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Analyze the Franchise

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Armed with a thorough understanding of the marketplace and consumer mindsets, the brands FSR highlights in its second-annual Top Franchise Values list are strategically positioned for today’s restaurant landscape.

By Sonya Chudgar October 2014 Finance

“I always like to say that if you are going to franchise something, it should be easy to replicate, but not easy to duplicate,” says Jonathan Benjamin, chief development officer for Huddle House, which turns 50 this year. His philosophy epitomizes the findings of this year’s top franchise values.

Each company on the list has carved out a niche that makes it attractive to a loyal set of diners. Each builds its brand accordingly and is smart about growth, whether entering a new area or filling in existing markets. And each is bullish on the future, because it’s brought in the right franchise partners and laid the groundwork for success.

All of these establishments have an ear to the ground—or to social media—to understand today’s dining climate and fine tune their offerings accordingly. Bar Louie tells FSR that its guests use the brand very socially, with 23 percent of sales coming from late-night, while on the other end of the spectrum, Black Bear Diner serves all three dayparts but emulates a fast-casual real estate model, according to the company. Meanwhile, brands such as First Watch and The Egg & I thrive by cooking up menus from 6 a.m. to 2 p.m.

Variations aside, these brands share one common thread: franchising victory. Read on to get inside the heads of the top full-service franchisors in the industry.

Bar Louie
BASED IN
Addison, Texas
U.S. COMPANY-OWNED UNITS 59
U.S. FRANCHISED UNITS 20
TOTAL 2013 UNITS 79
2013 U.S. SALES $178,550,000
2013 AVERAGE UNIT VOLUME $2,400,000
FRANCHISE FEE $50,000
STARTUP COSTS
$410,000–$3,000,000
ROYALTY FEES 5%
MARKETING FEES 1%
PROJECTED U.S. COMPANY-OWNED OPENINGS IN 2014 12
PROJECTED U.S. FRANCHISED OPENINGS IN 2014 1

Franchising is in the early stages at Bar Louie, but the ultimate goal is for one-third of the chain’s portfolio to be franchised, so now is a good time to take a deeper look.

Twenty-three percent of Bar Louie’s sales come after 10 p.m., and this dovetails with its real estate strategy, which is to set up shop where there is evidence of late-night activity, such as other bars and restaurants open late, as well as movie theaters, stadiums, and arenas. “We really don’t want to be the only one open at midnight,” explains Chris Devlin, vice president of franchise development.

To identify these markets, Bar Louie created a model of its top-quartile performers and analyzed the demographics of these markets, such as income and population density. “It’s not 100 percent accurate, but it gives us some direction to look at,” Devlin explains. Bar Louie then sends representatives to scope out potential markets, talk to hotel concierges, visit local restaurants, and even chat with bartenders to determine whether the brand would be a good fit with that area.

Bar Louie has seen an uptick in franchising interest in recent years, particularly in markets where it already has locations, such as Texas, Illinois, and Ohio, and it is starting to develop more of the West Coast. Devlin names Michigan, Florida, Alabama, and Arkansas as growth targets for 2015. To create the local bar feel in each unit, Bar Louie conducts many second-generation conversions, “everything from Ruby Tuesday boxes to independents that may have failed in their efforts,” Devlin explains.

Fifty-one percent of the clientele is female, and the alcohol mix is just north of 50 percent of total sales.

“[A group] that surveyed our guests called it ‘freakish’ that people visit us so frequently,” Devlin says. “Twenty-one percent visit us once a week and 73 percent once a month. The average time spent in a Bar Louie is over two hours, and that tells you how people use us: It’s not to come in, dine, and leave. It’s really to come in, nibble on some food items, hang out, and have other people join them.”

Black Bear Diner
BASED IN
Redding, California
U.S. COMPANY-OWNED UNITS 4
U.S. FRANCHISED UNITS 57
TOTAL 2013 UNITS 61
2013 U.S. SALES $148,483,000
2013 AVERAGE UNIT VOLUME $2,420,000
FRANCHISE FEE $40,000
STARTUP COSTS
$535,000–$1,400,000
ROYALTY FEES 4.5%
MARKETING FEES 1%
PROJECTED U.S. COMPANY-OWNED OPENINGS IN 2014 2
PROJECTED U.S. FRANCHISED OPENINGS IN 2014 10

Black Bear is successfully working the family-dining segment, unlike a lot of the industry. The company serves breakfast, lunch, and dinner, and the last 10 restaurants it opened have a higher AUV ($2.7–$2.8 million) than its older units ($2.4 million), which speaks volumes at a time when consumers’ dining penchants veer unabashedly toward fast-casual meals and sports bars with craft beer and wings.

