Food Franchising; “A Recipe for Disaster?”

Posted by judesteed on February 6, 2009 under Wing Zone |

In researching both successful and unsuccessful franchises, I came across the most recent list of the 25 worst franchises in the US according to SBA loan failure rates. (blue mau mau Jan 24, 2009). Ranking from the worst to merely “bad,” 40% of the top failing franchises were in the food industry and included pizza parlors, sub shops and creameries. I then came across an article in the Westchester County Business Journal announcing the launch of a Wing Zone franchise by a successful Westchester county businessman, Duwayne Shaw. As lack of business experience serves as an all too common denominator of failing franchises, this peaked my curiousity. I decided to check up on the franchise a year after its grand opening and discovered that this Wing Zone Franchise is closing and will shortly reopen as a similar but independent business. Wanting others to know the story behind what occurred, the owner, Duwayne Shaw took the time to do an interview:

Q. What business experience did you have prior to opening up the Wing Zone?
I had a cleaning business which I ran while I was going to school full time. Five years ago I opened up my own real estate company where I have sold over $49 million in real estate. As a realtor I went into this with a lot of experience in sales, marketing, budgeting, accounting, etc.

Q. What happened with your Wing Zone franchise?
It’s been a total failure. I purchased it with the intention of having a lot of guidance but there was no support. It became a nightmare but I learned a lot in the process.

Q. When you say there was no support, can you give me some specifics?
Their platform or motto is “we can teach you how to run our franchise.” But they didn’t know how to run their franchise and when I was training in one of their so called model, corporate stores, it was nothing but chaos and that’s when I realized I had made a mistake.

Q. How much did it cost to purchase the franchise?
The overall investment was over $350,000 with about 70 to $100,000 of it coming out of my own pocket, not to mention the stress and strain of the activity. It just wasn’t worth it at all. It’s more set up for the franchisor than it is for the franchisee.

Q. How so?
At McDonald’s and Dunkin Donuts they actually manufacture their own products but this company doesn’t. I had to purchase the food through a distributor where I ended up paying double or triple what I could have negotiated on my own. I also discovered that the franchise actually works a deal through the distributor which gives them kickbacks behind the scene. There’s also an arrangement whereby if you purchase so much chicken say from a manufacturer, they give a rebate to the consumer who turns out to be the franchisor, instead of passing it on to the franchisee.

Q. What exchange have you gotten as a result of opening this franchise?
I didn’t make a dime in this franchise, whereas I turn a profit every day in my real estate business. The only exchange I got was knowledge, meaning I’m back doing what I’m good at– real estate. Even in a down economy, at the end of the day I can still come out on top of it. You hear people talking about franchises, you know “franchsises are great, you get a profit,” but there are these negative sides. People don’t see the failure rate of franchises. Bennigans just shut down, they’re right up the street from here. I think the restaurant failure rate in general for this county is somewhere between 30 and 40 percent. What I also came to realize is you have to know how a restaurant, any restaurant forget franchises, runs and how it makes profits and how you have to cut corners to cut costs, all the things it takes to make a profit. Most restaurants only have a small profit margin, somewhere between 10 to 15 percent.

Q. While the restaurant business proves tough, if a person really wanted to open up a restaurant, what would be the difference between opening up a franchise or doing it on their own and what do you think it would take for them to succeed?
Well, if a person came into it and they knew a lot about marketing the hell out of something it would help. Because so many restaurants are currently going out of business, it also means that you can find restaurant equiptment right now for peanuts, and if you could find a great location, make it real presentable and grow, you can build it up. Then you can renovate the business to make it look better once you have a good customer base, unlike a franchise where you’re putting out hundreds of thousands of dollars at the beginning. So I think it’s better if you can start off small, because I think that’s where the economy is going right now. Some of these businesses are growing too fast. The businesses I’ve seen succeeding are the smaller ones who, keeping their eye on the goal, are growing little by little until they have something. So that would be my spin on it. To start a franchise you’re spending $50 to $100,000. It might take you ten years to get back the initial investment, which I’d call a recipe for disaster.

Q. So, why would a person purchase a franchise rather than doing it on their own?
Most franchises already have their own website and marketing set up and this makes it seem more attractive. Also as an entrepreneur, it’s a lot easier to get financing if you apply as part of a franchise which has a certain overall success rate, whereas the average Joe might get discouraged trying to get financing on his own without a proven track record.
Thank you, Duwayne.

Duwayne is in the process of officially ending his contract with Wing Zone while he continues to operate his thriving real estate business, Shaw Properties in Westchester County. This will enable him to eventually recover from the financial losses in contrast to many franchise owners who have tragically lost entire savings and/or retirement funds, some even having to file bankruptcy in the effort to run a successful franchise.

Despite the hardships of restaurant franchising, it’s obviously being done successfully. Fifty percent of the Top 10 Franchise 500 for America in 2009 (Entrepreneur.com) are restaurants, namely Subway, McDonald’s, Sonic Drive- in Restaurants, Pizza Hut and Papa John’s Int’l Inc. What then is the recipe?

Jude Pedersen