The growing potential of the urban market

One-third of the nation's population is "minority" (U.S. Census), but only about 10 percent of franchises are minority-owned (National Minority Franchise Initiative). Or, to look at it another way, 90 percent of franchises are not minority-owned.

Okay, franchisors, it's time to wake up and smell the city! The malls are saturated with your brands, and suburbia is tapped out. And with competition intensifying, can you really afford to wait for more Sunbelt subdivisions to be completed so you can open a new unit?

It could be time to turn your strategic vision northward, to the urban renaissance that has been building for the past several decades. City living is where it's at.

After a generation of middle-class and white flight, the children of suburbia are repopulating the nation's cities, eager to experience what their parents left behind. And some of their parents are following, seeking the culture and diversity they abandoned for the and of the 'burbs. Face it, a retirement of watching grass grow on perfectly manicured lawns is not where it's at.

But where the real untapped opportunity lies for franchisors is with the people who have been there all along. While all those middle-class kids were growing up suburban, that renaissance, unrecognized or ignored by "mainstream America," was quietly building in many of the nation's older cities. The post-industrial economies of the Midwest's "Rust Belt" have transformed steadily to information-age, high-tech business, while those old houses have been restored and neighborhoods reclaimed. Crime is down, even in New York.

In the industry, urban cool has taken over (with all due apologies to Country), with rap, hip-hop, and Latino stars firmly in the mainstream. Why? The good old American profit motive, in most cases. (Can you say "bling"?)

Now it's time for franchisors to board the soul train--or at least dip their suburbanized, countrified toes in the city waters; and cast their suburbanized
eyes toward the city lights, beckoning tantalizingly in the distance, down the freeways, across the rivers... to the places where most Americans still live (and spend).

  • Inner cities in the 100 central cities are home to 21 million people--equal to the population of Texas--and 814,000 business establishments, 8 percent of U.S. private employment. (ICIC)
For the right brands, with the right attitudes, a measured foray into Urban Franchising might be just what the doctor ordered to give their bottom lines a lift.

For some franchises, urban franchising is second nature, part of how the brand began and grew. Diversity is woven into the fabric of their organization, a natural fact. The Athlete's Foot, founded in 1971 and franchised the following year, is one of those companies.

"We don't specifically target a demographic. It's evolved that way," says Bob Corliss, CEO of The Athlete's Foot, which has more than 600 units in more than 40 countries. "We're open. We do occasionally advertise in a minority publication, but it's been quite some time since that has happened."
Perfect timing, location, and product don't hurt either. "With the confluence of entertainment and fashion and function, in the media world, athletic seems to do very well in the inner city demographic," says Corliss. In fact the brand seems to do just fine in most places. "Our particular format plays very well across all demographics, whether it's city center or suburban markets."

Says Corliss: "A customer is a customer. If the product is right, and the environment is right, and it's a fair value, and the execution is good, then I would say there's plenty of opportunity out there [in the inner cities]."

Statistically, Corliss agrees, about 32 percent of the population is considered a minority. Yet this growing segment of the population accounts for an estimated 6 to 9 percent of total franchisees. "In our business, that does not hold true. We are about 53 percent minority population and 47 percent Caucasian," he says. "It pretty well speaks to the balanced nature and the appeal our product has across the entire spectrum of consumer tastes and lifestyles."

For other brands, targeting diversity is a recent strategy, with many systems busy hiring VPs of diversity or inclusion. Others focus on selling to a specific ethnic or other demographic segment. Pizza Patron is one of those companies. Pizza has broad appeal across all groups, but Pizza Patron is focused on being the premier provider to the Latino market.

No Juanny-come-lately

"We do everything in our power to sell pizza to Latinos--or anyone who wants one," says Antonio Swad, who founded Pizza Patron in Dallas in 1986. He went on to found Wingstop in 1994, which he built to 100 stores in 16 states and sold them in 2003 to focus on building Pizza Patron into a national brand.

Pizza Patron locates its stores in city areas with a high population of Latinos, or in areas transitioning from an older Anglo neighborhood into a Latino community. "It's a growing demographic and a good fit," he says. For Swad, urban franchising offers four distinct advantages:
  1. More customers: "For a long time, urban locations have been overlooked by companies in their hurry to get out to the suburbs, chasing the idea of more disposable income. If it's possible any more to find an under-served customer base, it's right in the heart of town."
  2. High density: "One unit can serve a lot of people. The density is there to support it, versus a suburb where new tract homes are still being built."
  3. Lower rents: "They're not always the newest locations, and they're not always in the best shape. But you look at your concept and see how you can make it fit into the available real estate."
  4. Available workers: "My experience has been that it's pretty easy to get a work force. They can get to work by walking, or public transportation. And they live in the community, which makes for a better customer experience."
  5. Says Swad, these factors "make for a pretty good proposition if you're the right kind of operator."

