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Business Observer Thursday, Jun. 11, 2009 12 years ago

Chow down growth

The restaurant industry is having several recession-forced problems. But a few hungry chains smell growth opportunities amid the downturn.
by: Mark Gordon Managing Editor

The restaurant industry is having several recession-forced problems. But a few hungry chains smell growth opportunities amid the downturn.

Gulf Coast entrepreneurs looking for a way out of the recession might find one through a large helping of omelets and Philly cheesesteaks. Maybe they'll top it off with a Big Gulp or a Slurpee.

That's because several restaurant chains in the region are priming for growth in spite of the downturn, using franchising as the go-to menu item. Lakewood Ranch-based First Watch, Tampa-based Westshore Pizza & CheeseSteaks and Lorton, Va.-based Five Guys Burgers and Fires are among the chains looking to open new stores and add new franchisees, both locally and nationwide, in the latter half of 2009 and into next year.

First Watch is moving gradually into franchising, a strategy befitting a company known for its low-key approach. “We are treading slowly in this economy, to make sure we don't make any mistakes,” says First Watch president and chief executive Ken Pendery.

After 26 years of growing its corporate run stores, First Watch decided to officially enter the franchising game in early 2008 — just in time for the recession to get cooking. Pendery, however, says franchising will provide a base for faster and deeper growth and he's still confident it's the right long-term decision.

“We can attract the right franchisee,” says Pendery, “but it's hard to find one loaded with cash.”

Westshore and TCH Restaurant Group, the Tampa-based franchise holder for a trio of Five Guys territories, are treading somewhat slowly into franchising expansion too, although the latter recently received a jolt of fast-growth news: A private investor, in a one-day placement last month, dropped $5.9 million into TCH's portfolio with the goal of helping the company open at least 15 new stores in the next few years.

The executives at these and a few other restaurant chains are reading the franchising trend lines. And one key recession-based trend in the restaurant side of the hospitality industry is that franchising is currently in. The idea is to find high net-worth folks, possibly coming from the corporate world, that are looking for a change of business scenery.

“Recent history proves that if you're employed in middle or even upper management and your company hits hard times, you could be expendable,” Westshore founder Bob Vasaturo says. “We want to offer an alternative to that scenario.”

Even 7-Eleven, the convenience store chain with more than 5,700 stores nationwide, is trying to grow its franchise base on the Gulf Coast by recruiting executives looking for a new opportunity. While not a restaurant chain, the company is competing with mid-priced eateries for some of the same perspective franchisees.

“We are really starting to see a lot of people looking for a career change, or who were laid off from other jobs, contacting us,” says Gary Gray, 7-Eleven's regional sales manager for Florida.

Eggs Benedict
Pendery says he has discovered a similar situation, at least anecdotally, in speaking with potential franchisees in places such as Michigan, Oklahoma and Kentucky.

The lack of financing has certainly been a roadblock for perspective franchisees, says Pendery, but he says the company has no regrets in finally deciding to go the franchise route. There was a time, during the boom, when First
Watch executives would get a call a day from someone asking about franchise rights.

“We always knew we wanted to franchise,” says Pendery. “But we had to have the right structure and find the right time.”

The company decided that time was early last year. Its initial goals are to grow the chain by about 35% over the next three years, going from its current count of 80 stores to about 110 by the end of 2012, with at least a dozen of those franchise-run. It's selling franchise territories, as opposed to individual stores.

The initial investment for a franchisee can range from $691,000 to $1.087 million, a cost that includes a $35,000 franchisee fee. Franchisees must be able to develop a territory with at least three restaurants and must have a net worth of at least $1 million, according to company franchise documents.

Other costs include a $17,500 development fee for each additional restaurant; a 4% royalty of weekly gross sales; and a system fund fee of up to 3% of weekly gross sales that promotes the First Watch brand on a system-wide basis. Finally, franchisees must spend at least 1% of gross sales on local marketing.

First Watch executives, of course, contend the investment is a good one long-term. The company's combination of a cheery corporate culture and good service with a mid-priced comfort food style menu has proven to be successful.

Indeed, the company has reported same-store sales growth every year since it was founded in California in 1983. Sales hit $82 million in 2008, up 14% from the $72 million it reported in 2007. The company is projecting $85 million in 2009 revenues. The average revenue per store is about $1.2 million per year.

In addition to sales growth, Chris Tomasso, First Watch's chief marketing officer, says a franchisee would be buying into the company's subtle yet successful strategy in keeping the restaurants up-to-date. “It's never one big splash,” says Tomasso. “We do a little bit that all adds up.”

The new initiatives include switching to a proprietary, gourmet-style blend of coffee and introducing some new menu items, which are scheduled to debut later this year.
“We are always trying to build on our core,” says Pendery, “rather than invent a whole new way of doing business.”

Thank heaven
Executives at 7-Eleven, meanwhile, haven't invented a whole new way of selling franchises in Florida, but they have altered the process enough to create a buzz of interest. Entrepreneur magazine ranked the chain as the best franchise opportunity in the U.S. last year.

To spur growth in Florida franchise opportunities, the parent company is selling several corporate-owned stores in the state without the premium that is attached to the purchase of a store already owned by a franchisee.

Jeff Davis, a field consultant for several 7-Eleven stores in New York City, took the bait. He and his wife bought a 7-Eleven store in New Tampa in December and are expecting to close on a deal for a second store near Orlando next month. “When you don't have to pay the [entry] fee and can get an existing store, it's a no-brainer,” says Davis, 37.

Even better, says Davis, is monthly sales at the store he bought are up, as much as 3% a month in 2009.

Davis declined to say how much the store does in sales per year or how much he paid for it, only to confirm that both figures are well over $1 million. The company's franchise fee is a percentage of the store's previous 12-month profit line.

“I look at our business as recession-proof in some ways,” says Davis. “We aren't selling Mercedes Benz here. We are selling the things people need every day.”

Entrepreneur moves on

While a few restaurant chains are seeking growth through franchising, several others are using the recession as a time to scale back.

Bennigan's, Applebee's and Steak & Ale are among the chains nationwide that have closed down restaurants; Bennigan's and Steak & Ale filed for bankruptcy last year.

And now locally, an entrepreneur who founded the Peach's Rise & Dine chain of breakfast-lunch-brunch restaurants 25 years ago is looking to get out of the industry entirely. Michael Luciano, a onetime Review nominee for
Entrepreneur of the Year, has put the 10 Peach's restaurants he owns in Manatee and Sarasota counties up for sale.

The $4.25 million asking price reflects the near-dead Gulf Coast market for big-ticket commercial real estate deals. Luciano actually had the restaurants under contract for sale late last year, but the deal collapsed when the buyer couldn't get financing.

The offering, which is being listed by Re/Max broker Stan Rutstein, includes all of the equipment and related restaurant items for all 10 locations, which are leased. Luciano has also put the company's corporate office building and its catering building up for sale, for $599,000 and $399,000, respectively.

Luciano founded Peach's in the 1980s, when he opened his first restaurant in New Hampshire. He moved to the Gulf Coast a few years later and began expanding in the 1990s. In 2006, Luciano brought in a team of restaurant executives to franchise the concept, under the Rise & Dine brand name.

Luciano kept his 10 corporate-owned stores in the deal. But he recently decided to get out of the business entirely, saying he wanted to try something new.

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