fee for new service centers or for existing ones that convert.”
– #4 7-11 “In 2012 it began offering upgraded technology systems on its own dime.”
– #6 Anytime Fitness “With more than 2,000 units that can be accessed 24 hours a day by all 1.7 million members, the company aims to minimize the hassle of fitness, allowing its customer to work up a sweat wherever they may be, at any time. Locations are small and unintimidating”
13
Top 10 Franchises Focus on Value
– #8 Denny’s “jump-started its franchise growth with a
series of fee cuts and reductions, including creating a
$100 million loan pool to help existing and new
franchisees open locations. … the company has
developed a tiered menu, with selections priced at $2,
$4, $6, and $8 – a broad strategy designed to appeal
to customers from all economic sectors.”
– #10 Pizza Hut “selling units with a footprint called
“Delco Lite,” a smaller store (offering primarily
carryout and delivery) that can fit into strip malls and
other shopping areas.”
14
FOCUS ON AGING
15
US Population 65 and Older
16
Aging Population Drives Growth in
Elder Care Franchises
17
FOCUS SHIFTS TO WOMEN
18
Women in the Workforce
19
LIFESTYLE
• FITNESS
• ENVIRONMENTAL
• DIETARY
20
7-Eleven Shifts Focus to
Healthier Food Options
21
Top 10 Franchises Focus on Health/ Fitness
• Health/Fitness
– #2 Subway “…in 2012 the company received the
American Heart Association “Heart Check” for
healthful menu items, solidifying the brand’s
reputation as a “Slimmer” alternative to other fast
food.”
– #6 Anytime Fitness “It’s the closest thing to having a
basement gym of one’s own.”
– #9 McDonald’s “customers across the U.S. were
greeted with new menu boards listing calorie counts
for each item and a separate list of those with fewer
than 400 calories.”
22
FOCUS ON MINORITIES
23
24
0 5 10 15 20 25 30 35 40
# of People speaking Spanish in 2011 (in millions)
# of People speaking Spanish in 2000 (in millions)
# of People speaking Spanish in 1990 (in millions)
25
Percent of U.S. Population By Race and Hispanic Origin
26
Source: U.S. Census Bureau, Population Division
Education
27
Competitors Still Beat
U.S. in Tests
28
29
US Students Studying Chinese vs. Number of
Chinese Studying English
Key =
one
or =
200K
people
Unadjusted Adjusted
30
0
50
100
150
200
250
300
350
400
# of Students Studying Chinese in the US
# of Students Studying English in China
Dennis Wieczorek, Partner
DLA Piper LLP (US)
31
WHAT’S HAPPENING RIGHT
NOW? TRENDS
FRANCHISORS ARE FACING
TODAY
32
The Institutionalization of
Franchising
33
Institutionalization of Franchising
• Financial Markets Have a Better Understanding
of Franchising
– Public companies
– Securitization
– Private equity
34
Institutionalization of Franchising
• Private Equity
– Numerous transactions
• Purchase from founder
• Purchase from another P/E firm
– Attractive because
• Predictable revenue stream
• Growth model
• Modest capital needs
35
Institutionalization of Franchising
• Private Equity
– But not all roses
• Prominent bankruptcies
• Restructurings at others
• Many relate to acquisitions before crash in 2008
36
SOCIAL MEDIA
37
Social Media
• Key element of many franchise programs
– Most often to reach customers and create loyalty
(and consumer facing programs are important to
franchise sales)
– But broader uses too: jobs, franchise sales
38
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
media but subject to some overall franchisor control
– Legal issues • Truth-in-advertising
• Defamation
• Franchise laws
• Endorsements
39
Social Media
• Importance to Franchise Sales
– Robust sites allow interaction with
candidates
– Blogs
– Validation from existing franchisees
(lessens need for phone intrusions)
40
• Who is watching your brand on social media?
– Staff
– Outside service
• Without unifying policies, could create chaos
Social Media
41
The Government
Is Here To Help You
42
Government Intrusion
Employment
– Health care
– Fast union elections (in lieu of card check)
– Wage hour laws – continued litigation
– But recent success in litigation against NLRB
43
Intersection With Employment Law
Can a franchisee be an employee of the franchisor?
• Massachusetts case – minimum wage and other requirements
– IFA working on a statutory change
• Some favorable decisions in other states
• But plaintiffs lawyers are expanding cases to other franchise systems
44
Government Intrusion
Operations
– Menu labeling
– What you can sell – N.Y.C. beverage law
– Where you can locate – local zoning restrictions
45
Government Intrusion
Financial matters
– Credit
• IFA working with SBA to facilitate use of Franchise
Registry
– Taxes
• Only going up and continuing uncertainty
regarding debt and spending
– Federal ethanol policies
46
―Nexus‖ – What Does It Mean?
