Franchising leverages growth

More firms take route to increase number of stores

Janet Forgrieve, Rocky Mountain News

Published October 27, 2006 at midnight

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For shoppers at Lowry Town Center, Squeeze Fresh Smoothies is just the citrus-colored shake shop on the corner.

But there's more to it.

Greenwood Village-based Squeeze, founded by former Quiznos Seattle-area director Richard Dean, is one of a growing number of companies that are franchising for faster growth.

Most recently, the company signed deals to open 75 more of the smoothie shops in Arizona and California over the next seven years.

Nationally, 767,483 franchises have created more than 18 million jobs, nearly 14 percent of the country's private-sector employment, according to the most recent figures from the International Franchise Association.

Those businesses generated $506.6 billion in payroll in 2003, the most recent IFA numbers available.

In Colorado, franchises employ 181,415 and generate payroll of about $4.6 million, IFA figures show. Numbers include Colorado-based franchisers and those from other states that have sold franchises here.

Anecdotal evidence - including frequent announcements from out-of-state franchisers planning to enter the market - indicates those numbers are growing fast.

Better support, financing

Texas-based Interstate Battery, which has been primarily a wholesaler for more than 50 years, instituted a franchisee program last year to expand its 19-store chain of All Battery retail stores.

The concept is simple: Stores sell batteries for everything from the tiniest gadget to the biggest motor vehicle and, if they don't have it, they'll make it. It has opened more than 40 franchises and has stores in 26 states, the District of Columbia and Puerto Rico.

Interstate has had one of its corporate stores in Arvada for nine years. Now, with franchisees, it expects to open up to five Denver-area franchises in the next few years, said Vice President Mickey Elam.

"We're just excited about expanding into the Denver market - it is recognized as the anchor for expansion into the west," Elam said.

Interstate has hired Houston-based Liberty Development Consulting to solicit, qualify and sign up franchisees in new markets.

For franchisees, the attraction is often clear: They start their own businesses but with backup, training and often an established name.

Financing comes more easily to franchisees than to pure startups, because lenders and guarantors such as the U.S. Small Business Administration are more likely to approve loans for franchisees signing on to a proven concept.

Other economic reasons also are adding to the growth of franchising, said Kevin L. Hogan, president of Liberty Development which has also advised Shell Oil, Church's Chicken and Breugger's Bagels.

After the stock market burned investors earlier this decade, many looked for alternative investments, Hogan said.

That fueled a real estate boom and, because franchising requires stores and so is often real estate-intensive, the number of franchisees grew.

"Now, people are moving more and more into franchising because even real estate now - it's questionable as to whether it's a bubble," he said. "Franchising is no bubble - you can do it for 30 or 40 years and even hand it off to your kids."

Denver-based Spicy Pickle Franchising was created in 2003 to take the popular local sandwich shop to a slew of new customers.

Franchisees have opened 15 stores in five states, with more under construction and franchise agreements in other states, including New York.

"Franchising is growing at a remarkable rate," said Marc Geman, managing partner of Spicy Pickle Franchising.

"The reason for that is there are a lot of people now who are looking toward owning a franchise as a lifestyle. They're coming out of white-collar industry and places like that, and owning a franchise is an opportunity to make a good living and own their own business."

Some Colorado franchisees haven't always found it smooth sailing. In 2004, 11 Capri Coffee franchisees had to hire a lawyer to break away from their Windsor-based franchiser after a court determined the company had violated another coffee producer's trademark and couldn't use the Capri name anymore.

Nine of them licensed the name of Denver-based Dazbog, whose coffee they were already selling under the Capri name. That deal helped jump-start Dazbog's own franchise expansion strategy this year.

Other companies find that franchising is one way to cut overhead.

In January, Denver-based Peaberry Coffee said it would close up to 13 of its corporate-owned shops, selling the leases to giant competitor Starbucks, and look to its Colorado franchisees for future store growth.

Colorado is home to some franchisers that have become big nationwide, including Quiznos and RE/MAX International.

The state also boasts a host of smaller ones - more than 40 at last count - that hope to make it as big.

From backyard to nationwide

As the pool of potential franchisees has grown, so have the number and diversity of franchisers.

Some, such as Squeeze, start with the fast-growth franchise track in mind, citing franchising as the best way to leverage other people's capital.

Others evolve from thinking smaller. Boulder-based Camp Bow Wow awarded its 150th franchise since founder Heidi Flammang launched her first doggy day care in 2000.

"Going in, I thought I would own four or five in the metro Denver area and be happy as a clam," she said.

Instead, she soon realized she was more of a big-picture person and not so much a detail-oriented operator.

"I kept getting distracted," she said. "I figured the day-to-day running was better left to someone with a more entrepreneurial spirit."

The camps began franchising about three years ago, and the company is now launching retail stores in its facilities.

Luckily, Flammang had a client who had been active in franchising for Mrs. Fields cookies and could direct her to the resources she would need.

"Franchising is very challenging because of all the legalities - it's very expensive to franchise your company, and I think that's downplayed a lot up front," she said. "Building a team and a support system for the franchisees is vital, because you're only as successful as your franchisees are."

Squeeze opened its first store in Highlands Ranch in 2004 and now has stores in Colorado, Oklahoma, Virginia and Texas. It's expanding in using "area director" agreements.

Such deals give franchisees the right to develop stores in a geographic area and often obligate the franchisee to open a certain number.

Area directors typically sign other franchisees to open new stores, then supervise them in exchange for a percentage of the royalties.

"It's almost like an extension of us as a franchiser - we have someone on the ground," Dean said.

That function is also vital because of another piece of Squeeze's business model: thinking locally.

Stores will become part of the community, often interacting with local schools. Last year, the Lowry store raised funds for George Washington High School's prom, said Squeeze marketing director Bo Gascoigne.

"That's another advantage of the business model - people own and operate stores in the communities they live in."

Franchising vs. licensing

• In a typical franchise agreement, the franchisee pays a franchise fee up front, invests in the real estate, improvements and inventory, then pays a percentage of sales as a royalty fee.

• Under a licensing deal, the licensee pays a set licensing fee in exchange for the right to use the name and logo and sell the company's products.

• To search available franchises, go to the International Franchise Association's site at www.franchise.org.

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