Boosting Diversity in Franchising

Statistical information speaks volumes. Take the 2002 U.S. Census. It points out that the composition of the U.S. population will continue to change quickly, with minorities projected to become the majority by 2050. There is also rapid growth taking place in the number of minority-owned businesses. Their numbers exceed 4.1 million; they generate 4.8 million jobs and almost $700 billion in gross receipts.

But how well is the franchise industry dealing with these projected population changes? Much still needs to be done, according to a report from the International Franchise Association (IFA) entitled "Diversity and Minority Franchisee Development Guide." Sponsored by the PepsiCo Foundation, the report points out that minority participation in the franchise industry is not keeping pace with the rapid changes in the U.S. population.

Less than 8 to 10 percent of franchisees are owned by minorities, according to C. Everett Wallace, past chairman of the IFA's Minorities in Franchising Committee. To change those numbers, three major obstacles must be addressed. Namely, minorities need to be provided with better information on franchising opportunities, they need to be able to establish relationships with existing franchise owners, and they have to be able to locate capital to launch and grow a franchise.

The report pinpoints other obstacles as well. These include language barriers for first generation immigrants and the lack of a minority franchise organization or association that can act as a clearinghouse and point of collaboration.

To identify ways franchisors can expand minority ownership in the franchise industry, the IFA authors conducted telephone surveys and followup interviews with 12 minority franchisees and 14 franchisors that were known to have some experience with minority franchise recruitment efforts. The franchisors represent a variety of business types from packing and shipping services to cleaning services to quick service restaurants and lodging. The franchisors interviewed offered the following recommendations with regard to increasing their minority franchise base:

• Understand your target market and then get involved--network, sponsor, speak, advertise.
• Make clear to all minority communities that your opportunity is very much open to minorities and that minorities are welcome.
• Understand that minority franchisee recruitment takes persistence. You have to be in it for the long haul.
• Be ready to commit a dedicated effort as well as resources to this endeavor.
• Keep it simple. Don't try many things at once.
• Realize that existing minority franchisees are the best marketers for the business.

Jose Cofino with the Pollo Campero-Adir Restaurant Corporation recommended taking time to become a member of the community you want to penetrate. For example, get involved in outreach programs and participate in local community groups. All 14 franchisors interviewed said they have minority outreach programs as part of their efforts to recruit minority franchisees. A number of franchisors said it was important to conduct minority community outreach at the local level and among social/church/business groups that are looking to bring new businesses and jobs into their communities.

One of the most effective types of groups encountered for lead generation and increasing awareness within the minority business community are the groups that combine social activities and causes with business imperatives, said Hannibal Myers with Williams Fried Chicken. Choice Hotels International does a lot of partnering with minority associations, particularly those that have an economic development or entrepreneurial orientation, said Brian Parker with the hotel chain. Keep in mind that half-hearted efforts have all the potential for a serious backlash, added Myers.

None of the 14 franchisors interviewed has special internal assistance programs for minorities. One franchisor did say that it is considering such minority internal assistance as part of its 2007 minority incentive.

Some franchisors said they already have efforts under way to address the financing needs of minorities. Three of those interviewed said that have active minority financial incentive programs that involve initial fee reductions, extended initial fee payment, royalty fee discounts, and other individually tailored incentives like loan guarantees. For example, David Messenger, chief financial executive with The ServiceMaster Company said Service Master offers a discount off of the initial franchise fee for women and minorities.

In addition, Choice Hotels International has two minority incentive programs. One is the standard minority incentive that provides up to $125,000 for its mid-scale brands, and $50,000 for its economy brands.

Minority franchisees also offered recommendations that franchisors may find useful regarding what is needed to launch and build a franchise. The majority of franchisees interviewed suggested better initial training and help with financing. They gave the following recommendations:

• Provide more experienced guidance and mentors at the local level who know the business and can act as an initial advisor. Franchisees tend to be geographically isolated and spread out throughout the country. Provide more "hand holding" when franchisees are first starting out.
• Establish a "one stop shop" covering everything from loans and finance, business operations, the franchising agreement, lease agreement, marketing support, and obtaining local permits.

The report also emphasizes the purchasing power of minorities. For example, the Hispanic-American population controlled $580 billion in spending power in 2002. That is expected to grow to $926 billion by 2007, a 60 percent increase over a 5 year period. Over the seventeen year period, the Selig Center projects that Hispanic-American purchasing power will increase by 315 percent, a growth rate that far exceeds any other segment of the population. (Ripley: The report has an interesting chart entitled Buying Power by Race, which you may want to use).

In addition, it is important to realize that the increased growth of a minority middle class represents a new and untapped market for franchisors. Minority consumers will spend where they feel welcomed, and where they can identify with the product or service and those offering them, according to the report. Franchisors must realize that minority consumers are different and warrant a targeted approach based on an understanding of their different needs and desires.

Difficulties will exist for those in the industry who fail to understand the need to address diversity, warns the report. Franchisors who don't embrace diversity or who choose to ignore the changing realities of today's and tomorrow's marketplace will lose franchise sales to competition and will not attract the best talent. Above all franchisors who ignore these important population trends may not participate in the fastest growing consumer markets of the future.

The report also offers useful information on other topics such as diversity marketing as well as developing a diversity strategy plan. To read the report, go to the IFA web site at www.franchise.org, click on Diversity and Minority Franchise Development Guide.