    The last frontier?

    Both the numbers and the experts support the experience and success of The Athlete's Foot and Pizza Patron. For established, national brands, inner cities could represent the last great opportunity for expansion.

    "Many retailers over-expanded in suburban markets in the 1990s, and pretty much abandoned the urban market," says Michelle Mooney, executive director of development for the City of New York's Department of Small Business Services. "For profits to keep rising, it only makes sense they would look at the urban area and expand there."

    "A lot of franchise systems in this country have exhausted the suburban marketplace and are now starting to look at the urban marketplace as the last frontier," says Mauricio Velasquez, president of the Diversity Training Group in Reston, Va. But many are still hampered by their erroneous perception of cities.

    "I think a lot of urban marketplaces get a bad rap, but there is a lot of potential there. The notion that the inner city is poor, crime-ridden, is wrong," says Velasquez. "There's a real revival of the cities, of urban America."

    "We have to change the perception of the inner city," says Deirdre Coyle, senior vice president at the Initiative for a Competitive Inner City (ICIC). "Unfortunately many people define 'inner city' through its deficiencies, not its assets."

    "'Inner city' can also be very much a valued term when selling to certain demographics," says Coyle. Hip-hop, as noted, has penetrated much of the U.S. entertainment industry as well as suburban markets. "Inner city and trends that come out of the inner city are cutting-edge," she says, and can be a "value" term in marketing a brand.

    One of the major jobs at ICIC, says Coyle, is to change the paradigm from "Inner cities are full of poor people" to "Inner cities have the greatest population density of any place in America, which translates into income density."

    There's clearly passion at ICIC and among urban economic development experts, and they drive home their case with a bevy of statistics. In its "State of the Inner City Economies" study, ICIC has researched 100 cities and compiled in-depth data to support its contention that urban centers represent more opportunity than risk. For example:
    • Available retail spending per square mile: $25 million in inner cities, compared with $8 million per square mile in the rest of the MSA;
    • Population density: 6,113 per square mile, compared with 327 per square mile in the rest of the MSA; and
    • Income per square mile: $76 million in inner cities compared with only $8 million in the rest of the MSA.
    In addition, inner cities contain a minority population of 82 percent vs. 31 percent in the U.S. Looking ahead, it's important to note that these inner city residents are younger than their suburban counterparts, and represent the large majority of the country's population growth through 2050 and beyond. In terms of demographics, they are the future.
    • Minorities will account for nearly 90 percent of the nation's total population growth between 1995 and 2050 (US Census).

    From an individual standpoint it's true there is less money per person than in the suburbs. But the greater density in the city more than makes up for that in aggregate spending. "They buy clothes, groceries, pharmacy products, high-quality products, and paint for their home," says Coyle. "If they're not buying them in the inner city, they're buying them somewhere else."

    Another ICIC study, done within the past two years, shows the inner city is 40 percent middle income, not just poor people. "That middle income is also attractive," she says.

    If you know how to work, employ, and operate and are willing to make some changes and take some chances, "you will have first advantage," says Coyle. And if you don't, says Velasquez, your competitors will. "The competition is loving it when you don't go in."

    Dig down

    "Market analysis has to be applied, as it does to anything," says New York's Mooney. Be as realistic and hard-nosed as you would when sizing up the opportunity at a mall or strip center: look at the primary market, competitive uses in the area, the population numbers, spending power, square footage required, and calculate it out from there.

    But when evaluating an urban neighborhood, be careful about the numbers you use in those calculations. While density is a given in an urban environment, sometimes the demographics need a little "drill-down analysis" to show an area can support the economics a franchise requires, says Wendy Sattin, director of planning and development, Cleveland Neighborhood Development Coalition, a nonprofit umbrella group that includes all of Cleveland's Community Development Corporations (CDCs).

    Says Sattin, the "official" U.S. Census numbers historically under-report population and income in poor urban areas. "Most of what franchisors base their decisions on are the pre-packaged demographic programs, like Claritas, which are based on census data that is notoriously wrong with respect to urban environments--as much as 50 percent off."

    In Cleveland, KeyBank sponsored a "drill down" study with Washington, D.C.-based Social Compact, essentially a second census that measured economic activity in the city, including the cash economy. Social Compact uses alternate methods to measure the economy, such as monitoring who pays bills in cash or check to the utility company, for example.

    "The City of Cleveland Neighborhood Market DrillDown" study revealed an untapped urban cash economy in Cleveland of $828 million (October 2004). "When we did our measurements, we found the buying power was close to 30 percent higher [than indicated in the 2000 U.S. Census numbers]," says Sattin. To her ongoing frustration, she says most franchisors are content to "press 3 buttons and get Claritas data."

