The New New Franchising

I am an entrepreneur doing startups in large area franchise developments. Since even my mother doesn't know what that means or why I am doing it, here's a brief explanation.

In a nutshell, it means that I (a) find a great concept (to date, Five Guys and NAKEDPizza) and a great territory (MA and NH have great demos and density) then buy the rights and close the deals, (b) work on the business constantly: find great sites, obsess over marketing and PR, hire/motivate/direct the best team I can assemble, and above all, (c) make sure we never run out of money. This is a different model than Franchising 1.0, in which you have a real full-time job either doing something else entirely or performing a vital daily function in your own stores.

Franchising 2.0 is about bringing operations, financial discipline, and the ability to scale to someone else's business idea and model. Working "on" the business, the right way, is a full-time job. It cannot be done any other way. This fact especially true in performing at a high level in real estate and marketing, which are key in high-margin businesses. When franchisees lose focus on these details, they can and will get killed and my friends at Apex or Nixon Peabody move in.

It is also about considering all stakeholders (employees, suppliers, partners, investors, community) more carefully and making long-term business decisions. When you develop only 1 or 2 units, you can take shortcuts that are suicide with 10, 50 or 100 units on your horizon. Ditto for franchisors.

NAKEDPizza knows this and this is one reason (of many) they are turning franchising upside down by starting with sophisticated developers. This then enables them to collaborate with franchisees in new ways to advance the concept. In turn, this requires a culture of openness, honesty and curiosity at the franchisor level - but then, to become and remain a great company, you need a culture based on those things anyway.

Area development is a business Warren Buffett would love: consumes capital (i.e., building stores), gets a high return on that capital (i.e., cash-generation from stores), and has a decent margin of safety (way better than software). For experienced developers with access to funds, it's like 1870 in railroads or the 1994 Internet: real estate's available, you can hire great contractors and managers, and my VC friends are funding the next wave of excellent and free local marketing technologies on top of Facebook, Foursquare and Twitter.

Professional investors have overlooked Franchising 2.0 as an investment class because of Franchising 1.0's brand image - but at the risk of sounding like a character in a Michael Lewis book, I say this will not last.

All that said, this is a people business. If you hire the wrong people, or hire the right ones but treat them poorly, you will fail. In NAKEDPizza, for example, Mark Cuban and the Kraft Group (owners of the NE Patriots and Revolution) are investors in the franchisor, with the Krafts part of my area franchisee group as well. Will they be a valuable strategic partner long-term? Definitely. Does their involvement get the right product delivered on time every time by a knowledgeable and personable associate? Nope. My cash registers start at zero at the start of the day like everyone else's and in a social media world, it is imperative that you serve customers an honest product in an honest way.

Summing up: Franchising 2.0 is a growing trend that enables developers and franchisors both to make money for their investors, and have a real impact on the community - financial promise with social purpose, if you will. It involves bigger territories, more capital and more collaboration, a more long-term approach, and the banking of real intellectual property that generates lasting value. This wave is only starting and I believe is the future of the $1.5 trillion U.S. franchising industry.

Denying the Denier at Pinkberry

I met the CEO of Pinkberry last night -- this kind of thing is unusual for me so while that's a pretentious-sounding thing to say, it's sort of ironic. I didn't actually realize that he was the CEO of the company until he said something like "Ted [Philip, from Highland, who I know through a mutual friend] has been a great Board member for me", and later he said "Let me bring over my Director of Operations", and he introduced himself as Ron, and then I looked him up on the web later. Yes, I'm slow on the draw.

Anyway, I was at the opening of Pinkberry's first Massachusetts store to congratulate my friend Trippe Lonian; Trippe is one of the very few people I know who also went to business school (HBS) but decided to go into franchising anyway. Standing in line, I sampled the chocolate flavor, which is not tangy like the rest of their yogurts. Ron, leaning against the wall next to me, asked me what I thought. It's not as distinctive as the rest of their flavors, but didn't want to say that, so I said "It's pretty good... seems like a classic 'deny the denier' offering."

This then led him to ask me when I became a marketer. The truth is, I got this phrase from Michael Pollan's "The Omnivore's Dilemma", but when an official-looking guy who later turns out to be the CEO of Pinkberry tells you that you sounded smart, you don't correct him.

"Deny the Denier" is one reason that McDonald's offers salads; this way, when mom tells the kids that they can't go to McDonald's because it's unhealthy, the kids can say "But mom, they have salads." Kids are huge drivers of their parents' spending, so for a company like McDonald's that relies on marketing to kids, this is crucial to build very long-term annuity streams (i.e., kids going to McDonald's for years and buying very high-margin processed food and soda).

Pinkberry has a non-tangy yogurt offering for the same reason. I have one daughter (Lily) who loves tangy pomegranate, but her twin (Sophie) won't go near it. This way, when Sophie says "I don't like Pinkberry", I can remind her of the plain chocolate version. That, and the Cinnamon Toast Crunch toppings.

Starbucks sells non-caffeinated / non-coffee drinks for a similar reason. As someone hooked on caffeine, I don't get the appeal of this personally, but I get the strategy. Starbucks' founder and CEO Howard Schultz is also on Ron's Board. I would love to get a ticket to those Board meetings.

The other Pinkberry feature I can highlight is the "one price for all the toppings you want" idea. I think this is really smart, and not just because I'm a Five Guys franchisee where all the toppings except cheese and bacon are free. The truth is that the food cost is basically the same if you get 1 ounce of 1 topping or 1/4 ounce each of 4 toppings, but as a customer, you feel like you got much better value from 4 toppings than from 1. Yes, it depends somewhat on whether you get fresh-cut kiwi or Cap'n Crunch, but since you're already paying a premium price for the base product (the yogurt in their case), it sort of doesn't matter since the aggregate profit numbers go up.

The irony is that when I brought home 3 cups of yogurt for my family, even Sophie liked the tangy stuff. The little chocolate-covered Krispies did the trick. Another denier, eliminated. Well played, Pinkberry.