IFA's CEO Speaks Out on Future of Franchising
Franchising has been the quick-service restaurant industry’s best friend. The major national chains that have served America for generations—McDonald’s, Wendy’s, Burger King, Taco Bell, and Subway—all franchise at least 85 percent of their units. As a whole, the quick-service industry is by far the biggest driver in franchising; some 26 percent of all franchise establishments are quick serves, according to International Franchise Association (IFA) data, while 46 percent of franchising jobs stem from that industry.
But foodservice franchising has taken its lumps in recent years. The rising crop of fast-casual and fast-casual 2.0 chains across the country has largely rejected the franchise model, with companies citing concerns over quality control. And many of the business regulations conceived during the Obama administration—minimum-wage hikes, menu-labeling policies, and the joint-employer rule, for example—have been especially burdensome on franchisees.
Could it be that franchising is simply a model of the past? Certainly not, says Robert Cresanti, president and CEO of the IFA, a trade group representing franchisees all over the globe. We spoke with Cresanti to gauge the status of franchising—and how franchisees and franchisors alike are fine-tuning the model for the future.
What is the health of the franchising industry today?
We’re fully back and more since the recession. The statistics basically prove that we shed fewer jobs than the rest of the industries with whom we measure ourselves. We had fewer closures overall relative to others, where the system kind of endured around franchising. Have there been some problems? Yes, there were problems during the recession, and certainly economic downtimes tend to expose some of those weaknesses. But overall, as a system, from restaurants—which amount to almost 50 percent of all franchise units out there—all the way to the service industry side of things … it’s really strong performance.
Our economic statistics indicate that we’ve out-performed competing non-franchise market segments every year in growth, and that trend continues. We expect it to continue this year. So I think all is at an even keel at the moment. We’re also really anticipating and looking forward to opportunities that we haven’t had in the past eight years with the coming of Trump.
What do you think it is about the franchising industry that has helped keep it so healthy?
These [quick-serve] restaurants and other restaurants that have gotten their noses bloody in their local markets, they’ve perfected the business model; they’ve learned to adapt and survive and overcome. Those are hard lessons that an individual who’s not involved in franchising and who is opening up a [quick-serve] restaurant concept for the first time usually has to learn the hard way. The fact that you have a playbook that has a game plan in place for you, and a system where if you talk to another franchisee who’s had a problem like the one you’re experiencing and you share your troubles with him or her, you can find answers to business problems you’re confronted with.
I was on a radio show in Chicago, and someone asked me, “Aren’t you guys just a nightmare for small businesses?” And I said, “No, really successful small businesses oftentimes become franchises.” When they open their third and fourth store and realize they don’t have enough capital to open up the stores they think are needed, and they can hire the managers that are of sufficient quality to independently run those stores, that’s oftentimes when the brands look around and say, “What we need is an ownership culture.” And they then begin to open up those [franchise] opportunities. There are places for all of these businesses, franchised and not, along the food chain.
We see a lot of fast-casual companies talk about franchising as if it doesn’t match their quality offering. What do you say to those businesses that think franchising is something that is of lesser quality?
It’s the last refuge and argument for them to make. There are great-quality restaurants that are private and independent, and there are great restaurants that are franchised. When I travel across the country and I see a brand with which I am familiar and I know what to expect, I often seek that brand out. When I feel like I want to explore something new and different, I often seek that brand out. But I can tell you, when I’m on a difficult business trip somewhere, I’m going to park myself at an [Intercontinental] or at a Marriott hotel, or one of the brands I know, more often than I would go with a local hotel that I’ve never heard of before. That’s the case for most business travelers—not just American business travelers, but travelers all around the world. They come to expect a certain quality.
Everyone’s chasing millennials as customers. What do you see as millennials’ role in franchising?
There’s a sub-class inside of the millennial group that is just absolutely brilliant, and I’m seeing them all of the time. I’m seeing them as owners of some of the franchise restaurants already.
We have something that we call NextGen in Franchising. We do a FranShark Experience [similar to “Shark Tank”] at our convention every year. I can tell you that the judges who are judging these concepts that young people have brought to them have invested as much as $50,000 personally. They not only voted on who had the best and most exciting and probably most likely to be successful franchise concept, but they also walked off the stage and wrote a personal check to invest in their franchise and offered to be mentors to them.