    In addition to the cash economy, disposable income is generally higher as a percentage of total income in cities, for two primary reasons:
    1. Housing: Most inner city residents rent, rather than own a home. And while rents can be equal to or higher than mortgage payments, there are no lawnmowers, household repairs, and other ongoing maintenance costs, freeing more disposable cash.
    2. Transportation: Most inner city residents do not own a car, freeing up more disposable income. Public transportation is usually plentiful, and although it's an expense, there's no auto gasoline, or repairs.

    Whether "official" numbers or not, to look only at household incomes, as opposed to disposable incomes, is to overlook a chance at success in an inner city environment. "I think there is a lot of opportunity in urban areas because the majority of incomes are under-reported," says Mooney, who acknowledges a "vigorous cash income" in urban economies.

    No Pollyannas, por favor

    While urban centers have their pluses, no one is naïve enough to ignore their problems. Even the most ardent city boosters know difficulties exist, and are quick to acknowledge them. Beyond the stereotypical perception of crime, drugs, racism, prejudice, ignorance, and fear, there's bureaucracy: policies, regulations, and land assembly issues to overcome.

    "Just due to the scale of a larger city, there are certain inefficiencies that are created," says Mooney. But many municipalities offer ombudsman services to help slice through the legal morass. In New York City, says Mooney, "Our center can help them deal with City Hall."

    "I'm not trying to be a Pollyanna. You'd be foolish to dismiss those obstacles," she says. "But the opportunities outweigh that. Inner cities are an incredibly ripe market for any retailer or franchisee."

    "There are risks, but these are things you can mitigate," says Pizza Patron's Swad. For example, when he opens a unit in a city, he has a requirement that store managers live in the same neighborhood as the store. (This is not a requirement for the franchisee.) He also looks to hire from within the community. "People who live in that community have that street savvy," he says.

    He's also been known to hire a "greeter" at the door, who not only welcomes legitimate customers, but tends to keep the undesirables away. "If you're up to no good, you don't want that person to be there, because there's no element of surprise," he says. Also, he works hard to have a busy establishment, especially toward the end of the day. "A busy store is a safer store," he says. Another adaptation: only in a city setting, both for security and to fit the available space.

    Velasquez challenges franchisors: "Why is it taking so long to get there? Why aren't they there?" He cites "risk, trepidation, and fear of the unknown," as reasons franchise systems continue to shy away from what he sees as a prime opportunity. "Every franchise system should be trying to get in there," he says. "Certain chains stop at the city lines."

    Financing urban dreams

    Opinions differ on the availability of money available for minority and urban programs. There's much talk about funding and assistance from the SBA, cities, the federal government (Empowerment Zones, tax incentives, etc.). But for small, unproven business owners that money and help can be hard to come by.
    • Franchisors who have offered had a 12 percent minority ownership rate; for those who did not, minority ownership was 4 percent. (SBA)

    "Funding is a problem," says Swad, who currently has 56 stores open, with 6 more nearly completed, in Texas, Arizona, southern California, and Colorado. About 50 percent of his franchisees are Latino.

    Pizza Patron is on the SBA's Franchise Registry. Still, he says, SBA loans can be difficult to obtain for those with limited credit experience. "We're trying to get some banks in our area to develop minority lending programs," but that hasn't seemed to work out, at least not yet.

    "We're also trying to put people with money together with operators." However, he says, that can be tough, too. The company also has extended some loans to qualified operators. "Typically, franchisors don't do lending, but we have on a limited basis," he says.

    "I used to believe there was a lot of that minority money available, but I don't see it," says Swad. Even though the deal at Pizza Patron is a good one, he says, with a sales-to-investment ratio of almost 3:1 (average investment to average store sales), based on a total start-up investment of about $150,000.

    For many development organizations (as well as small businesses), says Sattin, "Finance streams are drying up." Both the federal government and banks have turned the spigot down, or even off. "How do we look at new streams of income for these development organizations?" she wonders.

    One idea from Sattin, is for Cleveland's CDCs and other nonprofits to jointly buy a franchise and locate it an urban center. It would provide a funding stream for the CDCs, fill empty storefronts, provide job and if successful, be expanded to other neighborhoods where the model would be repeated.

    Getting the word out

    Velasquez recommends getting out of the corporate offices and doing a "walk-around" in cities with good market potential. "Too many people decide they can't do it; others that they need to get on the ground and work with local people," he says.

    "Are you in the urban marketplace? If not, why not?" he asks. Those who are interested should meet with organizations such as LULAC (League of United Latin American Citizens), the National Council of La Raza, the Urban League, the NAACP, the African American Chamber, the Hispanic Chamber--and any neighborhood or civic groups representing the nation's growing number of nationalities seeking to participate in the American Dream.