• KFC v. Iowa – first high court holding that
franchisor has nexus with a state for
income tax purposes
• Income tax different from sales tax
• Nexus exists if trademarks used in state
47
Government Intrusion
Franchising
– Some issues percolating in several states
– IFA fought off CA bill
– New activity in MA and elsewhere
48
The Affordable Care Act
49
Affordable Care Act
• Unless very small (less than 50 employees), it
applies to many franchisors and franchisees
• Setting up additional entities doesn’t help -
attribution rules
50
Affordable Care Act
• Understanding the law
• Determining financial impact
• Retaining employees – dealing with the
competition
• Public relations issues
51
Government Intrusion
• Franchisors and franchisees are on the
same page on almost every issue
• IFA increasingly recognized as the
voice of small business (and all of
franchising)
52
John Hamburger, President
Franchise Times
53
Restaurant Finance Monitor 200
• The Top 200 U.S. Restaurant Franchisees in the
U.S.
• Ranked According to Annual Sales and Number
of Franchised Units
54
Franchise Times 200 Ranking
2011 2001
System Sales $545 Billion $318 Billion
Locations 463,976 342,130
Franchise % 88% 81%
International % 34% 27%
55
The Top 10 Franchises–Revenue
Company Worldwide Sales
McDonald‘s $85.9B
7-Eleven $76.6B
KFC $21.3B
Subway $16.6B
Burger King $15.0B
Pizza Hut $12.6B
Ace Hardware $12.5B
Hertz $11.9B
Circle K $11.8B
Wendy‘s $9.2B
56
The Top 10 Franchises–Locations
Company Worldwide Locations
7-Eleven 43,912
Subway 35,920
McDonald‘s 33,510
KFC 17,401
Pizza Hut 13,747
H&R Block 12,776
Burger King 12,512
Jani-King 11,170
JAN-PRO 10,680
Dunkin‘ Donuts 9,792
57
10-Year Sales Growth
Company Worldwide Sales
7-Eleven $46.9B
McDonald‘s $45.3B
KFC $12.6B
Subway $11.4B
Pizza Hut $5.0B
Tim Horton‘s $4.6B
Hilton Hotels $4.4B
Dunkin‘ Donuts $3.5B
Burger King $3.3B
H&R Block $3.2B
58
10-Year Unit Growth
Company Worldwide Locations
7-Eleven 21,264
Subway 19,961
KFC 5,586
Dunkin‘ Donuts 4,892
McDonald‘s 4,454
Liberty Tax Service 3,522
Domino‘s 2,670
Jani-King 2,648
H&R Block 2,425
Coverall Cleaning 2,168
59
10-Year International Unit Growth
Company International Locations
7-Eleven 21,037
Subway 8,487
KFC 6,205
McDonald‘s 3,493
Domino‘s 2,576
Century 21 2,273
Pizza Hut 1,875
Burger King 1,823
Dunkin‘ Donuts 1,620
Dairy Queen 1,284
60
10-Year Percentage Growth
Company Worldwide Sales
Liberty Tax Service 3335%
Wingstop 1804%
Jimmy John‘s 1796%
Plato‘s Closet 1424%
Cold Stone Creamery 1005%
Buffalo Wild Wings 929%
Panera Bread 646%
Goddard School 575%
McAlister‘s Deli 458%
Tim Horton‘s 430%
61
10-Year Largest Unit Declines
Company Worldwide Locations
Taco Bell -738
Midas -526
Holiday Inn -505
Hardee‘s -419
Schlotzky‘s -322
Jiffy Lube -255
Sir Speedy -238
Play It Again Sports -177
Travelodge -158
Fantastic Sams -135
62
Growth Trends–Sandwiches
Company Worldwide Sales
Jimmy Johns‗s $970M
Einstein Bagels $413M
McAlister‘s Deli $367M
Firehouse Subs $285M
Jersey Mikes $280M
Corner Bakery $261M
63
Growth Trends–Fitness
Company Worldwide Sales
Massage Envy $804M
Planet Fitness $520M
Anytime Fitness $365M
Snap Fitness $334M
64
Growth Trends–Fast Casual
Company Worldwide Sales
Five Guys $946M
Qdoba $528M
Moe’s SW Grill $381M
Jamba Juice $423M
Wingstop $379M
Noodles & Co. $300M
65
Franchise Times 200
Franchise Concentration
% Franchised 2011 2001
100% 66/200 61/200
>90% 113/200 103/200
>80% 138/200 122/200
66
Franchise Times 200
International Franchising
2011 2001
Overall 34% 27%
>50% 21/200 16/200
>25% 54/200 47/200
67
Restaurant Finance Monitor 200
2011 Versus 2001
2011 2001
Revenue $23.9 Billion $16.6 Billion
Locations 18,407 16,462
Multi-Concept 89/200 77/200
68
Monitor 200—Largest Franchisees
Company Annual Sales
NPC International $938M Pizza Hut
Apple American $821M Applebee‘s
Bridgeman Foods $518M Chili‘s—Wendy‘s
Covelli $426M Panera
Strategic $405M Burger King
Boddie-Noell $386M Hardees
Carrols $348M Burger King
Harman Mgmt $346M KFC—Taco Bell
Briad Group $327M TGI Fridays—
Wendy‘s
Doherty $303M Applebees—Panera 69
WHAT HAVE WE LEARNED FROM THE MONITOR 200
STUDY?