This doesn’t jar Doug Branigan, vice president of franchise development. “You know what’s interesting is, our restaurants are full-service, but our model is more fast-casual,” he says. The distinction is the initial investment. “It’s not $1.5–$2 million, like most full-service franchises are. We look for restaurants that are second- and third-generation, and we go in and remodel those. We can do that for anywhere from $350,000 to $1 million.”

What makes Black Bear Diner attractive to guests is, despite the rising food costs and trend toward smaller portions, the restaurant hasn’t slashed its food portions or raised its prices. “We’re very conscious of keeping it affordable and serving our usual big portions,” Branigan says. “Today, that’s a challenge. The commodity pressures are tremendous; the minimum wage pressures are tremendous; the Affordable Care Act is tremendous. We take it really seriously and we try to go find better purchasing avenues and just build sales so we can manage margins that way. It’s hard, but it’s our commitment.”

Black Bear Diner aims to add eight to 10 units each year, and about two-thirds of those are franchise-operated. While the geographic penetration is Colorado west, Branigan says Black Bear Diner is engaging in discussion with potential franchisees to spread eastward. By 2018, the brand aims to have 100 units nationally.

Buffalo Wild Wings
BASED IN
Minneapolis, Minnesota
U.S. COMPANY-OWNED UNITS 420
U.S. FRANCHISED UNITS 558
TOTAL 2013 UNITS 993 (14 are international company-owned units)
2013 U.S. SALES $1,266,719,000
2013 AVERAGE UNIT VOLUME $2,740,000
FRANCHISE FEE $40,000
STARTUP COSTS
$2-$3 million
ROYALTY FEES 5%
MARKETING FEES 3.5%
PROJECTED U.S. COMPANY-OWNED OPENINGS IN 2014 45
PROJECTED U.S. FRANCHISED OPENINGS IN 2014 40
PROJECTED 2014 INTERNATIONAL FRANCHISED OPENINGS 10

As the only brand on this list to top $1 billion in sales, Buffalo Wild Wings (BWW) is a safe franchise bet for the risk-averse investor, says Jason Moser, senior analyst at financial services firm Motley Fool One. “If someone’s looking at franchising with BWW, there’s a known quantity, a known quality, and it’s probably going to be viewed as a less risky transaction,” he explains. “You know that you’re going to get solid performance from BWW, though in the restaurant industry, you never rest on your laurels. Just as BWW is well-established, it is also subject to competition and someone coming in there and trying to do it better.”

Attractive, still, is the fact that franchised BWW restaurants have higher average weekly sales volumes than company-owned stores—and that’s saying something, considering sales at the company have increased a whopping 6–8 percent each quarter, compared to the same period a year prior. While BWW is a large franchisor, and some companies sign up to franchise entire regions, the minimum area development for a new franchisee is only two restaurants.

It’s also a good time to be in the chicken wings business, as prices for meat commodities such as beef and pork skyrocket. BWW addressed that by testing a smart pricing strategy, which is to charge diners by volume or portion size—such as a snack, platter, or full meal of wings—rather than charging by the number of wings. The brand is also investing in tabletop tablets, to arrive in all restaurants by year-end 2015, which will lower labor costs right as the Affordable Care Act kicks in.

Meanwhile, diners keep coming back to watch sporting events at BWW, whether it’s the World Cup, NHL playoffs, or a fantasy football draft party.

Football season, after all, is “our favorite time of the year,” CEO and president Sally Smith is happy to acknowledge.

