Trends

The roach coach has hit the road, Jack.
Those sanitarily questionable movable feasts that have rolled through America's cities for decades are being replaced. Filling the void come this year's models: clean, efficient, state-of-the-art mobile food trucks with kitchens, griddles, stoves, and all the refrigerated machinery a small restaurant could possibly need. A new day has arrived for mobile food trucks, and a dynamic market shift is under way.
Major U.S. cities have experienced an increase in mobile food trucks during the past few years. Often, they are mom-and-pop operators who rove industrial parks and office complexes in search of hungry customers. In some cities, mobile food parks with a dozen or more trucks and trailers representing all types of mobile food vendors have set up camp, offering everything from subs, sandwiches, and ethnic specialties to espresso, desserts, and more...

As I wrote last issue, "the factors that must be accounted for while structuring financial affairs are much more complicated than ever before."
Given that 400- to 500-point swings in the Dow have nearly become the norm rather than the exception, this is ringing even truer today than it did a quarter or two ago. In the previous issue, I outlined the structural and emotional changes that we suspect have primed the markets for their current volatile behavior. I also promised to bring a few ideas for how to keep your wits about you amidst the chaos, so here goes:

What changed last month in sales, costs, market share, and customer satisfaction? Data answers those questions for you. Data gives you history. But there is a higher level of business intelligence that answers questions such as: Why is this happening? or What will happen next?
Insight--and foresight--spring from using data, statistical analysis, and predictive modeling to understand why things are happening and what will happen if current trends continue. Let me share three powerful discoveries made by different franchise concepts that improved their future.

#1: Ain't no one happy if Momma ain't!
Franchisees who operated portrait studios wanted to know which customer segment was the most profitable and most likely to be loyal...

If I were to ask 100 CEOs to define customer service, I would guess that 97 of them would say something like this: "Customer service is providing the customer with service that is fast, accurate, and courteous." While those are indeed elements of customer service, there is more to it, so much more.

Customer service is a moving target; it is whatever the customer thinks it is. That includes quality products, convenience, competitive prices, timely responses, reliability, a personal touch, and knowledgeable employees. Customer service means doing what you say you will do and doing it when, if not before, you say you will do it. It is operating on the belief that no transaction is complete unless the service customers receive is sufficient enough to motivate them to return...

Lenders establish frameworks for various types of lending: housing, personal, small business, and more. Those frameworks are called lending policies and define the rules and procedures for conducting a lending program. They form the basis a credit committee uses to make loan structuring, pricing, and individual loan application decisions, and that a credit risk committee uses to make portfolio allocation decisions--how much of the bank's assets should be allocated to small business and further allocated to franchised small business and particular franchise systems.
The competition for credit cycle small business are facing is pushing lenders toward consideration of tighter (and in some cases different) lending policies. This tightening generally is around the five C's of credit--character, capital, capacity, conditions, and collateral--leading to requirements such as higher credit scores, more equity contributions and cash reserves, and so forth...

Recently, I spent several hours with Simon Sinek (www.sinekpartners.com), a very creative New York marketing strategist.

He has developed the "Golden Circle" approach to understanding business and focusing on what your strengths and course of action should be. His model codifies the three distinct and interdependent elements that make any person or organization function at its highest ability. It's all based on the biology of human decision making and the way in which people interact with each other and with organizations and brands in the formation of cultures and communities.

Sinek wanted to hear about my time as CEO of Southwest Airlines and the stories behind the development and growth of the airline. I took him through the many trials and tribulations that occurred before I arrived and those that we worked our way through when I was there for three years at the time of airline deregulation...

In this sluggish economy, home-based franchises--or businesses you can run out of a home office--are some of the fastest moving franchise opportunities out there. While many of the opportunity seekers purchasing home-based are first-time franchisees or business owners, the trend toward home-based franchises presents an opportunity for current multi-unit franchisees, too, in the form of complementary franchises.

What is a complementary franchise? In its most basic form, it is when a business owner utilizes the existing infrastructure for his or her business to run an additional business that complements--not competes--with the sales and operation of the primary business.

