Success Secrets from the Biggest Franchisees
“Franchise” can be a loaded word. Say it to an industry executive, and she’ll call it an efficient vehicle to building a fast-food empire. Bring it up with a local-loving consumer, and he’ll peg it as a threat to independent restaurants. As for an aspiring operator, he might extoll the benefits of a structured system with mitigated risks.
For all of these differing opinions, many assume that franchised restaurants originate and operate in very similar ways. After all, the model involves fine-tuning processes, replicating businesses, and expanding footprints—oftentimes at a much speedier rate than other growth strategies can afford.
But the stories behind some of the largest restaurant franchisees in the world vary greatly. There are many roads to success as an operator, and perhaps the biggest challenge they each face is going their own way.
We spoke with five large-scale franchise companies to find out how they maintain extensive operations—often with hundreds of locations across multiple brands—while also investing in a distinct company culture.
All in the family
In 1969—five years after the Raffel Brothers founded Arby’s—Bob Davis opened his first franchised store in Tulsa, Oklahoma. He had no plans for expansion, but decades later, his family owns the largest franchise in the system.
“My dad was quite the entrepreneur, and he really wanted to be his own boss. He had five kids, and just getting ownership of one store was amazing,” says John Davis, CEO of U.S. Beef, the franchise company that one store spawned.
Nevertheless, Bob Davis’ one store became many more. Today, U.S. Beef is the largest Arby’s franchisee, with more than 340 stores across eight states in the West and Midwest. It also owns and operates six Taco Bueno restaurants in those markets.
Despite such growth, U.S. Beef has remained a family affair. Jeff Davis helped his father with the very first store, served as CEO for a number of years, and is now the chairman of the board. His brother John took over the chief executive role after decades in the family business.
“My brother Jeff, who started with my dad on day one, has been a huge leader in the system for almost 50 years. He’s been a constant while we’ve had [corporate] leadership changes at Arby’s that I could talk to you about for an hour, and that goes for other brands as well,” John Davis says. “That’s commonplace in the industry.”
But for all the stability of U.S. Beef, the same hasn’t always been true of Arby’s corporate. In fact, just a year after Bob Davis opened his first store, Arby’s was forced to declare chapter 11 bankruptcy. Ironically, the corporate brand’s misfortune was what first paved the way for U.S. Beef to open additional units.
Over the proceeding years, Arby’s would face further adversity; the brand changed hands and headquarters several times, with expansion and sales waxing and waning. “Any brand that has a 40–50-year history is going to have its challenges—that’s the competitive marketplace that we’re in,” Davis says.
Lately, U.S. Beef and other Arby’s franchisees have had more reasons to be optimistic. Roark Capital purchased Arby’s in 2011, and within a couple of years established a new C-suite team under CEO Paul Brown.
“Bringing Paul Brown in is when we saw a real shift in the franchisee-franchsor relationship,” Davis says. “One of the first things he did was talk to all the major franchisees and find out what’s going on with this brand. He could tell from his research that the franchisees were really holding the brand together.”
The approach has paid off. Earlier this year, Arby’s marked its 26th consecutive quarter of same-store sales growth, and last fall it posted a record for average unit volume.
Arby’s continued success has opened the door for more expansion; U.S. Beef plans to build 70 new stores by 2020. But even with those ambitious plans, the franchisee keeps a small-business perspective.
“My brother and I don’t think of ourselves as being a huge franchisee. We think of our day-to-day operations one store at a time,” Davis says. “I’ve got two nephews in the business; my son is in the business. Our desire is to keep this in the family as long as we can, and I think that means a lot to our people.”
Rules of acquisition
Standing in stark contrast to U.S. Beef’s homegrown, family-owned approach to franchising is NPC International. Founded in 1962, the largest Pizza Hut franchisee amassed as many as 1,225 stores at its peak and today claims roughly 1,150.
NPC International became a Wendy’s franchisee in 2013 and recently inked a deal to acquire 62 additional stores, bringing the company’s total to 246 units. The recent purchase exemplifies NPC International’s expansion strategy.
“We love to buy existing cash flow—it’s proven cash flow, and it’s how we’ve built the business over the last almost 30 years,” says CEO Jim Schwartz, who has been with the company nearly 26 years. “Our secret sauce is around improving the operations.”
