Food Franchises Gain Momentum in Arkansas

Two years ago, few people in Arkansas had heard of Zaxby’s. Since then the “fast-casual” chicken franchise has hatched nine locations across the state and continues to multiply with oddly unflinching confidence in a teetering economy.

Three more locations, in Jacksonville, Cabot and Searcy, are preparing to open soon. More stores in Bryant, Van Buren and Fort Smith are in the works, and Conway can expect a second location. One of the state’s three franchisee teams also has plans for a location at the Shackleford Crossings shopping center but is waiting for the development to become more populated.

And that’s not all. Brian Driggers, co-owner of the Bentonville and Springdale locations, opened a Fayetteville location on May 12 and his Siloam Springs store will open in about a month. Driggers and his business partner, David Jackson, have an 11-store deal with the chicken franchisor, all of which will sprout in Northwest Arkansas.

By next June, the chain will have created more than 440 jobs in Arkansas and could add as many as 1,200 jobs if the franchisees fulfill their contracts for a total of 30 Zaxby’s stores in Arkansas.

But why has this fast-casual concept – a category that offers higher quality meals than fast-food restaurants but without full table service – enjoyed such rapid growth? Is the rocky economy that is shifting consumers from department stores to Wal-Mart also driving them from higher-end restaurants to something cheaper?

Gary Avants, whose 12-store contract is the largest in Arkansas, said yes. “I think what we’re seeing is people are downsizing to Zaxby’s … . And I think the people who are going to these Outbacks and Chili’s are coming now to Zaxby’s,” he said.

Or is the allure in the assurance a franchise gives investors, in the confidence that one’s life savings won’t be squandered on a long shot because the concept has already been proven to work?

John Reynolds, president of the International Franchise Association Educational Foundation, said that the security of a franchise network is certainly a factor in the trend. According to statistics from the IFA, Zaxby’s is not alone in its expansion.

Franchises in Arkansas climbed 16 percent to 10,070 establishments from 2001 to 2005, which are the only two years the IFA has conducted comprehensive surveys. Economic output from franchised businesses grew 54 percent to $17.6 billion in 2005.

‘Brand Promise,’ Support

The sense of investment security is rooted in the “brand promise” – the consistency and predictability that likely influences, even if subconsciously, a consumer’s choice to buy that product or service. “You know that you’re going to get the same consistent service, the same quality product or whatever that’s associated with that brand name,” Reynolds said.

But it’s more than just security that has caused franchises to proliferate, Reynolds said.

Another draw to the franchise business is the monetary support. “The main reason businesses fail in the first three or four or five years is because they’re not capitalized adequately to begin with,” Reynolds said. Of course, initial franchise fees vary, but many are less than it would take to start a business from scratch.

Some franchises, like Chick-fil-A, shoulder pretty much all of the expenses of real estate, construction, etc. The company charges only $5,000 for the initial fee, a nominal amount that is much easier to budget than shelling out the cash for all the components of a business start-up.

Knowing the costs up-front is one thing that attracts investors to franchises. “They take all the guesswork out of it,” Avants said of franchising.

“One of the things that I think has helped the franchising industry grow is that there are many more sources of information out there about business investment opportunities than there were five years ago,” Reynolds said.

“When you’re looking at getting into a franchise business, you have all the info in the world you need to make a sound decision about whether that’s a good investment opportunity for you or not because of the way the disclosure laws are set up,” he said.

Reynolds detailed some of the information available: owners, franchisees, how long they’ve been in business, a list of franchisees that left the business, etc. In addition, about a third of franchised companies provide earnings reports, Reynolds said.

Having a list of fellow franchisees offers a network of support. Reynolds said franchise owners tend to be willing to help each other for the common good of bolstering consumers’ attitudes toward the brand.

“In some systems you have a lot of communication and cooperation and exchange of ideas between franchisees with other franchisees in the same system,” he said. “A lot of new ideas get developed, a lot of new products and services, ways to improve the store.”

The network can even serve as a safety net when disaster strikes. Reynolds said some franchises that were hit by Hurricane Katrina received support from both their corporate headquarters and other franchisees. They went to New Orleans to help the victims get the businesses back up and running.

The collection of individuals in a franchised operation, Reynolds said, creates a sort of interdependence. The franchisee has to depend on the franchisor for his support, training, advertising, marketing and other things.

“And the franchisor has to depend on the franchisee to get up every morning and go open the store and sell the products and services and then pay him a royalty. And if both of them aren’t doing their job, neither one of them is going to be successful.”

Reynolds said this creates synergy within the operation.

On the other hand, this distinguishing element of a franchised operation is one reason Allan Roberts, chief executive officer of Dixie Restaurants Inc. of Little Rock, has steered clear of franchising his Dixie Cafés.

“Franchisor/franchisee relations can be a little difficult at times,” Roberts said. “We just prefer to be able to control our own restaurants and make sure that they operate the way we would like to try to operate them.”

