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The Wall Street Journal Thursday, December 3, 1998

Standing Out From the Crowd
New Companies Take Offbeat Path to Profits

By Julie Bennett

Scott Menough of Denver found he was growing weary of being a dentist. So when staring into the mouths of strangers became a grind, he did what 600,000 other Americans have done in the last 30 years and started a franchise business. Today, Mr. Menough owns and operates two Colorado Wild Birds Unlimited, Inc. franchises with his wife Sandy. He says the subject matter and work schedule makes for an easier lifestyle. We like people and nature," he says. "And best of all, birds don’t have teeth."

Firm Hold

While franchising has taken a firm hold in the restaurant industry, retail franchising has lagged behind. In the universe of 2,158 U.S. and Canadian franchise systems tracked by Robert Bond, publisher of "Bond’s Franchise Guide," Oakland, CA, 328 are retail franchises, compared to 936 service concepts (with almost 700 fast food and full-service restaurants).

The Strongest retail and services concepts are the oldest – Southlands’ 13,819 7-Eleven convenience stores, several chains of drug stores, and tool selling giants Matco Tools, of Snow, Ohio, and Snap-on Tools, of Kenosha, Wis. All other non-traditional retail franchises, including bird stores like Wild Birds Unlimited, make up only 5% of franchise systems.

Mary Tomzack, president of Franchisehelp, Inc., of Elmsford, New York, a franchise consulting company, says she feels that the heavy advertising needed to launch and support most retail businesses is too expensive for the entrepreneurs who start franchise companies.

Managing a large retail operation with dozens of employees may be beyond the reach of the average franchise buyer, says Mr. Bond. The 4% to 8% cut in gross revenues franchisees must pay to their franchisors as royalties may bite too deeply into retail margins. When computer prices dropped this year, several franchised computer retailers disappeared.

However, sales of used computers are doing well. That is one indication of the relative health of the secondary market for retail goods – consumer demand for exercise equipment, "near new" little girls’ party dresses, and the like, is growing. Tom Emmel, a retail analyst with the John G. Kinnard brokerage firm in Minneapolis, says that because real income has remained flat for over 20 years, "people are getting more creative in finding sources of supply for the products they want and are more willing to buy used goods."

Franchise firms are cashing in on this trend. Cash Converters, an Australian resale franchise with over 500 stores around the world, recently started selling franchises in the U.S. And in less than a decade, Grow Biz International of Minneapolis has grown into a resale powerhouse, with 1,200 franchisees posting $500 million in annual revenues. It sells "gently used" merchandise from six retail concepts: Once Upon a Child, Computer Renaissance, Music Go Round (musical instruments), It's About Games, Play It Again Sports and the newest, ReTool.

Play It Again Sports, with 700 stores, has become so successful that franchisees often run through the used items in stock and now sell 60% new merchandise, says Richard Kamman, a franchisee who owns five stores with a partner, Salli Burrows, in Pittsburgh, PA. Although their stores usually buy and sell common gear like gold clubs, hockey skates, and exercise equipment ‘as seen on TV,’ the partners will sometimes take an odd item, like a gymnastics horse or a unicycle, Ms. Burrows says.

While all families don’t lack the money to spend on full price merchandise, most working couples do suffer from a lack of time. This has generated a greater demand for on-the-go products and services, says Jerry Wilkerson, past president of the International Franchise Association, a Washington, D.C. trade group and now president of Franchise Recruiters Ltd. In Crete, Ill. Providing these services, from lawn care to pet sitting, has become a multi-billion dollar industry. According to "Bond’s Franchise Guide" for 1998, over 43% of franchise systems provide some kind of service to consumers, businesses, or both.

Mr. Winslow now has franchisees in eight states and has started a second company, Detail Guy USA. "I’m 34," says Mr. Winslow, "but the market for this is so hot, I wish I were 10 years younger."