NPC International ascended to the top of the Pizza Hut system in the 1980s before having another growth spurt in the 1990s, when PepsiCo. spun out its fast-food concepts (Pizza Hut, KFC, and Taco Bell, now under the Yum! umbrella). The divestment encouraged franchisees to purchase more units—a major boon for acquisition-minded NPC International.
Schwartz points out that no company could maintain such scale—accounting for nearly 20 percent of the Pizza Hut system—without a strong focus on the customer and operations, as well as an active role in corporate-created initiatives.
“We’re a highly sophisticated organization with similar data analysis systems and processes that many franchisors or corporations would have,” Schwartz says. “We’re able to partner with, test with, and share with our franchisor partners that perspective, which brings some credibility. Sometimes, if the franchisor says it, it may not be viewed as accurate as if a franchisee says the same thing.”
He adds that NPC International takes a more measured approach in effecting change within the brand; leaders don’t “pound their fists at the table.” The company doesn’t dictate to the franchisor, but rather uses its influence to drive new programs or even augment and enhance them.
Although Pizza Hut remains the No. 1 pizza chain in the U.S., Schwartz concedes that the brand has had some troubles in recent years. It’s all the more reason for NPC International to work closely with the corporate side.
Schwartz is hopeful such collaborative efforts will soon bear fruit. After all, he adds, legacy brands like Pizza Hut and Wendy’s are part of the appeal in working for NPC International. Its scale also allows employees to climb the company ranks.
“Our people love working for these iconic American brands,” he says. “If you’re working in a smaller shop with 15 or 20 stores, your opportunity isn’t going to be that great to grow, but at NPC, you have tremendous growth opportunity.”
Sometimes a franchisee plays the part of guinea pig when corporate trusts them enough to test new menu items, initiatives, or even completely new store formats.
That was the case for Matt Frauenshuh.
His father had done real estate work for Dairy Queen since 1983, and in the early 2000s, corporate approached him and his wife about becoming franchisees in the Minneapolis-St. Paul area for the brand’s new iteration, DQ Grill & Chill. The family was heavily involved with local charities, and saw the new venture as an opportunity to help people coming out of halfway houses find jobs.
“We really started with the philanthropic desire and continued that. We still do a lot with the Salvation Army and try to focus on communities in which we operate,” Frauenshuh says.
Frauenshuh helped open two of the restaurants while in college, and in 2006, after completing his MBA, took over his parents’ seven locations. His company, Fourteen Foods, has been the largest in the entire Dairy Queen system since 2011, and today comprises more than 200 units in 12 states. Only two units are treat-only locations and the rest are DQ Grill & Chill units, which Frauenshuh says helps it be a year-round business through Minnesota’s frigid winters.
Testing new waters was part of Fourteen Foods’ origin story, and that pioneering spirit has not abated. Four years ago, the company was involved in creating and testing the $5 Buck Lunch.
“Generally, we test most of the new items that come out for Dairy Queen in one market of ours or another, since we’re in a lot of different [designated market areas],” Frauenshuh says. “For example, [Dairy Queen] came out with a new cooking platform using speed ovens called DQ Bakes! in 2014, and we tested that and helped create the groundwork.”
This adventurous attitude could also be chalked up to age. Frauenshuh, who is 34, says Dairy Queen operators tend to skew on the older side. As a member of the ubiquitous and highly sought-after millennial generation, he has an edge.
“I bring a different perspective because I’m living our exact demographic for Dairy Queen. I’ve got three children and I’m married, and that’s exactly who our consumers are: families with kids and folks that live in our communities,” he says.
It’s somewhat rare for a franchisee to turn franchisor. Even more uncommon? An operator becoming a franchisor by buying the corporate brand.
Last December, longtime Wingstop and Pizza Patrón franchisee Charles Loflin did just that when he purchased the latter brand from founder Antonio Swad, who also founded Wingstop.
“Owning Pizza Patrón for me is like the next evolution of my life. I’ve been a franchisee for 19 years, and now I’m going to try to stay as a franchisee at Wingstop and become a franchisor at Pizza Patrón,” Loflin says.
Loflin, who has been in foodservice since he was 15, was working at a hotel in Dallas when he became acquainted with Wingstop. Through a common acquaintance, Swad reached out to Loflin regarding the brand’s plan to roll out a national franchising program. In 1998, he opened his first Wingstop in San Antonio. Five years later, he opened the city’s first Pizza Patrón.
