Have you read about Arcos Dorados Holdings Inc. — the world’s largest McDonald’s franchisee — raising $1.25 billion dollars in an initial public offering on the New York Stock Exchange today?
Arcos Dorados, which is based in Buenos Aires, owns and operates an astounding 1,755 McDonald’s restaurants throughout Latin America and the Carribean. This constitutes 5.1% of all McDonald’s restaurants in the world!
According to a source at Bloomberg, there was so much interest in the public offering that the deal received 10 times more orders than the number of shares available for sale. To top it off, Arcos Dorados’ stock popped 27% in its first day of trading!
Company management said that the money raised will be used to renovate stores and construct new buildings.
Sure would be nice to be in that position right now, eh?
When I opened my UPS Store in 2003, I also had illusions of becoming a big time, multi-unit franchise owner. Unfortunately, it’s much easier to dream than to actually do!
Certain business concepts are just not compatible with multi-unit ownership, or at least it’s more difficult and takes much longer to pull off. In my experience, it takes a few years to really establish a UPS store in the community. You need to change consumer habits by getting them to choose your store over the Post Office or other competitors in your neighborhood.
It’s not like opening a new restaurant, where everyone in the neighborhood is curious to try the hot, new place in town.
So, with the benefit of hindsight, if I were to take another stab at billionaire franchise mogul-hood, this is the advice I would give myself:
1. Choose a Food Service Concept – Owning a UPS Store gave me first-hand insight on just how fast technology can transform entire industries. It’s amazing how quickly consumers took to online shipping.
And I’m not just talking about consumers doing their entire Christmas shopping online via Amazon.com and thereby completely bypassing the retail shipping stores.
Equally alarming was that more and more customers were printing their own shipping labels online, and just dropping off their pre-paid packages at our store. (Our store earned a measly dollar or two for these drop offs)
Even big companies like Borders Books are not immune to seismic shifts in technology and consumer behavior, as evidenced by their recent bankruptcy filing.
In other words, it’s very risky to plan a franchise empire based on a model that can be completely obsolete a few years from now.
If there’s one industry that is probably safe from extinction due to technology, it’s the food business. Technology may affect the way we order or pay for food, but the pleasure of eating out will never be replaced by any future technological advance.
2. Choose an Established Food Concept That is New to Your Area – I live in downtown Vancouver, where there is a Subway and Tim Horton’s (Canada’s version of Dunkin’ Donuts) on practically every street corner. I’ve inquired about opening either of these 2 franchises in the city and, well, it’s pretty much impossible without spending an arm and a leg.
Current Subway and Tim Horton’s franchisees have first dibs at any new location that becomes available within their territory. Given that both concepts are quite popular and profitable in my area, current franchisees often choose to open the new location, instead of allowing a new franchisee to steal a chunk of their business with the new store.
In case none of the current franchisees are interested in the new location (which is a warning sign in itself), there are stacks of applications from prospective franchisees waiting for the opportunity.
One way through the back door is to purchase an existing store from a retiring owner. However, this comes at a steep cost because the buyer now has to pay a multiple of the store’s revenues, versus just the build-out costs for a new store, which tend to be lower.
So the key is to find a food service franchise that is a well established concept, with a proven track record in other parts of the country, and now ready to expand to your city. I personally am not comfortable with a franchise concept that has not proven itself as a viable business in at least several regions of the country.
3. The Franchisor Must Have the Resources to Support the Franchisee in the Local Area – It’s much riskier to be working with a franchisor who is new to the local area. When paying the franchise fee, it’s understood that the franchisee is relying on the specific expertise of the franchisor to succeed in the business. If the franchisor is based thousands of miles away and without any representative in the local area, things could get tricky fairly quickly.
In this case, I’d probably be more comfortable being the second or third in the local market, rather than the first. Or I’d wait until there’s at least another franchise location in a neighboring city.
4. Reasonable Financing Options Must Be Readily Available – If having a multi-unit franchise operation is the goal, you must be financially prepared to move quickly, especially if you’ve chosen a hot fast food concept that is expanding rapidly in your area.
Once your first location is open and you’ve determined that it’s a profitable and lucrative endeavor based on your own criteria, then be prepared to move quickly to work out appropriate financing for future locations. If your location is busy and generating buzz, chances are other local investors will be keen on following your footsteps. You must be able to scoop up the best available locations in your area before others beat you to it.
What other factors do you think wannabe franchisee moguls should consider to increase their chances for success?