Driving for diversity.

As the $758 billion franchise industry continues to grow, business format franchisors are more aggressively pursuing minority owners.

Agnes M. Davis is a member of an elite group. She is one of a handful of African-American women who have gained access to a cliquish, white-male-dominated fraternity known as the franchise industry. As president of Senga Travel Inc./DBA Travel Network in Staten Island, N.Y., the former nurse has proved many of her skeptics wrong--her franchise pulled in revenues of $2 million last year. A lot of my friends--especially the men--were surprised that I've lasted this long," says the 65-year-old Davis, who bought her Travel Network franchise eight years ago.

Franchising has traditionally been touted as an excellent business opportunity for blacks. The reasons are simple: There's often less risk involved with franchises than there is with building a business from the ground up. Franchises have a built-in recognition factor, and franchisees receive on-the-job training on how to run every facet of their outlets. The two fast food titans, McDonald's Corp. and Burger King Corp., have often boasted of "making millionaires" out of many black entrepreneurs, including BLACK ENTERPRISE 100s CEO Lonear Heard. Heard's Cerritos, Calif.-based company, James T. Heard Management Corp., which owns and operates several McDonald's restaurants, is No. 90 on the BE INDUSTRIAL/SERVICE 100, with 1991 sales of $12.7 million.

Unfortunately, the franchise industry as a whole has failed miserably at producing similar success stories. Only 5% of the 52,641 franchise units represented by this year's BE FRANCHISE 50--our listing of the franchisors with the most black-owned units--are owned by African-Americans. It gets worse for the rest of the industry: In 1990, the U.S. Department of Commerce's Minority Business Development Agency (MBDA) in Washington, D.C., projected that 14,000--or 2.5%--of the 550,000 U.S. franchises were minority-owned. Now, keep in mind that these are minority-owned franchises, not just those that are black-owned.

The numbers don't lie. Most of the nation's franchise companies have no black owners participating in their systems, and many aren't even looking for any. Some franchise companies don't even track the number of black-owned units they do have,

In April, the international Franchise Association (IFA), a Washington, D.C.-based industry group, created the Alliance for Minority Opportunities in Franchising to correct the industry's less-than-sterling track record. The Alliance's goat is to increase the number of opportunities for women and minorities to own franchises, expand the use of minority vendor and supplier companies and enhance career opportunities for women and minorities. The organizations affiliated with the coalition are: BLACK ENTERPRISE, Hispanic Magazine, the MBDA, the NAACP, the National Minority Business Council (NMBC), the National Minority Supplier Development Council (NMSDC), the National Council of Negro Women, the National Urban League, the U.S. Commission on Minority Business Development, the U.S. Hispanic Chamber of Commerce, the IFA, the Institute for American Business and the Indian American Chamber of Commerce.

Working with members of the Alliance, the IFA plans to increase participation in minority organizations' trade shows and conventions, issue special reports on franchisor minority recruitment programs and establish financial and technical assistance programs for minorities seeking franchise opportunities.

The IFA isn't the only organization taking steps to address the situation. The MBDA recently launched a national franchise initiative. The agency is now holding introductory and other orientation seminars, as well as building private and public sector alliances with the Small Business Administration (SBA), the Department of Labor, the Federal Trade Commission and the IFA. (For more information, call Theresa Speake, the MBDA's assistant director, Office of Program Development at 202-377-3007.)

The MBDA has also worked with Women In Franchising inc. (WIF), a Chicago-based organization, to provide eight-hour orientation sessions to clients of the MBDA's Minority Business Development Centers. Sessions are scheduled for Seattle; Atlanta; Charlotte; Boston; and El Paso, Texas. Moreover, several states, including New York, Pennsylvania, Florida, Maryland and Ohio, have established low-cost financing programs for prospective franchisees.

Why all of the increased efforts? "There is a huge market out there," says IFA President Bill Cherkasky. "I tell franchisors all the time that not only are they overlooking riches for minorities, but they're overlooking riches for themselves as well."

Franchising Remains Strong

During the unforgiving recession, corporate America's loss was the franchise industry's gain. Many franchise companies tapped the wave of displaced corporate executives to replenish their pool of potential franchise owners. Last year, franchise chains created more than 18,500 new businesses and added more than 100,000 new jobs to the economy.