• Increase in multi-concept franchisees
• Primary concept is a large brand
• Growth is from consolidation, not unit growth
• Lenders, PE firms, lower margins and high
remodeling costs are driving consolidation
• Large franchisees are willing to accept modest
risks with secondary brands
• Top 200 are heavily targeted by franchisors
70
WHAT‘S IN STORE FOR THE FUTURE?
• Franchising is still a growth business
• New ideas come along frequently on trends
• Companies would be wise to focus on
international development
• Franchisees seek strong brands
• Capital migrates to the strong brands
71
THE GROWING
INTERNATIONALIZATION OF
FRANCHISING
72
International Growth
The 200 Top Franchisors now have 34% of Their
Units Outside the U.S.
Courtesy of Franchise Times
73
International Growth
• The Larger the Franchise Network, the Higher
the % Outside the U.S.
Courtesy of Franchise Times
74
International Growth
• But Not Just the Giants. . .
• And Not Just Food Service. . .
• And Not Just Hotels. . .
• Service and Retail. . .
75
Does your company currently either franchise or operate
locations in international markets?
76
Does your company plan to accelerate or start new
franchise operations in international markets?
77
How important is international to your company‘s
future success?
78
WHY IS THIS HAPPENING, AND
WHY IS IT HAPPENING NOW?
79
THE LEGAL ASPECTS OF
INTERNATIONAL FRANCHISING
80
Franchise Laws Around the World:
Beginning of the 1970‘s
Copyright © 2011 DLA Piper. All rights reserved. 81
Franchise Laws Around the World:
Beginning of the 1980‘s
Copyright © 2011 DLA Piper. All rights reserved. 82
Laws Applicable to Franchising
February 2013
83
Blue = Disclosure Law
Green = Relationship Law
Red = Disclosure & Relationship Laws
Black = Other
The Americas
Antigua and Barbuda (1991)
Barbados (2002)
Brazil (1995)
Canada
Alberta (1980)
Manitoba (2012)
New Brunswick (2011)
Ontario (2000)
Prince Edward Island (2005)
Mexico (1994)
United States
Federal
Several States
Venezuela (1992)
(competition law)
Europe
EU (2002)
(competition law)
Within EU
Belgium (2006)
Estonia (2002)
France (1989)
Lithuania (2001)
Italy (2004)
Romania (1997)
Spain (1996)
Sweden (2006)
Non-EU
Albania (1994)
Belarus (2006)
Georgia (2001)
Moldova (1997)
Russia (1996)
Ukraine (2004)
Central Asia
Mongolia (2002)
Kazakhstan (2002)
Kyrgyzstan (1998)
Turkmenistan (1998)
Asia
China (1997)
Japan (2002)
Macau (1999)
South Korea (2002)
Taiwan (1999)
Vietnam (2005) The Middle East
Saudi Arabia
(1992)
(commercial
agency law) South Pacific
Australia (1998)
Indonesia (1997)
Malaysia (1998)
Does 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.
Africa
South Africa (2011)
Angola (2003)
Tunisia (2009)
Western Asia
Azerbaijan (2000)
• Implications for U.S. Franchisors
• Upside or downside?
84
Becoming More Like Us?
Improving Markets Abroad
• Spreading affluence, growing middle
class
• …the pluses and minuses
• Growing Competition
– By indigenous Companies
– Coming into the U.S.
– For employees
85
86
87
Moments of Opportunity…Moments of
Peril
88
Programs or rights not included at outset
will prove difficult to initiate later.
89
Establish objective criteria, or
self-executing mechanisms or events that
eliminate need to take confrontational
position with franchisees.
90
Preserve right at renewal to require franchisee to –
– Sign a current franchise agreement
– Upgrade its facility to current standards
– Use appropriate occasions to require franchisee
to update or improve.
91
What if you‘re wrong?
92
WHEN TROUBLES COME…
93
Number of Franchise Brands Added Each Year
94
Brands Starting to Franchise
0
50
100
150
200
250
300
350
400
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012*
*estimate
Percentage by Year of New Brands with 0 Company
Units at Start (Frandata)
95
Percentage of Brands with Previous Years of
Business Experience (Frandata)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%2
00
0
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
0-1 Y R
2-5 Y R
> 5 Y R
96
“Majority of US Franchises Now Owned
by Multi-Unit Franchisees”
97
Q & A
98
Contact Information
Jim Amos
Email: [email protected]
T: 615-550-3114
Jack Earle
Email: [email protected]
T: 856-797-9870
John M. Hamburger
Email: [email protected]
T: 612-767-3201
Dennis E. Wieczorek
Email: [email protected]
T: 312-368-4087
Philip F. Zeidman
Email: [email protected]
T: 202-799-4272
99
100
DLA Piper LLP (US) gratefully acknowledges
the following:
101