Roberts said he wasn’t against franchising as a form of business expansion; it just wasn’t the direction he chose for his business.

“There’s a lot of benefits to franchising: you can grow faster, let somebody else invest the capital and take the risk. We just never wanted all the baggage that comes with franchising.”

Another possible downside to franchising is that one poorly run operation can damage the entire brand. Properly run franchises, though, have a safeguard in place that keeps franchisees from making a mess of the family name.

A field operations liaison performs routine check-ups on locations to ensure that quality and standards are up to par and to help clean up any messes. The position is not quite as theatrical as a Harvey Keitel clean-up since the periodic checks generally head off any messes of “Pulp Fiction” magnitude.

How to Succeed

Pretty much any business can be franchised, Reynolds said. But some types of business lend themselves better to franchising than others. Simpler concepts are easier to replicate than businesses that are more complicated.

Reynolds said, for example, that a housekeeping service can franchise well. Since cleaning a house is pretty uniform despite the size or kind of house, Reynolds said, it is a transferable operation. Stock analysis, on the other hand, involves many factors and requires a lot of education and experience. Thus, it is not as transferable.

“The idea of business-format franchising is to take all the components of a business and break it down operationally into a business that can be easily transmitted. … The skills and operations necessary for that business can be easily transferred to the business owner or operator, with the training support and other materials that can easily be transmitted to the employees of the business.”

Zaxby’s owner Driggers said dedication and careful cultivation are requisite for at least the first year. But after that, the general manager holds the life of the business in his hands, which is why Avants said the secret to long-term success of a franchisee is a good general manager.

A district manager, which would oversee not more than five locations, Avants said, also keeps a growing franchise alive and thriving.

And Zaxby’s is doing just that.

The Bentonville location, the first store in Arkansas opened by Driggers and Jackson in January 2006, grew 32 percent in its second year of business. Revenue for 2007 was about $1.2 million.

“If there’s a recession out there, we don’t see it,” Avants said. “There’s no guaranteeing. But if you use the tools that they give you, chances are you’re going to be successful.”

Whole Hog Expands Through Licensing

Brothers Mike and Ron Blasingame and Mike Davis, owners of the original Whole Hog barbecue restaurant on Cantrell Road in Little Rock, chose a different route of business expansion than franchising. The three entrepreneurs chose to spread the savory wealth through licensing.

One of the main distinctions is that the Federal Trade Commission regulates franchises. Licensing is a matter of contract law and is not regulated by the government.

Another big difference is the level of involvement of a franchisor compared to a licensor. “The franchisor exercises significant control over, or offers significant assistance in, the franchisee’s method of operation,” according to the FTC Web site. A licensor doesn’t maintain such authority over a licensee.

“We don’t tell them when to open, when to close, what to wear, where to locate…. They’re independent business people,” Ron Blasingame said.

The Whole Hog founders charge a $35,000 initial fee and a 4 percent royalty on sales. The crew requires only that a few details be uniform, such as the type of smoker used to cook the meats and the point-of-sale model, in which customers pay when they order at the counter.

Other than that, the licensees are free to run the business as they please, whether it be increasing menu prices or adding new items. So far Blasingame hasn’t had any of the 10 licensees – in locations as far-flung as New Mexico – stray too far from the concept.

He added that a licensed location is pretty independent after the initial training process and, therefore, less time-consuming for the licensor. Often a small franchisor finds that making a franchised location succeed is a full-time gig that keeps him from operating his own original store.

Blasingame also mentioned that franchises seemed to have a lot more legal entanglements. “One of the first things I noticed was there seemed to be a lot of lawsuits between franchisors and franchisees,” Blasingame said.

Franchise Law Changes

The FTC recently amended the Franchisor Disclosure Rule. Franchisors in all industries have until July 1 to implement the changes, which for the most part will benefit franchisees.

Here’s what the franchisors have to disclose, according to attorney Michael Einbinder of Einbinder & Dunn of New York, a practice with an emphasis in franchise law:

The existence of direct or indirect parents, or both, and the bankruptcy and litigation history of each.

• Lawsuits the franchisor has filed against its franchisees
• A specific warning when the franchisee is not granted an exclusive territory
• The franchisor’s right to use other distribution channels to make sales within the franchisee’s territory
• The use of confidentiality clauses that restrict the franchisee from discussing his experience in that franchise community

On the other hand, franchisors will benefit from the change in that they’re no longer required to disclose risk factors on the FTC cover page. For example, if the franchise company has only $25,000 in capital, it doesn’t have to reveal that to the franchisee, Einbinder said.

The change also eliminates the requirement that the franchisor must deliver the disclosure document on the first face-to-face meeting with the franchisee. And franchisors no longer have to disclose franchise brokers.

Einbinder said many have yet to implement the changes and potential franchisees need to be aware of the augmented latitude the new rules provide.