There could certainly be a lot better education out there; it’s our daily battle, educating people on what franchising is and isn’t, and how the business model works. That is a continuing challenge for us. We’ve launched a series called [email protected] Franchise,” and it tells a bunch of the stories of people who are to be emulated in franchising but aren’t necessarily household names.
I think we’re in decent shape on the millennial side. There is not a franchise system out there that is going to be successful in the next five to 10 years that doesn’t have a strategy to engage millennials as customers or to bring them on board as people who operate their systems. They better have a plan, or else they’re going to be finding themselves on the outside looking in.
How do you think the franchise industry has evolved over the course of the last decade? What direction do you see things moving in?
One thing that seemed to appear out of thin air was the union activity around the joint-employer issue. That has been a high-arching threat in the franchise space—an attempt to basically treat all of these owners of local businesses as though they were run and owned by one entity. As one of the protesters at one point said to us, “We won’t quit until Ronald McDonald sits at the table with us and negotiates for all of the McDonald’s restaurants in the United States.” Well, that’s an interesting concept, except if you know nothing about franchising, you should still know that most of those stores are not owned by Ronald McDonald or by the McDonald’s Corporation, but rather are individually owned, locally.
That’s been a building dark cloud over what we’re doing. A small business owner can’t look over his or her shoulder and say, “Get my general counsel out here; she needs to take on the federal government for me.” They don’t have a general counsel. They can’t call their head of HR because they are their head of HR.
Despite these pressures over the last 10 years, we’ve continued to grow, and it’s one of the reasons why I’m so excited about the possibilities that we see when the regulatory pressure from the federal government level … might begin to abate, at least a little bit.
What do you see as being the primary challenges to franchisees today?
Finding competent and capable people to assume jobs is the No. 1 complaint I hear from people in the day-to-day operation. The workforce we have access to is not well trained, and we have to do a tremendous amount of training. When we recruit people into restaurants, we don’t require a high school degree, because the people we hire that are good and smart people sometimes come from very challenged family lives and, often, failing school systems. We provide them with an opportunity to learn how to do a few basic steps to help themselves and feed their families, and then to open up opportunities to greater jobs—cashier jobs, manager jobs, cook jobs, transportation jobs. That pipeline needs to be acknowledged and understood.
We have some franchises, by the way, that only hire people that have master’s degrees because they work for hospitals and do blood samples and so forth, and they’re doing very precise and careful things. But from soup to nuts, finding people who are qualified to work and take up a job without a huge amount of additional training—although we do it anyway—is the No. 1 challenge I see.
What direction is franchising heading, and how do you see it changing in the coming years?
With Trump, we’ll have to wait and see. These are very challenging things that he’s undertaking. This is not little league baseball. This is the major leagues he’s stepped into. I think Trump gets a number of mulligans, and he’s a fairly smart and sophisticated businessman, and hopefully he’ll be able to convert those skills into the political arena here in D.C. I have every confidence that he can and will.
One of the things that’s interesting about franchising and challenging to what our traditional business model has been is the concentration of multiunit franchises in the marketplace. I think we all have to acknowledge that there was a time when people worked their way up from the back of the house, ultimately to rise and own their own franchise. With some of the larger brands that are out there that are sort of platinum-plated brands, I think it becomes harder and harder every year for someone who’s got just barely enough money to buy one franchise to get into one of those places. It means that you’re going to have to come up with investments or opportunities in franchises that may not be your first choice.
A lot of the larger brands know what regulatory burdens are out there right now at the state and federal level and even internationally, and they’re looking for people who are very experienced in this space, who already have several hundred stores. I think one of the long oars in the boat going forward is this intensification of multiunit franchising. I know many of those multiunit franchisees, and they’re very sophisticated and good businessmen, and I can understand why franchisors seek them out. It’s their ability to develop the brand.
I can tell you that the franchisees that come into these spaces, especially the multiunit guys—but also the little guys—often come up with very innovative ideas that the brand adopts and then redistributes out to the brand. Not all of the wisdom resides in the hands of the franchisors, and I think the good brands are flexible.
This story originally appeared in QSR's July 2017 issue with the title "Franchising Fights Back."