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The 21st Annual “Elements of Successful Franchising: Working Through
Difficult Economic Times”
Presented by John Hamburger, Jon Luther, Dennis Wieczorek &
Philip Zeidman
Sunday, February 12, 2012 DLA Piper LLP (US)
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Dennis Wieczorek Partner | DLA Piper
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Philip Zeidman Partner | DLA Piper
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Jon Luther Chairman | Dunkin Brands / Arby's Restaurant Group
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John Hamburger President | Franchise Times Corp.
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Philip Zeidman, Partner
DLA Piper LLP (US)
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How is Franchising Affected by
the World Around us?
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Disposable Personal Income
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Women in the Workforce
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“Child Care Franchises Boom”
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US Population 65 and Older
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THE WALL STREET JOURNAL. WSJ.com NOVEMBER 5, 2011
Aging Population Eases Jobless Rate
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Americans With Healthcare Coverage
Source: U.S. Census Bureau report “Income, Poverty, and Health Insurance Coverage in the United States: 2010”
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LIFESTYLE
• FITNESS • ENVIRONMENTAL • DIETARY
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0 5 10 15 20 25 30
# of People speaking Spanish in 2000 (in millions)
# of People Speaking Spanish in 1990 (in millions)
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Percent of U.S. Population By Race and Hispanic Origin
Source: U.S. Census Bureau, Population Division
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050
100150200250300350400
# of Students Studying Chinese in the US# of Students Studying English in China
US Students Studying Chinese vs. Number of Chinese Studying English
Key = one or = 200K people
Unadjusted Adjusted
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Migration
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John Hamburger, President
Franchise Times
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FRANCHISE TIMES 200
• The Top 200 U.S. franchise systems • Annual worldwide sales • Number of domestic and international
units • 2010 versus 2000
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REST FINANCE MONITOR 200
• The Top 200 U.S. restaurant franchisees • Annual sales • Number of units
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DISCUSSION POINTS
• What have we learned? • Franchising trends • Development trends • The future?
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FRANCHISE TIMES 200
2010 VERSUS 2000
2010 2000
Revenue $500 Billion $303 Billion
Locations 450,523 325,882
Franchise % 87% 80%
International % 34% 27%
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THE TOP 10 IN 2010—DOLLARS
Company Systemwide Sales McDonald’s $77.3 B 7-Eleven $63.0 B KFC $19.4 B Subway $15.2 B Burger King $14.8 B Ace Hardware $12.5 B Circle K $10.7 B Pizza Hut $10.2 B Wendy’s $9.1 B Marriott Hotels $8.0 B
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THE TOP 10 IN 2010—UNITS
Company Systemwide Units 7-Eleven 39,482 Subway 33,959 McDonald’s 32,737 KFC 16,853 Pizza Hut 13,432 H&R Block 13,149 Burger King 12,251 Jani-King 11,454 Dunkin Donuts 9,760 Coverall 9,416
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THE TOP 10 IN 2000
Company Systemwide Sales McDonald’s $40.2 B 7-Eleven $29.5 B Carlson Travel $15.0 B Burger King $11.5 B KFC $8.9 B Pizza Hut $8.0 B Wendy’s $6.5 B Marriott Hotels $5.5 B Taco Bell $5.3 B Holiday Inn $5.0 B
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BIG NAMES IN 2010 NOT ON 2000
Company Systemwide Sales
Boston’s Pizza $953 M
Five Guys $721 M
Massage Envy $652 M
Pet Supplies Plus $549 M
Planet Fitness $521 M
Edible Arrangements $385 M
Wireless Zone $385 M
Comfort Keepers $323 M
Anytime Fitness $284 M
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PERCENTAGE GAINERS
Company Systemwide Sales Wingstop 3127 % Plato’s Closet 3013 % Goddard School 2085 % Jimmy John’s 1908 % Buffalo Wild Wings 984 % Panera Bread 892 % Hilton Garden Inn 590 % McAlister’s Deli 586 % Budget Blinds 522 % Tim Horton’s 437 %
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DOLLAR GAINERS
Company Systemwide Sales McDonald’s $37.2 B 7-Eleven $33.5 B
Subway $11.2 B KFC $10.5 B Tim Horton’s $4.3 B Hilton Hotels $4.0 B Dunkin Donuts $3.4 B Burger King $3.3 B Holiday Inn $3.0 B Panera Bread $2.8 B
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UNIT GAINERS
Company Systemwide Units Subway 19,277 7-Eleven 18,340 KFC 5,515 McDonald’s 5,015 ServiceMaster 4,701 Dunkin Donuts 4,603 Jani-King 3,683 Coverall 3,406 H&R Block 2,822 Domino’s 2,374
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INTERNATIONAL UNIT GAINERS
Company International Units 7-Eleven 18,380 Subway 7,681 KFC 5,824 McDonald’s 3,815 Century 21 2,664 Domino’s 2,263 Burger King 1,979 ServiceMaster 1,734 Pizza Hut 1,733 Baskin Robbins 1,714
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UNIT DECLINERS
Company Systemwide Units Blimpie -1,123
Hardee’s -758
Shakey’s -403
A&W -398
Schlotzky’s -360
Midas -354
Kwik Kopy -327
Holiday Inn -294
PIP Printing -283
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FRANCHISE TIMES 200
FRANCHISE CONCENTRATION
2010 2000 100% 70/200 63/200
>90% 113/200 106/200
>80% 136/200 125/200
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FRANCHISE TIMES 200
INTERNATIONAL FRANCHISING
2010 2000
Overall 34% 27%
>50% 20/200 14/200
>25% 52/200 46/200
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WHAT HAVE WE LEARNED?
