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Franchisees on the sidelines in tough economy

TAMPA

Executives with the Planet Smoothie chain pulled out all the stops when their "Franchise U" tour pulled into town this month to entice prospective franchisees across Florida.

A franchisee wearing the Atlanta chain's trademark "Cupman" suit paraded around a conference room. Attendees' names were thrown in the hopper to vie for a $5,000 discount on Planet Smoothie's standard $25,000 franchise fee. Free, antioxidant-boosting strawberry/banana/acai berry smoothies were liberally disbursed.

Attendance for the free event: five people with varying degrees of interest. That was one person more than the tour drew in Tallahassee, its first Florida stop.

Organizers had expected about 20 Tampa prospects.

"It's really hit or miss," acknowledged Tanya Mareno, vice president of franchise sales and development for Planet Smoothie owner Petrus Brands.

Chalk up one more way this recession is different than its predecessors. Typically, the franchising industry grows during economic downturns, in part because of laid-off workers who leverage severance packages to strike out on their own. This time, the credit crunch is hampering startups from getting financing and inhibiting many existing franchisees from growing.

"Even people who are very successful and have a long-standing relationship with lenders are finding it hard," said Alisa Harrison of the International Franchisee Association. "The money is there but lenders aren't letting go of it."

In an economic outlook earlier this year, PricewaterhouseCoopers LLP forecast that the number of business franchise establishments will drop by 1.2 percent, from nearly 865,000 to less than 855,000. It also predicted the number of jobs connected to franchise businesses would fall by 2.1 percent, a loss of 207,000 jobs.

Little has happened the past couple months to improve the outlook, Harrison said.

Lawrence "Doc" Cohen, a longtime and major franchisee of the Great American Cookie Company, recently testified in Congress that the credit squeeze forced him to take on more personal risk in opening two new stores last year despite his strong track record. It's unlikely he'll open any new locations in this climate, he said, adding that lending options are far worse for potential franchisees trying to get established.

"The current credit crisis is keeping America's entrepreneurs on the sidelines and the negative impact this is having on our country's economy could not be more real," Cohen told the House Small Business Committee.

In a national survey, franchisees cited the current business climate and the credit crisis as their top two concerns.

There are success stories, particularly in niches such as inexpensive fast food and health and wellness. In the Pricewaterhouse report, the restaurant category was the only franchise type expected to grow in 2009, just over 2 percent. Look for other major categories, such as automotive, lodging and retail services, to contract.

From boom to crunch

The early part of this decade was the franchise industry's boom time.

Between 2001 and 2005, franchises grew 18 percent; the franchise association estimates 140,000 new businesses and 1.2 million new jobs were created over a five-year period.

But, Harrison notes, that spurt came during an era of easy credit. It can be costly and difficult now to tap into a franchise, particularly an established, successful concept.

Franchise fees vary widely, from as little as $20,000 for an established, home-based business to $2 million or more for a well-known restaurant chain like McDonald's. Hotel franchises could cost in the multimillions.

Beyond the franchise fees, entrepreneurs face royalties and startup costs for supplies and real estate. (One upside of the downturn is that franchisees are finding cheaper real estate to buy and rent. According to the franchise association, many of its members have been able to renegotiate their leases with landlords eager to keep them.)

The advantage of connecting with an established franchise network is the parent company can offer expertise to newbies.

Planet Smoothie, for instance, offers aid in finding real estate, lining up vendors, marketing, and even training employees to operate smoothie machines. It promises everything an entrepreneur needs to navigate the nine- to 12-month startup process.

"We want to make sure you're ready the day you open," said Jason Mann, a Planet Smoothie owner-operator and a principal contact for developing locations throughout central Florida.

Mann says he'll personally hang around new franchisee stores every day for a week, or more, if they want his help. "You'll want to get rid of me," he told prospects at the Franchise U in Tampa

One of the five attendees was local restaurateur Louis Robert, who came less to hear about Planet Smoothie than to solicit franchise tips for himself.

Five years ago, Robert opened Nola Cafe in Tampa, which he describes as a "New Orleans coffee drinking place" where customers can pick up beignet bits or a seasoned andouille sausage egg and cheese sandwich with their cafe au lait.

Now he's ready for the next step: franchising his bayou concept. He's in the early stages of arranging financing and scouting his first expansion location.

"I think I've really fine-tuned a concept that can be well-duplicated," he said.

Robert is braced for "a difficult summer" as the recession rolls on. But by fall, he anticipates a rebound. Then would come what he envisions as the first of 35 to 40 franchise Nola Cafe locations scattered from Florida to Louisiana.

His fellow entrepreneurs may be scared and risk-averse now. But long-term, Robert has no doubt the franchise model has staying power.

"It has a lot to do with the communication speed we work with today. What works well in one area, works well in another area," he said. "Franchises are going to do very well over the next 50, 60 years."

Jeff Harrington can be reached at jharrington@sptimes.com or (727) 893-8242.

Franchise units

5.6% Average rate of increase in number of franchises annually from 2001 to 2005

2.1% Rate of increase from 2007 to 2008

-1.2% Projected rate of decrease this year

Franchise employees

3.7% Annual rate of increase of employees at franchise businesses from 2001 to 2005

-0.2% Drop in employment by franchises in 2007 to 2008

-2.1% Projected drop in employment by franchises this year.

Source: International Franchise Association

Franchisees on the sidelines in tough economy 06/26/09 [Last modified: Monday, June 29, 2009 3:34pm]

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