From the Archives: Rebirth!
In September 1993, SUCCESS featured Mrs. Fields Cookies (now known as Mrs. Fields) in an article on franchising. Whether you are building a sales team or considering franchising as a way to expand your business, the insights offered by Mrs. Fields and her francisers may smooth the way for your success. The following is the complete article from the SUCCESS archives.
Debbi Fields, the woman behind Mrs. Fields Cookies, could not bear to franchise. A perfectionist, Fields was afraid she would lose control. “I always feared that independent franchisees might substitute product or sacrifice quality,” she says.
But too much growth nearly sank the company; now Mrs. Fields Cookies is using a newly popular franchising industry technique known as conversion franchising in order to build its way back.
A hot industry concept, conversion franchising means changing company-owned units or independent businesses into franchises. For Mrs. Fields Cookies, it will create an instant franchise network – bringing the on-site ownership of franchising to the formerly centralized cookie company.
Back in the roaring 1980’s, Fields was opening some 70 stores a year. Fields and her husband Randy built a chain of nearly 800 stores that were all owned and operated by the company. By the early 1990’s, that growth had come to a dead stop. Over-expansion left the company saddled with massive debt.
To write off $49.5 million of those loans and restructure the rest, Fields was compelled to surrender nearly 80 percent of her company to lenders. She also gave up operational control, although she is still the largest stockholder, with 11 percent of the company.
Now Mrs. Fields Cookies plans to reinvigorate marginal stores through conversion. The company is replacing employee managers with franchisees in 250 company-owned outlets. The reorganization takes advantage of franchising’s most fundamental premise, which is that highly motivated owner/operators possess an entrepreneurial drive and energy rarely found in employees.
An Established Technique
The technique is nothing new. As far back as 1971, Century 21 used conversion franchising to unify independent real estate agents nationwide. Since then, franchisors have used conversion both to bring outside vendors into the franchise-network fold and to convert company stores into franchise outlets.
To become franchisees, independent owners must pay initial fees and an ongoing piece of their gross sales to the franchisor. In return, they received pooled advertising and sophisticated management and control systems that have been proven on a national or regional level. Then there’s the power and security of a proven trade name. Look at Mrs. Fields Cookies. Despite the company’s recent financial problems, it offers prospective franchisees a nationally recognized brand, one with a built-in market.
For company-owned chains, existing franchising units can recapitalize sagging financial fortunes as well as create the highest-quality manager, someone who owns the business and has the motivation to make it work.
Using Technology to Boost Sales
Mrs. Fields Cookies is using technology to maintain the quality control Fields thought franchising would sacrifice. Through Randy Field’s software-development firm, Park City Group, the company had developed sophisticated retail management software. The software lets distant stores download sales information to the company’s huge database, stored in a mainframe in Park City, Utah. There, the company tracks, budgets, and monitors in-store activity, right down to the number of cookies or muffins prepared each hour.
The program can look backward in time, then project how many muffins and cookies a franchisee should prepare during the next hour of operation. It gives the company a microscope to examine every corner of operations and boost sales. Already, sales have surged 17 percent in the franchised outlets that are using the system.
After Michael Zreik bought a Mrs. Fields location in West Covina, Calif., sales doubled. “It’s just too difficult to manage a business from a distance,” says Zreik, who bought the franchise in 1992. “I am here on location. I drive the business forward.”
One of his first acts as a franchisee was to meet with employees to stress the need for quality. “I laid down the ground rules,” he says. “We were going to have a spotless store, superlative product, and great customer relations. Some employees left. Others bought into my dream.”
He also courted new markets. “We go out of our way to introduce the product to new people,” he says. “Every week, we deliver sample trays to businesses and corporations. Two days after we did that with a local bank, they called and ordered $1,000 worth of cookies for all their branches. An employee isn’t going to do that kind of marketing. But an owner will.”
When Roger Block first thought of using conversion a decade ago, he considered it a stroke of genius. Not surprisingly, it took others a while to appreciate his brilliance.
A former executive with a Florida-bank holding company, he had just completed an in-depth feasibility study for installing travel agencies in the bank’s branches. When the Federal Reserve quashed the idea and the bank was sold, Block was determined to create his own franchise network.
He shopped around and examined four travel agencies in the Tampa area. All disappointed him. The owners wanted a lot of money, but none could even generate a computer list of customers.
While griping at lunch with an executive of Realty World, a franchised real estate firm, Block had a brainstorm. Real estate and travel have a lot in common in terms of marketing, commission structure, and sales. Like real estate, Block thought, a powerful travel agency network could be built by converting independent offices to franchises.
The only problem was that independents weren’t interested. Even after Block started his own successful agency, Travel Agents International Inc. (TAI), independents remained indifferent. “They just didn’t understand why they needed me or my franchise,” he remembers.
So Block gave up his efforts to convert them and began to sell ground-up franchises. In the next 10 years, he sold 325 TAI franchises. Combined, they did $618 million in sales in 1992.