• Increase in franchise concentration • Increase in international development • Sales growth rather than unit growth • Big name brands grow internationally
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REST FINANCE MONITOR 200
2010 VERSUS 2000
2010 2000
Revenue $23.2 Billion $16.2 Billion
Locations 17,887 15,985
Multi-Concept 100/200 76/200
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THE TOP 10 IN 2010
Company Systemwide Sales NPC International $935 M Apple American $671 M Bridgeman Foods $508 M Harman Management $416 M Covelli $400 M Strategic $380 M Boddie Noell $373 M Carrols $357 M Briad Group $328 M Pilot Travel $308 M
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WHAT HAVE WE LEARNED?
• Increase in multi-concept franchisees • Primary concept is a large brand • Willing to take risks with secondary brands • Targeted by new franchisors • Large franchisors are finally embracing the
large mega-franchisee
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WHAT’S THE FUTURE?
• More franchising concentration • Greater emphasis on international
development • Franchisees willing to operate multiple
brands • Capital will move to the strong brands • The economic model of the franchise is
key
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Dennis Wieczorek, Partner
DLA Piper LLP (US)
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Selling Franchises What Has Changed?
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Selling Franchises
Changes • Who is buying • The sales process • Getting to a closing
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Selling Franchises
Who are the New Prospects? – Existing franchises adding units or renewing – Transferees – Franchisees of other systems – Other business owners including conversions – Co-brand/express (lower cost) – Institutions
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Selling Franchises
Enticing New Prospects – Leads are not the problem – Internet is key component – Referrals and brokers are best resources
(Franchise Update report) – Item 19 more critical than ever (look at
median)
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Selling Franchises
Sealing the Deal – Credit is a key part of the sales process
• Mom ‘N Pop absolutely need it (e.g., 401K) but big operators too
• Must offer, enhance or support
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Selling Franchises
Sealing the Deal – Look at franchise agreement
• Condense, soften, make readable and prepare to negotiate
– Focus on equity appreciation; franchisee controls cash flow and net
– CRM programs, including social media – Lower expectations
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Selling Franchises
Capital Access – Lenders act as franchisee advocate – they
approve franchise for the borrower • Lender buy-in to franchise program is critical
– Franchisor must assure franchisee is credit-worthy
• If several loans go bad, lender is gone (and other lenders too)
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Selling Franchises
Capital Access – SBA – greater availability but hurdles in SBA
process that franchisor must overcome – 401K – increased popularity but complicated – Matching services – Money is available but at what price
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Selling Franchises
• But after all of this, getting to “yes” still a problem – Psychological barrier – Concerns about economy – NFIB – Small business wants sales, not credit
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Social Media
• Key element of many franchise programs – Most often to reach customers and create
loyalty (and consumer facing programs are important to franchise sales)
– But broader uses too: jobs, franchise sales
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Social Media
• Differences among franchise systems – some love it, some tolerate it, but can’t be ignored
• Need social media policy (ops manual, agreements) – Most common-franchisee can use social
media but subject to some overall franchisor control
– Legal issues • Truth-in-advertising • Defamation • Franchise laws
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Social Media
• Importance to Franchise Sales – Robust sites allow interaction with
candidates – Blogs – Validation from existing franchisees
(lessens need for phone intrusions)
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Government Intrusion
Employment – Health care – Fast union elections (in lieu of card check) – Wage hour laws
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Intersection With Employment Law
Can a franchisee be an employee of the franchisor? • Massachusetts case – minimum wage
and other requirements Can an employee of the franchisee also
be the franchisor’s employee? • Kentucky case – franchisee didn’t pay
workers’ comp insurance and state fund went after franchisor (recently resolved favorably)
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Government Intrusion
Operations – Menu labeling – What you can sell – Where you can locate
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Government Intrusion
Financial matters – Credit – Taxes
• Impasse in Congress
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“Nexus” – What Does It Mean?