East Coast
Wings & Grill
BASED IN Winston-Salem, North Carolina
U.S. COMPANY-OWNED UNITS 2
U.S. FRANCHISED UNITS 26
TOTAL 2013 UNITS 28
2013 U.S. SALES $37,000,000
2013 AVERAGE UNIT VOLUME $1,526,146
FRANCHISE FEE $40,000
STARTUP COSTS
$439,943–$993,870
ROYALTY FEES 5%
MARKETING FEES 2%
PROJECTED U.S. COMPANY-OWNED OPENINGS IN 2014 1
PROJECTED U.S. FRANCHISED OPENINGS IN 2014 6

An adherence to unit-level economics makes East Coast Wings & Grill a winner in the franchise field. At the headquarters, a team crunches the numbers daily for each of the locations, breaking down the sales by menu item for the previous day, the same day last week, and the same day last year.

It helps East Coast understand which units are on track and identify any that are slipping into an area of questionable performance, which East Coast dubs the Red Zone.

“After a year and a half of researching, I discovered that very few franchise-model businesses had specific people inside their companies dedicated to driving that unit-level philosophy,” CEO Sam Ballas says. “Everybody has a CFO and COO, and most franchise systems have some sincerity in the franchisees’ sales and bottom lines, but there were very few, maybe one hand count, of companies that had any rendition of a division similar to ours.”

If a store falls into the Red Zone, the unit-level economics division will analyze its daypart mixes, down to incremental hourly time slots. They assess when employees punched into work, so they understand how many employees the franchise put on the floor to expedite sales. They analyze payroll against the same day last week and same day last year. The company speaks with the franchisee or general manager on the phone to determine if there have been any management changes, such as in the kitchen, or if anything is going on in the market or community that may have impacted traffic patterns.

“We spend a lot of energy understanding what’s happening inside the unit’s four walls but also in a 5-mile radius,” Ballas says.

When a franchisee is shopping East Coast, Ballas says the numbers speak for themselves. The AUV is strong compared to the startup costs, which are more equivalent to a quick serve such as McAlister’s Deli or Moe’s Southwest Grill, and the brand recently marked 10 years of positive same-store sales.

First Watch
BASED IN
University Park, Florida
U.S. COMPANY-OWNED UNITS 100
U.S. FRANCHISED UNITS 15
TOTAL 2013 UNITS 115
2013 U.S. SALES $126,000,000
2013 AVERAGE UNIT VOLUME $1,200,000
FRANCHISE FEE $35,000
STARTUP COSTS
$714,400–$1,043,000
ROYALTY FEES 4%
MARKETING FEES 1–3% (local marketing minimum spend: 1%)
PROJECTED U.S. COMPANY-OWNED OPENINGS IN 2014 6
PROJECTED U.S. FRANCHISED OPENINGS IN 2014 5

The emergence of the daytime café has shaken up some of the more traditional brands that stick to lunch and dinner service. Doing some of that shaking is First Watch, which serves only breakfast, brunch, and lunch.

“To me, as a franchisee, when you’re going searching for a category of food or business, that’s something that’s going to catch your eye,” says Joe Genovese, vice president of franchise development. “We like to say breakfast is the new dinner. Maybe that’s a little too cute, but breakfast, with its focus on healthy dining, is not a meal diners are taking lightly.”

Founded in 1983, First Watch has stepped up its franchising program in recent years. Last year, 15 of its 115 units were franchised, but Genovese expects that number to grow. “From a company standpoint, we’ll open 12–15 new restaurants each year, and from a franchise perspective, about the same. We’d like to see 20–25 franchise openings per year, but that’ll take some time to develop.”

In the meantime, First Watch attracts franchisees with a favorable real estate strategy: shopping and strip centers. “This isn’t a multimillion-dollar freestanding building with lots of parking and drive-thru lanes,” Genovese explains. “This is a 3,500-square-foot strip center location, and there is a lot more real estate available in that category.”

Communities receive First Watch warmly. Genovese says it’s common for First Watch units to win a Best Breakfast or Best Brunch award from a local publication within a year of opening, and it’s something First Watch actually strives for with each new opening.

First Watch spans from the Carolinas west to Texas, and most of the region has the opportunity for franchisee development, except Florida, which is primarily company-owned and -operated. In 2015, First Watch will have a heightened focus on the Atlanta, Dallas, Houston, and Charlotte, North Carolina, markets.