Sales of goods and services by the nation's half million franchises reached $757.8 billion in 1991, a 6.2% increase from the previous year. Product and trade name franchise sales increased 4.9% last year, from 500.7 billion in 1990 to $525.6 billion in 1991.

Business format franchises, which include everything from specialty retail stores to credit collection services, played a key role in the franchising boom. (See charts, "What's Booming" and "Where The Dollars Are.") Sales of these kinds of franchises--which are characterized by an on-going business relationship between franchisor and franchisee--increased 8.9% in 1991 to $232.2 billion, up from $213.2 billion in 1990. And the number of business format franchises rose to 408,217 last year from 386,118 in 1990.

Industry watchers predict those figures will only get higher. The volume of sales and the number of units owned or franchised by business format franchisors have risen steadily since 1972. Why do these kinds of franchises remain so popular? The main reason is that business and personal service franchises are less real estate and capital intensive than, say, fast food or construction franchises. For example, the average start-up cost for a fast food restaurant is $250,000, while the average start-up cost for a business service outlet is about $50,000.

Franchises that are either on the decline or whose growth has slowed because of market saturation include fast food restaurants, convenience stores and printing shops. "The most growth will be in the service sector," notes Susan Kezios, WIF president. "Fast food is the granddaddy of all franchises, but it's kind of peaked out. I see some serious problems with printing services. Some chains are filing for bankruptcy and are being bought by companies that aren't even franchisors."

Terrian Barnes-Bryant, the IFA's vice president of research, minority and women's affairs, also thinks that service franchises will remain hot. "Service franchise are the buzzwords for the 1990s," she says. "Most people have fast-paced lives and don't have enough time to deal with personal chores. But they need to get them done quickly and efficiently."

Barnes-Bryant, who was promoted to her current position in May, knows what she's talking about. Since joining IFA in 1981, she has been on the front lines in the battle to get more minorities in franchising. Barnes-Bryant was also instrumental in the creation of the Alliance for Minority Opportunities in Franchising. She says: "When I started here 11 years ago, I rarely saw an article on franchising. Now it's not uncommon to see more articles on new minority-owned franchisees. We need to do a lot more, but I'm very encouraged by what I see."

So is Michael H. Baum. The executive vice president of Francorp inc., an Olympia Fields, Ill.-based management consulting organization, believes that the outlook for the industry as a whole is bright. "Every time there has been a recession, there has been a corresponding boom in new business formation," says Baum. "We've always seen a surge in new franchises. The franchise industry will see continued growth for the balance of the decade."

If you're looking to start a franchise, some of the areas to watch, according to Francorp, include: * Health care: These franchises produce products and services for health care or to improve the quality of life. For instance, the nation is seeing more family medical practices, walk-in surgical centers and aerobic clubs. * Environment. These franchises do everything from recycling metals and other materials to providing leak detection services. * Graying of America: These businesses produce products and services for older baby boomers and senior citizens. One example is Reading Glasses To Go--a franchise that sells nonprescription reading glasses. * Mini baby boom: These franchises include businesses that cater to the needs of the baby boomers' children. * Niche restaurants: These are restaurants with a point of difference, in either service format or menu. * Specialty retail: These retailers cater to the increasingly diverse needs of the American public and supply products and expertise not available at chain stores. * Personal services: These franchises cater to families with higher disposable incomes who desire specialized services. * Specialized business services: These franchises provide a wide range of services; they can range from franchises that provide office coffee services to those that provide temporary services. * Discount retail: These franchises compete in the growing low-price segment of the market. For example, the Dallas-based D&K Enterprises franchise sells personalized children's books. D&K's motto is "stack it high, sell it low." * Direct sales to businesses: According to the IFA, accounting, credit, collection and general business systems franchises represent one of the fastest-growing sements of the market.

Tracking The FRANCHISE 50

For five consecutive years, McDonald's was No. 1 on the BE FRANCHISE so. That honor now belongs to Coverall North America, the San Diego, Calif.-based commercial cleaning business. In 1992, Coverall increased its number of black-owned franchise units to 632, up from 500 the previous year. McDonald's slipped to the No. 2 spot on the list, with 563 black-owned outlets, up from 509 in 1990.

