Notes

Restaurants Kinds and Characteristics
Broadly speaking, restaurants can be segmented into a number of categories:
1- Chain or independent (indy) and franchise restaurants. McDonald's, Union Square Cafe, or KFC
2- Quick service (QSR), sandwich. Burger, chicken, etc; convenience store, noodle, pizza
3- Fast casual. http://b3.zcubes.com/v.aspx?mid=11979044 , Atlanta Bread Company, Au Bon Pain, and so forth
4- Family. Bob Evans, Perkins, Friendly's, Steak 'n Shake, Waffle House
5- Casual. Applebee's, Hard Rock Caf�e, Chili's, TGI Friday's
6- Fine dining. Charlie Trotter's, Morton's The Steakhouse, Flemming's, The Palm, Four Seasons
7- Other. Steakhouses, seafood, ethnic, dinner houses, celebrity, etc. Needless to say, some restaurants fall into more than one category. For example, an Italian restaurant could be casual and ethnic. Leading restaurant concepts with regard to sales have been tracked for a long time by the magazine Restaurants and
Institutions.

CHAIN OR INDEPENDENT
The impression a few huge quick-service chains completely dominate the restaurant business is misleading. Chain restaurants have some advantages and some disadvantages over independent restaurants. The advantages include:

1- Recognition in the marketplace
2- Greater advertising clout
3- Sophisticated systems development
4- Discounted purchasing

When franchising, various kinds of assistance are available. Independent restaurants are relatively easy to open. All you have to is a few thousand dollars, a knowledge of restaurant operations, and a strong desire to
succeed. The advantage for independent restaurateurs is they can ''do their own thing'' with regard to concept development, menus, decor, and so forth. Unless our habits and taste change drastically, there's plenty of room for independent restaurants in certain locations. Restaurants come and go. Some independent restaurants will grow into small chains, and larger companies will buy out small chains.

Once small chains display growth and popularity, they are likely to be bought out by a larger company or can acquire financing for expansion. A temptation for the start restaurateur is to observe large restaurants in big cities also to believe that their success can be duplicated in secondary cities. Reading the restaurant reviews in NEW YORK, Las Vegas, LA, Chicago, Washington, D.C., or San Francisco can provide the impression that unusual restaurants can be replicated in Des Moines, Kansas City, or Main Town, USA. Due to demographics, these high-style or ethnic restaurants will not click in small cities and towns.

5- Will choose training from the bottom up and cover every area of the restaurant's operation Franchising involves the least financial risk for the reason that the restaurant format, including building design, menu, and marketing plans, curently have been tested available on the market. Franchise restaurants are less inclined to go belly up than independent restaurants. Associated with that the idea is proven and the operating procedures are established with all (or most) of the kinks exercised. Training is provided, and marketing and management support are available. The increased odds of success will not come cheap, however.

There exists a franchising fee, a royalty fee, advertising royalty, and requirements of substantial personal net worth. For all those lacking substantial restaurant experience, franchising may be a way to enter the restaurant business-providing they're prepared to start in the bottom and take a crash program. Restaurant franchisees are entrepreneurs who would rather own, operate, develop, and extend an existing business concept through a type of contractual business arrangement called franchising.1 Several franchises have ended up with multiple stores and made the big style. Naturally, most aspiring restaurateurs want to do their own thing-they have a concept in mind and can't wait to do it now.

Here are examples of the costs involved with franchising:

1- A Miami Subs traditional restaurant has a $30,000 fee, a royalty of 4.5 percent, and requires at least five years' experience as a multi-unit operator, a personal/business equity of $1 million, and a personal/business
net worth of $5 million.

2- Chili's requires a monthly paid on the restaurant's sales performance (currently a service fee of 4 percent of monthly sales) in addition to the greater of (a) monthly base rent or (b) percentage rent that is at least 8.5 percent of monthly sales.

3- McDonald's requires $200,000 of nonborrowed personal resources and an initial fee of $45,000, plus a monthly service fee based on the restaurant's sales performance (about 4 percent) and rent, which is a
monthly base rent or a percentage of monthly sales. Equipment and preopening costs range between $461,000 to $788,500.

4- Pizza Factory Express Units (200 to 999 square feet) require a $5,000 franchise fee, a royalty of 5 percent, and an advertising fee of 2 percent. Equipment costs range between $25,000 to $90,000, with miscellaneous costs of $3,200 to $9,000 and opening inventory of $6,000.

5- Earl of Sandwich has choices for one unit with a net worth dependence on $750,000 and liquidity of $300,000; for 5 units, a net worth of $1 million and liquidity of $500,000 is required; for 10 units, net worth
of $2 million and liquidity of $800,000. The franchise fee is $25,000 per location, and the royalty is 6 percent.

