Even 'Copycat' Businesses Require Creativity and Flexibility

By Richard Gibson
Staff Reporter of The Wall Street Journal

Entrepreneurs typically pride themselves on being adventurous, independent, different. So it may surprise you to know that many of the new businesses created these days are basically copycats of proven concepts: They're called franchises.

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You know them when you see them: fast-food outlets (McDonald's, Dunkin' Donuts, Subway, Quiznos), auto-repair shops (Jiffy Lube, Midas, Meineke); or hair salons (Supercuts, Fantastic Sam's), and dozens of other categories. Although each franchise is independently owned, the products and services offered are substantially the same from store to store.

Franchising accounts for more than $1 trillion of annual U.S. sales and nearly one-third of all retail transactions. More than 320,000 small businesses are franchises, employing one in every 16 workers in the country. A new franchised outlet is said to open every eight minutes. And what began with hamburgers and dry cleaning half a century ago now is a factor in more than 75 diverse lines of business. Among the latest: laser hair removal.

No Guarantees

Franchise businesses essentially involve two parties, both bound by a contract called the franchise agreement. One party is the franchiser, which licenses out its trade name and business concept. The other is the franchisee, the entrepreneur who pays the franchiser a royalty and sometimes a start-up fee for the right to do business under the franchiser's name and system. This structure allows to franchiser to expand its business concept without owning and operating additional stores. The franchisee, meanwhile, enjoys some of the advantages of independent ownership, along with some of the security and benefits of being identified with a larger organization. And consumers gets the consistency and predictability that they expect from a large, nationwide or even world-wide organization.

But for all the possibilities, owning a franchise carries no guarantees. No matter how well a business is designed, or how often the model has worked elsewhere, no business-not even a copycat one-is foolproof. In the end, success usually comes down to how good the individual franchisee is at picking the right concept, finding the best location, keeping down costs and fulfilling customer needs-in other words, the same things that determine the success of any business.

"The most important lesson to learn now is that franchisees cannot expect the franchiser to do everything," says Dennis Monroe, an attorney who specializes in the franchise industry. Franchisers are mostly focused on the parent company's cash flow, Mr. Monroe says, not on tweaking each outlet's profits. That means it's up to the franchisee to make smart business decisions and solve problems creatively.

Sometimes the most critical decisions are the ones you make in the beginning, like picking a product you care about and setting up in a good location. To Mitch Baker, an 18-year franchisee at Dunkin' Donuts, the biggest mistake franchisees make is opening stores in bad locations.

Mr. Baker opened his first store in densely populated Hackensack, N.J., in 1986, and today owns 10 outlets. With the exception of a few years with hard winters, he says, his sales have risen steadily to an average today of $1 million a year per store.

At the same time, franchising doesn't necessarily mean being your own boss, even though it's often touted as such. A franchisee relies to a significant extent on the franchiser to call the shots on such matters as the product mix, store decor and marketing. And franchisees must adhere to the terms of the franchise contract, which, experts say, is often designed to put the franchisee in a weaker position.

Successful franchisees straddle the line between independence and loyalty to the franchiser. Dick Woltz, who left a marketing manager's job 10 years ago to become a Wild Birds Unlimited franchisee in suburban Des Moines, Iowa, regards himself as an independent businessman. He insists that "the only parameters I have on me are those that would do nothing but help me." He thought about starting his own business before signing on with the birdseed franchiser. But he says he concluded that with the franchiser, "I just had a partner that helped me get to it quicker."

'Your Own Money on the Line'

Flexibility is another key. When Mike Roper opened his first Quiznos Sub franchise south of Chicago in the fall of 2000, the restaurant industry was about to collapse into its longest slump in nearly 30 years.

Yet he was barely touched by it. Sales leapt 40% in his store's second year, obliterating his projection of only 4% for the year. Mr. Roper says he has been able to increase sales in a fragile economy because every time business slows, he pretends it's grand-opening day again, aggressively promoting his business with coupons and cookie giveaways to draw more traffic.

"When you have your own money on the line, you act a little differently," he says. "You tend to be a little more aggressive on the day to day."

When sales dipped after Sept. 11, 2001, Mr. Roper launched his grand-opening strategy again and again. He started to drop more coupons offering free sandwiches in direct-mail packs. While that may seem like an unprofitable strategy, Mr. Roper says he makes it up in the chips and drinks customers buy when they bring in their coupons.

In fact, Mr. Roper says that if he spends $400 on coupons, his profit is almost always 1.5 times to double that. He says giving away something free is the only way to get people to try something new.

"People are creatures of habit," he says. "If I can get them out of their routine of going to Burger King every day, I'm confident Quiznos will be part of their new routine."