Huddle House
BASED IN
Atlanta, Georgia
U.S. COMPANY-OWNED UNITS 8
U.S. FRANCHISED UNITS 377
TOTAL 2013 UNITS 385
2013 U.S. SALES $240,027,000
2013 AVERAGE UNIT VOLUME $611,686
FRANCHISE FEE $25,000
STARTUP COSTS
$620,670–$1,300,000
ROYALTY FEES 4.75%
MARKETING FEES 2%
PROJECTED U.S. COMPANY-OWNED OPENINGS IN 2014 4
PROJECTED U.S. FRANCHISED OPENINGS IN 2014
28 (8 are re-openings)

Year-over-year franchise sales are up 300 percent at Huddle House, so chief development officer Jonathan Benjamin may be on to something when he says smart franchises should be easy to replicate and hard to duplicate. With nearly 400 units open last year, and 98 percent of those franchised, Huddle House has found success by creating loyalty in regions that other national chains have yet to penetrate. This creates an advantageous value proposition, Benjamin says.

“If you look at our low cost of entry and our appeal to go into certain areas where a lot of other brands just aren’t ready to go yet, some smaller towns and things like that, that’s where we have some very distinct advantages,” he explains.

Situated through the Mid-Atlantic and Southeast, Huddle House is just beginning to push west, signing its first franchise in the state of Nebraska—though Benjamin says growth doesn’t need to come from new geographies alone. “Even if we don’t push our footprint anymore, we believe we can double our presence within our existing footprint,” he says. Growth is anything but stagnant; through August and September of this year, Huddle House had more restaurants under construction than it opened in all of 2013 combined.

As part of its growth strategy, Huddle House also launched an aggressive remodeling program for franchisees, incentivizing franchisees with $25,000 to redesign units into the new Evolution prototype. “We’ve been very successful at getting that turned around,” Benjamin says. “What it’s done is create some opportunities where licenses have expired but the buildings are still in good shape and might need a remodel. So, we’re looking to be able to get franchisees into an existing Huddle House for a lot less money, if they’re willing to pay for a remodel.”

Johnny Rockets Group
BASED IN
Aliso Viejo, California
U.S. COMPANY-OWNED UNITS 30
U.S. FRANCHISED UNITS 177
INTERNATIONAL FRANCHISED UNITS 120
TOTAL 2013 UNITS 316
2013 U.S. SALES $228,186,000
2013 AVERAGE UNIT VOLUME $1,125,000
FRANCHISE FEE $49,000
STARTUP COSTS
$758,000
ROYALTY FEES 5% of weekly gross sales
MARKETING FEES 1.75%
PROJECTED U.S. COMPANY-OWNED OPENINGS IN 2014 1
PROJECTED U.S. FRANCHISED OPENINGS IN 2014 17
PROJECTED 2014 INTERNATIONAL FRANCHISED OPENINGS 35

Modern Americana isn’t a theme that diners in the U.S. or abroad are ready to retire yet. Just ask Johnny Rockets, which plans to open 100 units in the U.S. and 200 more internationally by 2017.

“Interest in franchising this year is at an all-time high, much higher than years previous,” notes James Walker, chief development officer. “This is a brand that’s weathered the test of time very well.”

Prototypes range from 700 square feet all the way up to 7,000 square feet. The flexibility in building styles sets the brand apart from a franchising perspective, as it’s formulated to fit malls, shopping centers, downtowns, airports, amusement parks, stadiums, and even cruise ships.

In September, Johnny Rockets rolled out two new prototypes, and Walker hints that by year-end, the brand will introduce “new technologies that address how people want to dine today,” something competitors are doing rapidly. Franchisees appreciate how the brand stays up to date and continues to resonate with guests, Walker says.

“I’m pretty new to the brand, and one of the things that was most exciting for me was meeting with more than a dozen franchisees in my first month and learning every single one of them still had plans to grow with the brand,” he says. “They were very bullish on management and very bullish on the future.”

Quaker Steak & Lube
BASED IN
Sharon, Pennsylvania
U.S. COMPANY-OWNED UNITS 18
U.S. FRANCHISED UNITS 44
INTERNATIONAL FRANCHISED UNITS 1
TOTAL 2013 UNITS 63
2013 U.S. SALES $155,846,000
2013 AVERAGE UNIT VOLUME $3,200,000
FRANCHISE FEE $40,000 (plus a $20,000 Area Development Agreement fee)
STARTUP COSTS
$1,500,000–$2,500,000
ROYALTY FEES 5%
MARKETING FEES 3%
PROJECTED U.S. COMPANY-OWNED OPENINGS IN 2014 1
PROJECTED U.S. FRANCHISED OPENINGS IN 2014 3

Finding the right franchisee with whom to grow is crucial to The Lube, where the prototype is typically 6,500 square feet with 250 seats, which requires a detail-oriented operator to operate it successfully. While the portfolio is most dense in Ohio and Pennsylvania, The Lube has an aggressive growth strategy, planning to open locations in more than 30 states, many of which have no current Lube units.

“We recognize customers are looking for an update not just in quality, but in flavor profiles,” says CEO Greg Lippert. “There’s just a higher expectation of how food is prepared, plated, and served. The consumer expects fresh now, and we have to reflect that.”

To that end, the wings-oriented chain is evolving toward more fresh, made-to-order menu items, which will surely support its strong AUV of $3.2 million. Plans include introducing a chicken tender product that is completely fresh and has never been frozen.

In both established and new markets, representatives from The Lube are on-hand during the opening to help franchisees have a smooth start. “The first several months of the opening, we get a lot of trial visitors because of the size of the building and awareness, so it’s important that every guest is taken care of and has a good experience,” Lippert says. “We try to assist and be involved in the very first steps of the opening of that restaurant to ensure that experience happens.”

Ruth's Chris
Steak House
BASED IN
Winter Park, Florida
U.S. COMPANY-OWNED UNITS 64
U.S. FRANCHISED UNITS 57
INTERNATIONAL FRANCHISED UNITS 18
TOTAL 2013 UNITS 139
2013 U.S. SALES $331,975,000
2013 AVERAGE UNIT VOLUME $4,900,000
FRANCHISE FEE $150,000
STARTUP COSTS
$3 million
ROYALTY FEES 5%
MARKETING FEES
Up to 1%
PROJECTED U.S. COMPANY-OWNED OPENINGS IN 2014 3
PROJECTED U.S. FRANCHISED OPENINGS IN 2014 3
PROJECTED 2014 INTERNATIONAL FRANCHISED OPENINGS at least 1
*FSR estimate

The first franchise-owned Ruth’s Chris opened in 1976 in Baton Rouge, Louisiana, and since then, 56 franchised units have followed. Over the next three years, Ruth’s Chris plans to open 13 franchised restaurants. With an average check of $73, the restaurant is a strong pick for upscale franchising. In the fine-dining segment, Ruth’s Chris has remarkable penetration compared with competitors such as Fleming’s Prime Steakhouse and The Capital Grille, outpacing them with nearly double the units.

Last year, the brand opened its first Ruth’s Chris in China, signaling its 18th international franchised location as well as its commitment to build a presence in Asia. Ruth’s Chris now operates in 10 countries outside the U.S., and as the brand grows globally, so does demand.

“Corporate really appreciates its franchisees, and many of the developments that have happened over time have come from the franchise community,” says Nancy Oswald, who co-owns 10 Ruth’s Chris franchises in the South with her husband, Mark, as partners in Sizzling Steak Concepts. “There’s an [internal] advertising council, and I’ve been on that since the beginning. And the fact that the company is asking for franchise input and franchisees’ insight and making us a part of that process really makes the system work well.”

“We’d get calls in the past of a franchisee looking at doing a Ruth’s Chris franchise and wanting to know our thoughts about it,” adds Mark Oswald. Together, the Oswalds have owned the franchise since 1990, making them the longest-tenured franchisee of the system (see story, page 51). “My thinking is, take Ruth’s Chris at its word. We’ve been at this nearly 25 years and we’ve got our own training center, so we’ve gotten very tried and true at this, but when you’re signing on to the brand, our suggestion is: Go with it. Embrace it. Enjoy it.”

The Egg & I
BASED IN
Centennial, Colorado
U.S. COMPANY-OWNED UNITS 12
U.S. FRANCHISED UNITS 80
TOTAL 2013 UNITS 92
2013 U.S. SALES $77,221,221
2013 AVERAGE UNIT VOLUME $1,003,000
FRANCHISE FEE $45,000
STARTUP COSTS
$600,000–$650,000
ROYALTY FEES 4.5%
MARKETING FEES
1% (spent locally)
PROJECTED U.S. COMPANY-OWNED OPENINGS IN 2014 3
PROJECTED U.S. FRANCHISED OPENINGS IN 2014 25

When Chris Osborne was considering a franchise relationship with The Egg & I about 10 years ago, two things jumped out at him: First, the brand, which serves breakfast, brunch, and lunch, had been around for 16 years, and every unit was still in operation.

The other piece that sealed the deal for himwas connecting with the values and vision of The Egg & I. “I related to their mission statement and commitment to a very intentional culture: being very community oriented, guest friendly, all those kinds of things. I’m very much a community person,” Osborne says, adding that he serves on community boards and also coaches Little League.

And so it was that in 2006, Osborne became the first franchisee of the Egg & I to franchise a location outside the brand’s home state of Colorado, opening a unit in Texas.

Today, Osborne is CEO and president of EVI Management Inc., which operates five Egg & I restaurants in the Houston market.

Much has changed since 2006, when Osborne opened the company’s 18th unit. The Egg & I is accelerating its franchise expansion, planning to grow its store count more than 30 percent this year to 120 by year-end.

Of the new units, 25 will be franchised, and target markets include Birmingham, Alabama; Hendersonville and Chattanooga, Tennessee; and Chapel Hill, North Carolina, which will mark the brand’s first foray into the Carolinas.

The Melting Pot
BASED IN
Tampa, Florida
U.S. COMPANY-OWNED UNITS 4
U.S. FRANCHISED UNITS 130
INTERNATIONAL FRANCHISED UNITS 4
TOTAL 2013 UNITS 138
2013 U.S. SALES $212,713,538
2013 AVERAGE UNIT VOLUME $1,580,012
FRANCHISE FEE $45,000
STARTUP COSTS
$977,795–$1,436,095
ROYALTY FEES 4.5%
MARKETING FEES 1%
PROJECTED U.S. COMPANY-OWNED OPENINGS IN 2014 0
PROJECTED U.S. FRANCHISED OPENINGS IN 2014 1
PROJECTED 2014 INTERNATIONAL FRANCHISED OPENINGS 5

The Melting Pot seems to nab headlines every other week by announcing a new region for franchise expansion. The brand has named no fewer than 11 states as growth targets in the last six months alone, though its greatest demand comes from abroad.

Asked how many units The Melting Pot aims to open each year, president Mike Lester jokes, “as many as possible!”

Banter aside, Lester assures FSR the growth strategy is more akin to slow and steady wins the race. “We’ve been in business now for over 40 years, and some might say it’s slow for a 40-year-old company to have 135 units.”

The list of points that differentiate The Melting Pot from the competition and make it a top franchise value is long: It’s the only national full-service fondue brand, so there is no direct competitor. From a financial standpoint, there are no chefs, fryers, grills, or hood systems, and most locations are open only for dinner. “Some of our restaurants open for lunch, but generally speaking, there’s no need to,” Lester explains. “It’s a one-shift franchise operation with $1.6 million in average unit volume; those are strong unit economics.”

In many ways, The Melting Pot is more relevant to consumers now than it was in the past. With a server who mixes fondue at the table, the meal is an event, primed for smartphone photos and experience dining. “People today, even if they’re not foodies, they’re food-aware,” Lester says. “We’ve been an interactive dining experience for many years.”

The entire meal is customizable. Guests use The Melting Pot as a snack occasion for its fondue with dippers; a more grandiose, four-course option with cheese, meat, and sides; or any size meal in between.

The brand supports its franchisees with local marketing consultants, a division added about two years ago. These consultants visit the market, study it, and then consult and offer marketing strategies for that specific unit.

Franchisees will also be able to tailor their offerings with a new menu that rolls out this month. Of the six fondues on the new menu, the brand will dictate three national core items, and the other three will be at the discretion of the franchisee.

“They’ll have the ability to select quite a few items on the menu that they know are going to be successful in their marketplace, based on dining preferences, flavors, and ingredients,” Lester says. “It’s not one size fits all in this marketplace any longer.”

An earlier version of this story quoted incorrect numbers submitted by Johnny Rockets.