Franchises Offer Relief to Operators, With a Side of Encouragement
By Beth Ewen
“I was on the phone talking a franchisee off the ledge,” said Mark Setterington, CEO of Island Fin Poke, when he called back to explain why he missed our interview time. Its eighth store was supposed to open yesterday, in Lake Mary, Florida, but COVID-19 scotched the plan.
Island Fin Poke is deferring royalty payments for franchisees, joining the giants like McDonald’s, Subway and Chick-fil-A in offering different types of support to franchisees. We spoke with the CEOs of Saladworks, Urban Air and Fazoli’s to learn what they’re doing to help their operators, as well, while feeling pain themselves as franchisors. None was more inspiring than Setterington.
“I truly believe, the way we treat people now whether it’s the franchisees, our guests, our staff members, is going to be remembered long after the coronavirus goes away,” he said. “We cannot panic and start treating people poorly at the cost of saving ourselves.”
Island Fin Poke has 22 restaurants sold and seven open pre-virus, “but 2020 was going to be our year for opening.” He will not collect royalties for a “fluid” amount of time. “We collect monthly, not weekly, and it’s 6 percent” of sales. “That means a lot more to them than it does to me” right now. He’s also hosting conference calls with franchisees about guerrilla marketing ideas, and making communication a priority. “I talk to my guys several times a week, and I text like a little girl,” he said. “We’re family.”
At Urban Air, a Dallas-based family entertainment park with 130 units, CEO Michael Browning said they put together a “franchisee relief package” that defers the 7 percent royalty by 50 percent for revenue generated in February and 100 percent for revenue generated in March. Pass-through expenses, such as a fund for a 45-person call center at the home office that books birthday parties for parks around the country, are similarly deferred.
All of Urban Air’s parks are closed, in several cases before state mandates went into effect, a decision made by Browning in consultation with two other CEOs of family entertainment brands, Chuck E. Cheese and Main Event. “We decided to close together, to show unity. It’s not about profit,” he said. “We said, you know what. It’s the overall good of the world, the American people. We need to close and lead again in the social distancing efforts.”
For front-line employees across the Urban Air system, Browning’s team worked with Amazon execs, who said, “Your demand is down, our demand is peaking; we have 100,000 jobs” to fill. “Amazon gave us a link that our employees could apply,” and if qualified, they could “have the job in seven days.” He doesn’t know how many employees have signed on and would not disclose the amount of monthly royalty payments the company is foregoing.
His team also approached banks in individual markets, along with the franchisees, to ask for loan payment relief. Large landlords, particularly in shopping centers, have also been asked for relief from lease payments. “Our philosophy is that everyone should suffer a little so no one funder, partner, franchisee, would suffer a lot,” he said, adding when his company was also taking a hit it helped convince others to do the same.
He said unlike many restaurant operators, Urban Air parks “operate on very healthy margins,” 30 percent, according to the FDD. “There’s very low cost of goods associated with operating our model. So we have high capital expenditures to get open—the average park costs $2.5 million to open—but once it’s open the cost of goods is quite low,” he said. “Last year 82 percent of our organic growth was from franchisees buying another park using cash flow.”
For other franchise leaders, he advises flexibility. “The situation is extremely fluid and there is no playbook,” he said. “We believe speed and innovation wins. In a time of crisis, you don’t have months and months and months to whiteboard it out, and create these sophisticated plans.
“Don’t be afraid to contradict yourself. Make decisions based on the information you have at the time, and if you wake up the next day and say things have changed, that’s OK.”
Carl Howard, CEO of Fazoli’s, said the times are “certainly challenging and we’re trying to navigate as best we can.” He told franchisees to not pay royalties, which are 4 percent of gross sales, through the month of April. “It will be deferred through June and paid back over 10 months,” he said. Beginning in April, he postponed the 3 percent collection of advertising fees; we will do the same in May, except for franchisees who want to do their own marketing plans “on a COD basis,” meaning cash on delivery.
The financial hit to the franchisor per month: “It’s north of a half a million dollars for the one month in royalties; on the advertising it’s not really our money; we collect from them and spend it,” he said. “It’s nothing we can continue with. We’re doing it for one month.”
He announced the plan March 17, “and the responses from several franchisees were very positive,” he said. Fazoli’s largest franchisee, who owns multiple brands, told Howard, “As usual you guys are best in class, the first one to make the right decision,” Howard said.
Over the most recent weekend, Howard said sales dropped in the 20 percent range at Fazoli’s restaurants. “Once Monday hit it was 40 percent” down. “We have a real benefit that we have drive-thrus, and we have also our mobile app where people can order ahead,” he said, adding stores can maintain 60 percent of sales because of drive-thru.
Fazoli’s has 52 company-owned and 167 franchisee-owned stores. “There’s going to be some fallout; people that were on the borderline will struggle,” he said about restaurant chains as a whole. His team is working on an “aggressive” plan to boost franchise sales once the virus is vanquished. “There’s going to be a lot of brands that don’t make it, unfortunately, and there’s going to be a lot of shells out there. We’re going to be aggressive,” when that time comes.
At Saladworks, CEO Kelly Roddy said his team offered deferral of royalties, which are 6 percent of gross sales, until “at least” May; local and national marketing fees are also deferred. “We put together the most aggressive plan we could actually think of,” he said.
“We’re fortunate to have an ownership group, with Centre Lane Partners, and we’re sitting financially in a position where we can continue to pay people’s salaries and run the company, and basically burn down our reserves, to make sure we can take care of the franchisees.”
Centre Lane, a New York-based private equity firm, acquired Saladworks out of Chapter 11 bankruptcy in 2015. Roddy joined the franchise a year ago, and set about getting growth going again. “We put some growth strategies in place and got traction immediately and turned comps around,” he said. “We’ve got a lot of restaurants that are either under construction or about to open between now and May, and literally all that progress has stopped,” he said.
“When it comes to the growth side, we’re riding it out. When it comes back it will come back strong,” he added, especially because “people will be really tired of eating their own cooking real soon.”
Then there’s all the snacking of all those home-bound people who are going to need their salads to purge the pounds. “We’ll be ready for them,” Roddy said.
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