Chain Leader

New Area Development Niches

May 2006

With the right strategies, area development is a fast-track vehicle for portfolio and profit growth. If adding a territory for a second brand or expanding potential with a multicity or statewide territory is a priority, consider an underpenetrated, easily differentiated niche, recommends Michael Beam, managing director, HVS Restaurant Management & Advisory Services, Mineola, N.Y. These key questions will help narrow the field among young franchise companies:

• Does the franchisor own and operate any of the units? “With a young brand, you don’t want ownership to be running only test kitchens. You want ownership that is actively involved in and savvy about operations,” says Beam.
• What are you getting for your fees? “In return for your fees of 9% or more, you should be getting compelling marketing and advertising support, benefits of scale and a defined brand image,” Beam advises. “You don’t want to partner with a company that does not have a clear picture of what its brand is all about and where it’s going.”
• How large a territory is available, how many units are required to fulfill mandated minimum density, and how much will you have to invest upfront? Chains used to set minimum density at two to three units for a territory; now that number may be seven to 10. They also may require a capital commitment for each unit upfront—a figure that varies from tens of thousands of dollars for takeout concepts that don’t require much floor space or equipment to $1 million or more for established quick-service and casual-dining brands.

Whatever the brand, location is still a vital component in a successful franchising model. “One of the biggest caveats in area development centers on understanding the market. Get the location wrong by one block and you risk having a marginal unit instead of an optimal performer,” Beam says. “Buy market research. But build on that with local knowledge. If you’re expanding into a new territory, open one unit you know will be a home run. Then hire a local district manager who knows the traffic patterns and local consumer preferences to help you find and evaluate sites.”

Looking beyond traditional solutions can also drive area development. Beam likes the fit of multibrand franchises with lifestyle centers. “When talking to the building owner, you may be able to make a more compelling argument for a tenant that offers the cross-market appeal of two or three well-known brands in a single outlet,” says Beam.