• KFC v. Iowa – first high court holding that franchisor has nexus with a state for income tax purposes
• Income tax different from sales tax • Nexus exists if trademarks used in
state
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Government Intrusion
Franchising – Some issues percolating in several states and
Puerto Rico – Arbitration vulnerabilities
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Government Intrusion
• Franchisors and franchisees are on the same page on almost every issue
• IFA increasingly recognized as the voice of small business (and all of franchising)
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THE GROWING INTERNATIONALIZATION OF
FRANCHISING
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International Growth
The 200 Top Franchisors now have 34% of Their Units Outside the U.S.
Courtesy of Franchise Times
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International Growth
• The Larger the Franchise Network, the Higher the % Outside the U.S.
Courtesy of Franchise Times
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International Growth
• But Not Just the Giants. . . • And Not Just Food Service. . . • And Not Just Hotels. . . • Service and Retail. . .
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Does your company currently either franchise or operate locations in international markets?
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Does your company plan to accelerate or start new franchise operations in international markets?
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How important is international to your company’s future success?
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WHY IS THIS HAPPENING, AND WHY IS IT HAPPENING NOW?
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Franchise Laws Around the World: Beginning of the 1970’s
Copyright © 2011 DLA Piper. All rights reserved.
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Franchise Laws Around the World: Beginning of the 1980’s
Copyright © 2011 DLA Piper. All rights reserved.
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Laws Applicable to Franchising February 2012
Blue = Disclosure Law Green = Relationship Law Red = Disclosure & Relationship Laws Black = Other
The Americas Barbados Brazil Canada Alberta New Brunswick Ontario Prince Edward Island Mexico United States Federal Several States Venezuela (competition law)
Central Asia Mongolia Kazakhstan Kyrgyzstan Asia
China Japan Macau South Korea Taiwan Vietnam The Middle East
Saudi Arabia (commercial agency law)
South Pacific Australia Indonesia Malaysia
Does Not Include:
• Codes of conduct which do not provide for governmental or private enforcement, even if promulgated under governmental authority.
• Bodies of law (e.g. competition, intellectual property, etc.) which also cover franchising, unless explicitly mentioned.
Europe EU (competition law) Within EU Belgium Estonia France Lithuania Italy Romania Spain Sweden
Non-EU Albania Belarus Georgia Moldova Russia Ukraine
Africa South Africa Tunisia
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Moments of Opportunity…Moments of Peril
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Programs or rights not included at outset will prove difficult to initiate later.
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Establish objective criteria, or
self-executing mechanisms or events that
eliminate need to take confrontational
position with franchisees.
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Use appropriate occasions to require franchisee
to update or improve.
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Preserve right at renewal to require franchisee to –
– Sign a current franchise agreement – Upgrade its facility to current standards
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What if you’re wrong?
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WHEN TROUBLES COME…
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Number of Franchise Brands Added Each Year
0
50
100
150
200
250
300
350
400
450
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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Percentage by Year of New Brands with 0 Company Units at Start (Frandata)
0%
5%
10%
15%
20%
25%
30%
35%
40%
2004 2005 2006 2007 2008 2009 2010
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Percentage of Brands with Previous Years of Business Experience (Frandata)
0%10%
20%30%
40%50%60%
70%80%
90%100%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0-1 Y R
2-5 Y R
> 5 Y R
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“Majority of US Franchises Now Owned by Multi-Unit Franchisees”
The Institutionalization of Franchising
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Characteristics of “Institutionalization”
• Public awareness • Popular culture • Size and consumer impact • Infrastructure
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Indicators... and Where There is a Lag
• Attention of financing institutions – Commercial banking – Financial markets – Private equity
• Attention of government • Attention of educational institutions
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Legal Aspects of Institutionalization
• Is franchising “different” • And is that good or bad? • Some recent straws in the wind • Some divergence between US, Europe • The legal profession itself
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Why is this potentially important?
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Q & A
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Contact Information Lena to update
John M. Hamburger Email: [email protected] T: 612-767-3201
Jon Luther
Email: [email protected] T: 781-737-3663
Philip F. Zeidman
Email: [email protected] T: 202-799-4272
Dennis E. Wieczorek
Email: [email protected] T: 312-368-4087
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DLA Piper LLP (US) gratefully acknowledges the following: