Site analysis tools do new encroachment-aversion duty
But data models seen as unable to forestall all franchisor-franchisee squabbles
By MILFORD PREWITT
(Mar. 05) Major restaurant chains have long relied on computerized sales forecasts or old-school human analysis to determine whether or not to invest in a new location. Now many franchised brands are learning that one of the byproducts of such research can help defuse a powder keg: encroachment fights with franchisees.
Chain executives, industry leaders and industry consultants say that the results of old-fashioned customer surveys and sophisticated statistical forecasting techniques—called “impact prevention programs” or “impact assessment surveys”—are helping to mitigate the pain and anger of cannibalized sales when a company or franchised unit allegedly encroaches on another licensee’s market.
But detente is not the case for KFC, where various sources familiar with the quick-service concept, which is owned by Louisville, Ky.-based Yum! Brands Inc., are reporting that a number of arbitration hearings are underway nationwide stemming from encroachment and cannibalization disputes, almost all linked to locations of Yum’s multibrand, two-in-one and three-in-one locations. Those outlets usually twin KFC with any of its quick-service siblings, such as Taco Bell, Pizza Hut, A&W and Long John Silver’s.
A KFC spokeswoman said Yum’s use of impact surveys is too proprietary for public discussion and declined to comment. The head of KFC’s franchisee association did not return calls by presstime.
Franchisee association leaders and lawyers familiar with impact assessments suggested that many franchisors do not heed data forecasts or share the results, and will open new units no matter what the numbers say.
Nevertheless, other experts say such brands as Burger King, Sonic, Dairy Queen and Dunkin’ Donuts—all former combatants in territory disputes with franchisees—have enjoyed relative quietude of late by carefully interpreting impact data gleaned from sales forecasts.
At Dairy Queen, where only 58 stores in the 5,700-unit system are franchisor-owned, officials use a “site clearance assessment” in which the five franchisees closest to a proposed branch are interviewed to assess their concerns about whether the project should proceed, said Troy Brader, DQ’s executive vice president of development.
Frank Steed, a former senior executive at Roma Corp. and Metromedia Restaurant Group who now heads the Steed Consultancy in suburban Dallas, said foodservice franchisors increasingly are using impact analyses to defuse potential problems and, in some cases, grow their businesses.
Steed noted that in cases where a franchisor believes it cannot afford to let a great location fall into the hands of a competitor but a franchisee is nearby, conflicts are being avoided by compensating the franchisee either with cash, cuts in royalty payments or giving impacted operators the opportunity to develop the site themselves. That is especially true when an impact study forecasts a 20-percent to 30-percent drop in sales, Steed said.
But critics say Dairy Queen’s and Steed’s rosy pictures of harmony are not the norm, and that, in too many cases, impact surveys change nothing.
Some lawyers and franchisee association heads said that they believe nothing breeds more mistrust and suspicion than a franchisor’s refusal to disclose what it learns from impact surveys.
“The impact forecast programs work if the franchisor wants them to work. It’s that simple,” said Andrew Selden, a Minneapolis-based lawyer for Briggs and Morgan, which represents several large franchisee associations. “To design one that is effective, commercially and politically, takes a collaborative process.”
According to Selden, there is an “art and a science” to sales forecasting that can diminish cannibalization. But he said he fears that too few franchisors are willing to allow third-party, neutral entities to conduct the analyses.
Jim Hansen, a 36-year Subway franchisee, who is president of the National Association of North American Subway Franchisees, agrees. Not only does Doctor’s Associates Inc., the Milford, Conn.-based parent of the 23,000-unit, 99.9-percent franchised Subway brand, conduct its own internal impact surveys, but it also uses outdated methods and keeps the results secret, Hansen asserted. He said he has continually challenged the company to embrace more sophisticated statistical analyses.
Last summer, Subway’s franchisee community did a pilot test in a few markets with a statistical-analysis firm to learn more about the process and was surprised at some of the findings, Hansen said. Firms and individual consultants that provide statistical sales forecasts and impact assessments—including several experienced in foodservice—described what they do as statistical modeling to forecast such cause-and-effect events as same-store-sales averages and regional economic growth rates.
|Impact assessors: secret agents who resent manipulationThe firms and individual consultants that contract with restaurant chains to perform expansion-impact surveys and new-unit sales forecasts belong to a highly specialized cottage industry in which integrity, objectivity and discretion are tools of the trade.
The proprietary information they draw from corporate playbooks, right down to the exact addresses where units are to debut, makes the relationship between big restaurant chains and impact assessors one of the most private business partnerships in foodservice. Such assessors often must sign confidentiality agreements in order to win contracts.
Among the several dozen firms and individuals offering impact assessments is Tom Colaw, who said that the past 16 years of his 35-year restaurant career, as everything from a unit manager to a senior-level executive, have been devoted to his respected and busy one-man shop, Thomas Colaw and Associates in Dallas.
Using shoe leather and old-fashioned survey and counting techniques, Colaw’s company and its subcontractors have done business with most of the major quick-service brands at some point, Colaw said. He added that he also has information in his database on the restaurant choices of well over 1 million consumers.
But he said there’s a dark side to the impact assessment practice and that he bristles when clients want the results edited in order to win points in an encroachment dispute.
“You go in stressing that you are a neutral fact finder,” he said. “But I resent it when they ask me to manipulate the results to favor them. All I have is my integrity, and once the word gets out that your integrity can be bought, what kind of business will I be left with?”
Rich Hollander, a principal in and one of a dozen former big-brand senior retail executives who founded Buxton Co. in Fort Worth, Texas, 14 years ago, said his company has done work for casual-dining chains like McCormick and Schmick’s as well as Burger King’s and Subway’s franchisee communities. Buxton uses advanced statistical software for customer and site selection analyses to produce what he calls “regression studies.”
Hollander argued that he has found that sales declines caused by encroachment are more a problem of perception than a reality. He said most brands accept that incumbent units will suffer a short-term drop in business. But he insisted that in the vast majority of cases, the numbers show that once the blush of the newcomer wears off, consumers return to their accustomed traffic patterns, which stabilizes and restores volume at older units and ends up benefiting all chain outlets in the market.—Milford Prewitt
“We’ve recommended on our website third-party impact analyses, and we’ve been saying that for some time,” Hansen said. “This is information that can be shared, but at the moment the company does not share that with us.” Hansen added, “When we conducted our pilot test, one of the things you learn is that it helps you with your leases,” he said. “For example, let’s say a landlord is telling you that the site he has for you is an A location, but the impact survey deems it a C location based on your chain’s operating history. Well, you can use that finding as leverage to negotiate C-location rent.”
Another surprise, Hansen said, was that the impact models could help a franchisee decide whether it makes more economic sense to remodel a unit the franchisor wants refurbished or to move to another site with a new prototype.
Proud that Subway has toppled McDonald’s as the nation’s largest chain by unit count, Hansen nonetheless said he is unhappy that his franchisor does not share its strategic growth plans to help franchisees select sites. “What Subway does not have is a smart, written growth plan that is fair and equitable and open for all of us to see,” he said. “I would say this is the most contentious issue in the system today. We don’t want to compete against ourselves. I’d rather a competitor move down the block because I know I can battle them. But another franchisee?”
Even in cases where a franchisee has been compensated for expected encroachment, the franchisor “handles these deals case by case instead of trying to come up with one uniform policy that the whole franchise community knows about,” Hansen said.
Don Fertman, Subway’s director of operations, said that much of what Hansen wants the franchisor to disclose is not required under federal franchising laws. Such information as sales projections on new units, for example, are not required to be disclosed in uniform franchise offering circulars, he said. If Subway is making mistakes in assigning locations, that is mainly because, as Fertman put it, “we’re treading on new ground” in describing the chain’s speed-of-light growth in the past few years. “No one ever grew this fast before,” Fertman said.
Nevertheless, Fertman, who called the words cannibalization and encroachment “inflammatory, negative terms meant to sell newspapers” and to upset franchisees, said no chain agonizes more over impact issues than Subway.
Although he noted that Subway’s franchise agreement gives the franchisor the right to assign sites wherever it wants, the company struggles to assure that incumbent franchisees are protected, for no other reason than that there is no benefit in having a franchisee fail.
“This has been a significant discussion with the company as a whole, and as we grow and mature our store density inevitably increases,” he said. However, “so too does our customer base, and our proportion of the overall sandwich segment grows. Now that is a good thing for all of us.”
Unlike brands that use high-tech software for impact studies, Subway’s franchisor disdains computers and opts for human assessments that utilize its network of area managers, all of whom were franchisees and are considered regional marketing experts, Fertman said. They survey consumers about travel habits, work and home proximities, spending patterns, and frequency of visits, he explained.
“Any software is just that—a computer program based on numbers and formulas—and it is impossible to deal with intangible factors that our area developers know about,” he said. “Nothing beats the human factor and their knowledge of the market.”