Loflin remained with Wingstop when Swad sold it to Gemini Investors in 2003, and later when Roark Capital purchased it in 2010. He’s the largest franchisee in the system, with a store tally up to 71 as of May.
But now Loflin is balancing his longstanding tenure as a franchisee with new responsibilities as the franchisor at Pizza Patrón; his 33 units in the 93-store system have converted to corporate locations.
“I think it puts me in a very unique position,” Loflin says. “I’m very involved in the day-to-day operations, and I think that helps me quite a bit from an operations standpoint. Sometimes we become an advertising company and not an operations company, and operations are the key to any good restaurant.”
Indeed, relations between Pizza Patrón and its franchisees have been strained for several years despite turn-around efforts. The company indefinitely suspended franchising in 2014 but relaunched it two years later. Following the acquisition, Loflin and business partner Chris Partyka, who now serves as brand president, once again paused franchising, with a goal to open it again in mid-August or early September.
“There is and was a lot of disconnect for the franchisees because the brand wasn’t growing and had gotten pretty stagnant. My partner and I are really working toward rebuilding that trust and that relationship,” Loflin says.
Loflin says that because Swad wasn’t the type of owner to micromanage and check in every five minutes with his operators, they haven’t been in regular communication over the past 20 years. Nevertheless, the two have mutual respect and appreciation for each other. Loflin recalls with a laugh that Swad once said that if he were Dr. Frankenstein, he would build someone like Loflin to run his companies.
“He’s a true food guy; he’s a true entrepreneur,” Loflin says of Swad. “As a franchisee and now a franchisor, I’m not the best entrepreneur, but I am a pretty good businessman. I put both together and I wear that hat very well.”
As counterintuitive as it may be, the largest franchisee of the world’s most successful fast-food brand does not operate in the U.S. McDonald’s franchisee Arcos Dorados is a publicly traded company in Latin America and the Caribbean.
Established in Buenos Aires in 1986, Arcos Dorados initially functioned as a joint venture partner for McDonald’s in Argentina. In 2007, McDonald’s transitioned its international ownership format to developmental licensees, essentially making its global associates more akin to traditional franchisees.
Arcos Dorados cofounder Woods Staton and his partners paid a reported $700 million to purchase more than 1,500 stores and the rights to develop Latin America and the Caribbean. The new holdings company was also named Arcos Dorados, although it was a completely different enterprise.
“There are quite a few people that have many, many years in the system. We even have a couple of individuals who actually started with [Staton] back in ’86,” says CEO Sergio Alonso, who succeeded Staton in late 2015. “We have a deep knowledge of what it means to do business in Latin America. Most of our markets face similar challenges: devaluation, inflation, political instability. … It’s probably one of the reasons McDonald’s chose us: We understand the elements and the challenges.”
Indeed, Arcos Dorados must pivot in conditions that are quite foreign to U.S. operators, whether it’s Argentina’s unstable currencies or the political strife in Venezuela. At the same time, a company composed of native residents has an unrivaled ability to sniff out opportunities in its territories.
While any restaurant brand could stand to learn about operating in unpredictable markets, Arcos Dorados’ customer-service approach could be the more relevant lesson for U.S. franchisees.
“When you look at the U.S., close to 70 percent of the freestanding restaurant business is going through drive thru. That’s not the case in our geography. Moreover, it’s the other way around,” Alonso says. “The biggest difference I would say is the way people interact with the brand. We’re less about convenience, more about experience.”
He adds that weekend traffic comprises 60–65 percent of business at Latin American locations, with families often making up the bulk of patrons. Whereas McDonald’s might be a regular standby for hurried U.S. families, it is a special occasion in Latin America, especially for the children, Alonso says.
As McDonald’s CEO Steve Easterbrook continues to tout the “Experience of the Future,” Arcos Dorados could offer some guidance. The initiative enhances in-store technology like ordering tablets but also incorporates components of table service, wherein employees bring orders to the guests.
It’s the kind of mutually beneficial relationship that seems integral to any successful franchise dynamic, whether it’s a relatively small, regional brand or the global fast-food leader.
“Our companies are on the same journey, because we do have common objectives of making McDonald’s even stronger,” Alonso says. “The future is there for us to take it, and I would say we’re in very good shape to capture it.”
This story originally appeared in QSR's July 2017 issue with the title "A League of Their Own."