October 7, 2008

As Economy Hurts, so Does Franchising


Vinod Kapoor believes in healthy food. If times were different, he might consider adding another Saladworks franchise unit to the three he already owns.

But with food prices high and some sources of credit freezing up, many of the restaurant franchisees he knows are trying to sell units instead, Kapoor said. The problem is finding buyers.

"I'm not even thinking of expanding," Kapoor said, sitting in his restaurant along Route 23 in Wayne. "I'm just trying to keep my units operational without getting ulcers."

Reduced access to capital has some franchisers struggling to maintain their growth and many franchisees wondering how to pay for improvements. Prospective franchisees, meanwhile, face having to raise hundreds of thousands of dollars for start-up costs at a time when banks are reluctant to lend.

Tom Scarda, a Long Island-based consultant with FranChoice, helps prospective franchisees find a good match and secure financing. He said traffic to the group's Web site is down 40 percent over the last year.

"I do work with some people who have their own capital, but for the most part we're at a standstill," said Scarda, himself a former franchisee.

Clients who do come knocking show far more flexibility than usual with where they end up, he said.

"They say, 'I just want to get into a system with a low initial investment and where I'm more sure to get customers,' " he said.

A spokesperson for the International Franchise Association in Washington, D.C., said the group has heard anecdotally that the credit crunch is "significantly slowing down some expansions."

Last month, McDonald's told some franchisees to seek other ways to finance store improvements after Bank of America Corp. declined to increase lending.

Ed Acre, owner of two McDonald's restaurants in Hackensack, plans to seek financing early next year to cover the installation of specialty coffee systems in each. He expects each system to cost about $100,000 and be in place by April. "I have no need to apply for any loans right now, but I have no reason to think I'd have trouble getting one," he said.

GE Capital Solutions, on the other hand, is taking a closer look at the loans it makes to franchisees. Spokesman Stephen White said the company is deferring rate quotes "until things settle down."

Chains including Wendy's International Inc. have said the tighter credit could restrict plans to renovate older locations and open new ones. Not all food industry franchisers project such cautionary outlooks, however.

Jeff Kip, chief financial officer for Panera Bread, said he foresees no "structural change" in how franchisees obtain funding.

"Even in this time, our franchisees are not having any issues accessing the capital they require to run their businesses," Kip wrote in an e-mail.

That response was supported by Jim Nawn, owner of the Fenwick Group, the franchise holding unit for 36 Panera Bread bakery cafes in northern New Jersey. He said a combination of in-house cash and bank borrowing has funded remodeling work at nine units this year. A store will be opening in Montclair next month.

He concludes that banks continue to view the Panera brand as a good risk.

"Some of the pullback from lenders goes beyond the credit crunch and speaks to the general business environment," he said. "If people have fewer dollars in their pocket, there's less willingness to spend it on luxuries" such as eating out.

Or, in Kapoor's case, eating in. During the past six weeks, he said, catering services have dropped from more than a quarter of his total revenue to about 5 percent, as local companies cut back on seminars and luncheons.

Franchises often fare better than other businesses during slowdowns. Scarda said service-based franchises -- particularly what he calls "dull normal businesses" such as plumbing repair -- tend to do especially well.

Cartridge World, which refills printer ink cartridges as an alternative to replacing them, has the benefit of offering a low- cost, business-to-business service that reflects the ideals of reuse and recycling, said Greg Carafello, master franchisee for New Jersey.

He said the state's 35 stores had record year-over-year sales last month

"Our store owners should be doing much better in this climate because people are watching what they're spending," he said.

For owners still seeking a location, the slowdown has offered at least one silver lining: more favorable commercial leases. In southern New Jersey counties, Carafello said, some owners have been able to negotiate down to $25 to $35 a square foot.


This article contains material from news service reports. E- mail: [email protected]


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