Older auto services franchise companies are also looking for more convenient ways to serve customers, says Don Hakes, division president of the energy finance group of Franchise Mortgage Acceptance Corp. in Parsippany, New Jersey, a major franchise lender. Instead of offering just one service, like oil change or muffler repair on-site, it makes more sense to provide multiple services, he says. The 2,300 franchisees of Midas International Corp. in Chicago, with 1997 sales of $596 million, now sell car batteries as well as muffler systems.

Staying Competitive

To stay competitive, Prescision Tune Auto Care in Leesburg, VA purchased nine other companies last fall and now offers its 650 franchisees a menu of three concepts: Precision Auto Care, Precision Lube Express and Precision Auto Wash. Franchisee Ed Zatta says his customers in Ohio, PA and West Virginia like the convenience of having their oil changed without leaving their cars. His Precision Auto Care franchises even perform major repair work without an appointment.

The oldest retail and services concepts are

Still strong, but unusual firms are now proving

that where there’s a niche, there’s a way

James Hay, Precision’s vice president of North American operations, says that the multiple options are so successful that the company is expanding rapidly into Mexico, Taiwan, Brazil, Indonesia and other countries where people drive older cars.

Franchisees whose franchisors do not offer such options are co-branding, that is, putting two or more auto service franchises in the same location. Alan Korpi runs a car care cluster – a Valvoline Instant Oil Change, Tuffy Auto Service Center, car wash and truck accessory shop – at the same intersection in downtown Bemidji, Minnesota.

North America’s 187 business services franchises are also making life more convenient for small business owners by serving as their neighborhood printers, shippers, accounting firms and sign shops. Corporate downsizing has provided a double boom for this industry. Thousands of corporate refugees have started their own small businesses, while hundreds of others former executives have purchased business services franchises. Warren Barney has been a vice president with a $300 million corporation; now he’s a Pak Mail franchisee in Anaheim Hills, CA. "This isn’t rocket science," he says, "but it is a good, clean business without a lot of government regulations,"

To stay competitive in today’s expanding marketplace, business services franchises must offer enhancements, products or services that make them stand out, says Mr. Wilkerson. For Mail Boxes, Etc., a San Diego, CA franchisor or postal centers, that something extra is the MBE Business Express, self service business centers in hotel lobbies that are open 24 hours a day, seven days a week. Each Business Express contains a computer, fax machine, copier and printer, all of which hotel guests can activate with a credit card. A direct dial phone links the center to the nearest Mail Boxes, Etc. franchisee.

Market Strength

Comprehensive Business Services, an accounting franchise in Mission Viejo, CA, expanded its services by buying up other companies and changing its name, to Century Small Business Solutions. Franchisee Joseph Donahue in Denver says he can now offer his 300 customers help with workers’ compensation coverage, health insurance, and retirement planning as well as tax and payroll services. "Each new service we can provide makes us stronger."

AlphaGraphics, Inc., a print shop franchise in Tucson, AZ is helping its franchisees expand their markets – by thousands of miles. One AlphaGraphics customer in Little Rock, Arkansas, for example, drops off sales presentation materials on his way to the airport. By the time his plane lands in Brazil, freshly printed transparencies and brochures are waiting for him at an AlphaGraphics in Sao Paulo. Chuck Werninger, the Little Rock franchisee, says his franchise company’s secure electronic network, AlphaLink WorldWide, lets him service global accounts through 82 overseas locations.

That worldwide reach works both ways. IB Your Office International, a German company that franchises office centers for home-based entrepreneurs and business travelers in 40 countries, is expanding into the U.S. Such international competition will force U.S. retail and services franchises to be even more innovative in the future, Mr. Wilkerson predicts.

In the meantime, Jim Carpenter, the founder of Wild Birds Unlimited, will continue to sell franchises to bird lovers and the occasional bored dentist. The company he started in 1981 has grown to 252 units and bird feeding nationwide has grown into a $4.5 billion industry. "We like to think we’re making it easier for the 52 million Americans who feed wild birds to buy specially blended birdseed," he says. "But there’s really only one relationship in this business that counts – and that’s the one we have with our end users, the birds."

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