Yet a slower economy was hurting the travel business. The independents who had been so smug were scrambling for ways to survive.
“They’ve seen the light and are coming towards it,” says Block. Only one independent travel agency converted to TAI from 1989 to 1991, but seven joined the system in 1992. Halfway through 1993, eight more independent agencies joined up.
“If a travel agency brings in $2.2 million in annual sales commission income would be about $200,000,” explains Block. “At that revenue level, it’s nearly impossible to develop professional sales collaterals, properly train agents, and build the infrastructure you need to grow an agency.”
By converting into TAI franchisees, independents gain those benefits in return for a $500-a-month royalty fee.
“It’s well worth the investment,” says Kim Whitfield, a recent TAI convert in Fort Walton Beach, Fla. Whitfield got into the business young, opening her own shop at age 21. Her love of travel and personal drive got her only so far. By the third year, her business was grossing $500,000 a year in sales, well below the national norm, and not much after payments to airlines, hotels, and car rental companies.
She converted to TAI in August 1991. Sales have since doubled.
“As an independent, you simply can’t afford all the training to stay current with the industry,” she says. “But as part of the franchise, we’re taking part in monthly training and educational seminars sponsored by the franchisor.”
A small fish, Whitfield could only maintain a 10 percent commission from airlines. But now that her bookings are counted within TAI’s massive volume, she gets 15 percent. “That’s been an immediate boost to my income that alone covers the royalty payment,” she says.
But the biggest advantage has been the overall support. “When you’re out there alone, you have to muddle through,” she reveals. “But with a larger organization in back of you, you can always call headquarters to gain their insight into a challenge. They can quickly investigate a hotel or tour company. They can get back to you with the information you need to better serve your customers.”
The benefits were all part of Block’s master plan, but it took the rest of the industry 10 years to understand.
“When travel was booming during the 1980’s, independents thought franchising was terrible,” says Block. “But now they’re seeking us out because they don’t’ have the depth of expertise needed to thrive in today’s market.”
As an example, Block points to a recent industry study that found 60 percent of customers who walk into a travel agency are ready to buy. But travel agents only close 15 percent of them. By contrast, TAI’s agents average 40 percent. Block believes that in the wake of his success, independents will flock to become franchisees. He predicts that 50 percent of the company’s future growth will come from the conversion of independent travel agencies.
Convert Anyone and Everyone
Chairman Jerry Nelson used conversion to jump start a franchise program for his electrical supply company, K&N Mobile Distribution Systems of Fort Worth, Tex. He converted his sales staff into franchisees. Now he’s using conversion to bring independent electrical supply houses under the K&N banner.
A former assembly-line worker for General Motors, Nelson started his own business in 1972, selling electrical couplers, cables, and other parts from a panel truck. He automated his sales eight years ago, installing computers in all his trucks to streamline inventory management and product ordering.
Five years ago, he started franchising by selling territories to his reps. “It was a good deal all the way around,” says Nelson. “On the one hand, we eliminated the cost of employee payroll, insurance, and taxes. On the other, the salespeople bought existing clients for territories they already knew and serviced.”
One of the recruits was Doyal Stephens. He waited until two or three other K&N salespeople did it before jumping in himself. “The transitions were going well,” he remembers. “The salespeople who signed up were making more money as franchisees than as employees.”
So Stephens took the plunge and converted in 1989. “I already knew everything about the business and this was probably going to be my only shot at owning my own stake in the world.”
Stephens quickly increased sales in his territory from about $18,000 a month to $28,000 a month. “When the business is yours to win or lose, you work harder and care more,” he says.
Since acquiring his first territory, Stephens has purchased three others that serve Louisiana, eastern Texas, and parts of Oklahoma and Arkansas. His long-term goal is to subfranchise parts of the territory to salespeople who now work for him. “Franchising is a great way to get the most out of people,” says Stephens. “I may as well put it to work for me by franchising my territory to others.”
At the same time, Nelson and his son Curtis, the K&N CEO, have just completed a marketing package aimed at converting independent electrical suppliers. The company is offering a level of automation unavailable to an independent. Franchisees use computerized ordering to keep inventory low and free up cash, a huge boost to the bottom line.
According to K&N’s Uniform Franchise Offering Circular (UFOC), the top 25 percent of its franchise locations grossed $312,000 in 1992 and netted $125,000. The bottom 25 percent grossed $125,000 and netted $31,100. Not bad, especially since many K&N franchisees own multiple locations.
A Powerful Strategy
Like Mrs. Fields Cookies, more and more company-owned chains are turning to franchising to leverage their power and to attract top-quality manager/owners. And the conversion of independent businesses to franchises helps smaller companies benefit from volume buying, pooled advertising, and the power of brand names. For these firms, conversion is the most efficient strategy for mining the power of franchising, to manage and create explosive growth.
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