Fast food and convenience store franchises lend themselves particularly well to complementary franchises...

As we've seen in high-definition in the past few months--from the natural and man-made disasters in Japan, to the rolling upheavals across North Africa and the Middle East, to the volatile whipsaws in food and energy prices--the factors that must be accounted for while structuring financial affairs are much more complicated than ever before. Plus, the information is coming at us much more quickly, and the potential ramifications for our financial affairs are much more dire than in the "good old days."

The 1980s and 1990s were great times to be an investor. Interest rates were falling dramatically, instigating a huge and lasting bull market in fixed-income investments. Credit became easy to obtain and even our tax policies encouraged consumerism...

Forecasting is a tricky business, involving equal amounts of data crunching, interpreting economic and general news events, common sense, and guessing. Like the weather, the shorter term the economic forecast, the more likely it will be close to reality.
Unfortunately, multi-unit operators must make investment decisions that have consequences for the next decade or more. We are only modestly affected by near-term economic event, so I will put greater emphasis on the last two forecasting factors--common sense and guessing--to see what some of the most influential trends might be for the next decade.
Let's start with the cost of capital. We have been in a cyclical 30-year decline. While access to capital is perhaps the biggest issue confronting unit expansion and acquisition today, the cost of capital is a relatively minor factor in budgeting and ROI decisions...

In a perfect world, businesses would only be sold when they are healthy and attractive to buyers. Unfortunately, this is not always the case, and trying to market a business as an appealing acquisition while the business is in decline can be difficult. However, it's not impossible. Here are some strategies to utilize when selling a business in less than ideal circumstances.

Focus on the Positive
Concentrate on the strong points of your business when meeting with potential buyers. Even if your current financial situation is not what you would like it to be, think about other areas of the business that aren't distressed. Perhaps your business is established within its trade sector and is known throughout the community. That rapport and community presence is hard to achieve, and buyers should be aware of it...

Do your employees know what makes your company radically different from all of your competitors? Do they understand the specific critical role they play in creating customer experiences that are so unique customers can't stop talking about them? Do they know how to talk about your company's products and services in the most powerful way? Is your front line engaged?

If you want your customers to understand how great your company, your brand, your products and services are, your front line must be engaged with customers. What do I mean by customer engagement? I mean that every employee must understand what makes you different from your competitors, and they must know how to talk about that difference in a powerful way. They must know what words to use, what stories to tell and how to tell them...

The Great Recession has shifted the thinking and behavior of consumers, forcing franchise brands to respond with changes of their own as they try to keep up with the new normal. Indeed, no discussion of franchise trends in 2011 and multi-unit operators' favorite brands can begin without a nod to the recent economic turmoil and its residual short and long-term effects.

"There's no question that coming out of the recent recession, lower price-point brands are more popular right now with consumers," says Darrell Johnson, FRANdata president and CEO. "The other big trend we're seeing is growth in brands that cater to personal needs, like healthcare."

With the economy now breathing deeply and exhibiting signs of a sustained recovery, this is a good time to take inventory of the current franchising marketplace as it begins to turn back upward...

In 1991, the Americans with Disabilities Act (ADA) issued regulations which allowed the use of service animals in public, including restaurants, hotels, retail establishments, theaters, and concert halls. The ADA's mandate caused little stir early on because service animals at that time were primarily "seeing eye" dogs highly-trained to help persons with blindness, deafness and some other disabilities while ignoring such distractions as food, strangers, and the presence of other animals. But given the regulations' lack of definitions, service animals steadily expanded more and more to boisterous poodles and irritable purse dogs, to say nothing of rabbits, rats, ferrets, lizards, and snakes. Doctors seemed to obligingly write notes testifying that the animals were helpful for mood support or to fend off depression and "therapy dog" vests could easily be bought online with no questions asked...

The goal of customer experience management is to move customers from satisfied to loyal and, ultimately, to be advocates for the brand.

The management of "customer satisfaction" was recast as customer experience management in the latter part of the 20th century. The transition officially began in 1998 when The Harvard Business Review published an article by Jim Gilmore and Joe Pine titled, "The Experience Economy." The boiled-down message for franchisees: customers don't just buy goods or services, they ultimately buy experiences.