    "Hit the streets yourself. Do your homework, meet with local people," says Velasquez. "Many are uncomfortable dealing with people different from themselves," he says. And for many, the urban marketplace is different. The idea, he says, is to "steep your critical questions in a conversation around diversity."

    Some quick, general tips from Velasquez: Use bilingual signs. Hire people who speak the language of your customers, who look like them, who know their values, maybe even their children or parents. Try to resemble the community you're serving.

    "You can't do it from afar, from headquarters. You have to have local connections, local talent to whisper in your ear. And you have to be very sensitive to your own biases and preconceived notions."

    What do urban retailers have that reluctant ones lack? Says Velasquez: "A willingness to embrace what is novel and different." He says to "check your preconceived notions" at the city line and embrace what he calls "the only uncharted territory for the franchise that's maximized the suburban marketplace."

    There's also the National Minority Franchising Initiative (NMFI), whose slogan is: "Bridging the gap between the minority community and the franchising industry." NMFI offers franchisors a resource for increasing minority representation in their systems. Partners include the IFA, the National Congress of Community Economic Development, the Minority Business Development Agency, and the National Black MBA Association.

    Based in Washington, D.C., and Oakland, Calif. NMFI was created in 2000 and is currently underwritten by 20 franchisors. The organization produces an annual Minority Franchising Guide containing profiles of more than 500 franchisors that support its objectives and seek to promote their system to the minority community. The Athlete's Foot is one of those underwriters.

    "We periodically get some pretty good feedback, and I would guess, PR from that," says Corliss. "We don't have a defined campaign that says we're going to go in the inner city of Detroit or Los Angeles or Miami and go after a very specific demographic target. That's not our strategy at all."
    Rather, he says, "We clearly have success in that market, so you tend to market where you have success, but it's not to the exclusion of any other market."

    No habla required

    Swad, who is of Italian and Lebanese heritage, says he is the only one in the office not fluent in Spanish. Laughing, Swad says he's surrounded by a group of Latinos "who don't allow me to practice on them." Yet he has sold his Wingstop brand and is completely dedicated to selling pizza in the Latino community. When it comes to franchising in America's cities, he's practically an evangelist.

    "Don't discount it," he says of the urban opportunity. There are challenges on design and as well as "But if you have a product or service attractive to this customer base, don't overlook it." One recommendation: Be prepared to develop a company store model to see what operational changes are needed to make the concept work in an urban setting. Even be willing to tinker with the concept itself.

    City neighborhoods can vary greatly, even from one block to the next, and suburbanized franchise executives should note this as well. A ride through a large U.S. city can seem like a visit to the United Nations, passing through neighborhoods whose signs and languages change by the minute. Not all city stores should necessarily be identical.

    And forget the cookie-cutter floor plan that works so well in a mall or on a pad. "You could be dealing with historic properties," says Mooney. "You may have to make considerations in design, so your product fits in visually."

    And while it may seem impossible to shoehorn a square concept into a round urban hole, innovative build-outs in a smaller or unique space can mean fewer employees and lower costs in a concentrated marketplace. The result? Extraordinary sales per square foot, especially for carry-out, which is extremely popular for on-the-go city residents.

    "You can't stay true to your model," says Velasquez. "Be ready to size up the market and change."

    Partner with cities

    With city officials eager to attract retailers, and franchisors seeking new markets, opportunities exist for private-public partnerships that benefit not only both parties, but the residents seeking a better life for themselves and their children.

    In the past, says ICIC's Coyle, city officials would try to attract retailers with the last part of the equation: doing good. Previously, mayors played up the good citizen aspect more than the profit motive. "Mayors have had to change their tune and become grounded in the business case of why a retailer should come in," she says. Mayors today who focus on the bottom line are generally more successful in enticing retailers into their core urban areas. Says Coyle "There has become more of a respect between the retail environment and government."

    "I view franchises as filling a kind of a niche between local retail and national chain retailers," says Mooney. "With franchises, you get a national name and ties to local community." The money generated also is more likely to be spent within the community, multiplying its effect. Without naming brands, Mooney says, "There are a handful of franchises that seem to almost seed an area, right when an area is ready for revitalization."

    "Economic development is a marathon, not a sprint," says Coyle. "To be able to really enhance an economy, you have to be thinking in decades. There's activity to measure, but it is a process. Success stories happen over decades, not years. The strategy to make this sustainable is what makes this long-term."

    "At the end of the day," says Corliss at The Athlete's Foot, "there's nothing to be afraid of. Your product has to resonate with the consumer. And if that consumer has a positive feeling for your product, then you'll do well.

    "There are typically under-served markets in many cases [in cities]. I think the communities that we operate in welcome us with open arms. I think if you're another franchisor, you'll have the same experience."

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