What can you get for all this money? Franchisors provides:

1- Help with site selection and a review of any proposed sites
2- Assistance with the look and building preparation
3- Help with preparation for opening
4- Training of managers and staff
5- Planning and implementation of pre-opening marketing strategies
6- Unit visits and ongoing operating advice

There are hundreds of restaurant franchise concepts, plus they are not without risks. The restaurant owned or leased by a franchisee may fail even though it is part of a well-known chain that is highly successful. Franchisers also fail. A case in point may be the highly touted Boston Market, that was based in Golden, Colorado. In 1993, once the company's stock was initially offered to the public at $20 per share, it had been eagerly bought, increasing the purchase price to a high of $50 a share. In 1999, following the company declared bankruptcy, the share price sank to 75 cents. The contents of many of its stores were auctioned off at
a fraction of their cost.7 Fortunes were made and lost. One group that did not lose was the investment bankers who put together and sold the stock offering and received a big fee for services.

The offering group also did well; they were in a position to sell their shares while the stocks were high. Quick-service food chains as well-known as Hardee's and Carl's Jr. have also been through periods of red ink. Both companies, now under one owner called CKE, experienced periods given that four years when real earnings, as an organization, were negative. (Individual stores, company owned or franchised, however, may have done well during the down periods.) There is no assurance that a franchised chain will prosper.

At one time in the mid-1970s, A&W Restaurants, Inc., of Farmington Hills, Michigan, had 2,400 units. In 1995, the chain numbered a few more than 600. After a buyout that year, the chain expanded by 400 stores. A few of the expansions took place in nontraditional locations, such as kiosks, truck stops, colleges, and convenience stores, where in fact the full-service restaurant experience isn't important. A restaurant concept can do well in one region however, not in another. The design of operation could be highly appropriate for the personality of 1 operator rather than another.

Most franchised operations call for a lot of effort and long hours, which lots of people perceive as drudgery. If the franchisee lacks sufficient capital and leases a building or land, there is the risk of paying more for the lease compared to the business can support. Relations between franchisers and the franchisees are often strained, even in the biggest companies. The goals of every usually differ; franchisers want maximum fees, while franchisees want maximum support in marketing and franchised service such as employee training. At times, franchise chains try litigation making use of their franchisees.

As franchise companies have create a huge selection of franchises across America, some regions are saturated: More franchised units were built compared to the area can support. Current franchise holders complain that adding more franchises serves and then reduce sales of existing stores. Pizza Hut, for example, stopped selling
franchises except to well-heeled buyers who can take on many units. Overseas markets constitute a big way to obtain the income of several quick-service chains. As might be expected, McDonald's has been the leader in overseas expansions, with units in 119 countries.


With its roughly 30,000 restaurants serving some 50 million customers daily, about 50 % of the business's profits come from outside the United States. A number of other quick-service chains also have many franchised units abroad.As the beginning restaurateur quite rightly concentrates on being successful here and now, many bright, ambitious, and energetic restaurateurs think about future possibilities abroad. Once an idea is set up, the entrepreneur may sell out to a franchiser or, with plenty of guidance, take the format overseas via the franchise. (It is folly to build or buy in a foreign country without a partner who's financially secure and amply trained in the neighborhood laws and culture.).

The McDonald's success story in america and abroad illustrates the importance of adaptability to local conditions. The business opens units in unlikely locations and closes those that do not prosper. Abroad, menus are tailored to fit local customs. In the Indonesia crisis, for example, french fries that had to be imported were taken off the menu, and rice was substituted. Reading the life stories of big franchise winners may suggest that once a franchise is more developed, just how is clear sailing. Thomas Monaghan, founder of Domino Pizza, tells another story. At once, the chain had accumulated a debt of $500 million. Monaghan, a devout Catholic, said he changed his life by renouncing his greatest sin, pride, and rededicating his life to ''God, family, and pizza.''

A gathering with Pope John Paul II had changed his life and his feeling about good and evil as ''personal and abiding.'' Fortunately, in Mr. Monaghan's case, the rededication worked well. You can find 7,096 Domino Pizza outlets worldwide, with sales of about $3.78 billion per year. Monaghan sold the majority of his interest in the company for a reported $1 billion and announced he would use his fortune to help expand Catholic church causes. In the recent past, most food-service millionaires have already been franchisers, yet a lot of would-be restaurateurs, especially those enrolled in university degree courses in hotel and restaurant management, aren't very excited about being a quick-service franchisee.

They prefer owning or managing a full-service restaurant. Prospective franchisees should review their food experience and their access to money and decide which franchise would be appropriate for them. Should they have little if any food experience, they can consider starting their restaurant career with a more affordable franchise, one which provides start-up training. For those with some experience who want a proven concept, the Friendly's chain, which began franchising in 1999, can be a good choice. The chain has more than 700 units. The restaurants are believed family dining and feature ice cream specialties, sandwiches, soups, and quickservice meals.

Let's emphasize this point again: Work in a restaurant you enjoy and perhaps would like to emulate in your own restaurant. Assuming you have enough experience and money, you can strike out on your personal. Better yet, work in an effective restaurant in which a partnership or proprietorship may be possible or where in fact the owner is thinking about retiring and, for tax or other reasons, may be willing to take payments over time.
Franchisees are, in effect, entrepreneurs, a lot of whom create chains within chains.

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