It is not simply what customers get, but how they get it that creates a branded customer experience--that is, one you can't get anywhere else. In customer experience management, version 1...

Our next financial concept? OPM (other people's money).

As a former commercial banker, I've had the opportunity to see both sides of the "debt/leverage" issue. When you go to a bank for a business loan, your banker (whether they tell you or not) will quickly compute your debt-to-equity ratio. As bankers, we viewed debt as an equivalent of risk: the higher your ratio, the more debt you have in proportion to equity. Therefore, the higher your financial risk. Let me explain why this is so. It all goes back to the financial basics: Assets = Liabilities + Net Worth.

An asset is something you own, and you own assets to generate sales. But to own an asset, you must buy it, and someone must provide the money. Money is provided either by creditors or owners...

Tom Kazbour doesn't believe the secret to success lies in studying the ABCs of business. He believes new franchisees can whiz on past most of the alphabet and focus on the letter "V."

"Volume is key. Volume can cure a lot of problems. You can have a small margin and still do well if you have the volume," says Kazbour who, with his brothers and partners, owns and operates 56 Hungry Howie's pizza and sub restaurants in Florida and Alabama. "I learned that years ago when I was struggling with a new store in the Gainesville market and had to discount just to make it. Soon we went from struggling to having the highest volume store in the system at that time."

That experience led Kazbour, with the blessing of Hungry Howie's founder Jim Hearn, to offer an inexpensive large pizza on the menu at all times...

In 2008 we dodged an international financial meltdown. In 2009 we saw the technical end of the second-longest-running recession in U.S. history. In 2010 we are wrapping up the first year of the recovery in a less-than-robust fashion. Let's look ahead to 2011 and what is in store for franchising and, in particular, access to capital.

I believe we're in a 3- to 5-year period of an uneven and slow economic recovery. There are too many serious headwinds to conclude otherwise. Housing will require a few years to absorb the overbuilding and mortgage mess before it stabilizes. State government budgets are a mess and will force some hard choices that will be a drag on growth. Consumer debt levels peaked last year and are starting to come down, a process that will go on for a few years...

With the stock market on a run at the start of 2011, I began thinking about the similarities of how stock investors and franchisees choose an investment. The obvious consideration in both cases is whether to make an investment, but that's just the starting point.

Prospective franchisees with no previous franchise experience seem to act a lot like retail stock investors, relying on news articles and other information gleaned from magazines, newspapers, and the Internet. They see ads (and variously disguised versions of ads, like infomercials and many press releases). They get calls from brokers who have plenty of suggestions. Some even get regulatory documents on targeted companies. They often buy on rumor or suggestions from a trusted advisor...

In his book, Hire The American Dream, Dave Melton writes about his first boss, Frank Meeks. Melton writes of how Meeks was not only a personal inspiration but an icon within the community of Domino's Pizza. Meeks was the first franchisee inducted into the Domino's Chairman's Circle Hall of Fame.

Meeks knew how to operate stores and was known for his relentless focus on the basics of product, service, and image. In the 1980's he drafted what he called the "Ten Things" that comprise the foundation of store management. These can, and should, be adapted to other franchise brands and concepts.

Service - The customer is the boss. The job of every team member is to go way out our way to impress every customer. This means we must meet our goal of 30-minute or less delivery and do it in such a friendly and ethical manner that customers will feel good about doing business with us...

On many occasions during the past year, I've seen and heard the past 10 years dubbed as "The Lost Decade." From a stock market perspective--with prices essentially flat between 2000 and 2010--it's not hard to understand why. Upon writing this article, the annualized return on the S&P 500 over the past 10 years was -0.68 percent, versus the average return of 6.28 percent since 1929 (according to FactSet Data Systems). Interestingly, over a similar time frame, aggregate corporate profits have doubled while total household net worth is about 50 percent higher.

While the stock market seems to say we've made no progress, economic statistics indicate otherwise. So why the disparity? For a better understanding, enter our lessons learned from the past decade...