That Coverall has dethroned mighty "Mickey D's" from the top of the BE FRANCHISE 50 is emblematic of the popularity and accessibility of low-cost, service-oriented franchises. (See "Tapping Into Low-Cost Franchising," this issue.) Alex Roudi, Coverall president and CEO, attributes the increase in the number of black franchisees to the low cost of the franchise. "One of the main attractions is that we provide a complete business for a low cost" he says. Roudi adds that the price makes his operation more accessible to blacks. Investments range from $3,250 to $34,000, and we provide training, equipment, supplies and a starting customer base." Meanwhile, typical start-up costs for McDonald's franchises are more than $600,000.

Operation Recruitment

When such giant franchise companies as McDonald's and Kentucky Fried Chicken Corp. (KFC) establish recruitment programs specifically geared to attract minority and women franchisees, they do it because it makes good business sense. Consider: Members of African-American, Hispanic, Native American and Asian communities now account for nearly one of every four Americans. And according to Workforce 2000, the 1987 study by the indianapolis-based Hudson Institute Inc., a nonprofit research organization, by the next decade only 15% of the new entrants to the labor force will be native white males. "This is an untapped market for franchisors," says Kezios. "Many franchisors have only two markets left--the international arena and women and minorites."

Companies that have actively recruited minorities and women include Hardees Food Systems Inc., Airways Rent A Car, Shoney's Inc. and KFC. In fact, KFC guarantees 15 to 20 loans annually made by local banks to minority franchisees and has reduced liquidity requirements from $150,000 to between $65,000 and $70,000. The company has franchised and financed 192 minority-owned restaurants, for a total of $69 million, of which $43 million has already been repaid.

Meanwhile, Hardees' three-year-old Franchise Associates Program reduced capital requirements to $50,000 in liquid assets, compared with $500,000 in net worth and $150,000 in liquid assets that it requires in its conventional program. During the associates program, Hardees is responsible for all the accounting and helps out in personnel decisions and pays for the franchisee's bills out of its own account

While some franchisors continue to actively pursue women and minorities, others have not made it a top priority. Says WIF's Kezios: "I had this one guy from a major fast food chain tell me that there are enough balding, pot-bellied white men that we can sell franchises to. I get those kind of comments at least once a month. Many of these franchisors don't have a clue as to how to sell to the black community."

The real problem is, most of them don't really care. Companies that tend to be the most aggressive in their pursuit of minority talent are usually big-name franchisors such as Burger King or McDonald's. "These companies are more skilled at putting people in business," notes the IFA's Cherkasky.

When Robert I. Lee purchased his Chicago-based General Nutrition Center (GNC) franchise in October 1991, he immediately realized the importance of bringing more minorities into the franchising fold. "I have a wide mix of customers," says Lee, who projects 1992 sales of $600,000. "I had to hire some people who were bilingual. There has to be more effort to find minorities."

The recruitment effort, however, has spawned its share of controversy. The central issue: minorities versus women--are their needs the same? Some members on the IFA's Alliance for Minority Opportunities in Franchising believe that a separate committee should have been formed to address the needs of women in franchising. By lumping white women with minorities, African-Americans stand to miss out on some opportunities that might go to white women.

"There's no question that white women are facing problems getting into franchising," notes Earl G. Graves Jr., BLACK ENTERPRISE's senior vice president for advertising/marketing and the magazine's representative on the IFA committee. "But ifs ridiculous to say that they face the same obstacles black women face."

Kezios of WIF doesn't agree. "While white women have not lost ground as franchise owners like minorities have, they still have a lot of catching up to do," she asserts. "The power base of women and minorities as a collective unit is what's needed. Splitting it up is that old divide and conquer' theory."

However, many minority entrepreneurs point out that in most programs where the concerns of women-owned and minority-owned businesses are lumped together, white women have tended to reap the biggest gains. The gains made by white women are usually at the expense of black-owned and other minority-owned businesses, not the white male enterprises that dominate the industries in question.

Perhaps the most recent example of this was the awarding of Resolution Trust Corp. contracts related to the savings and loan bailout. Firms owned by white women received 25.7% of the contracts awarded between 1989 and 1991, while minority-owned (male and female) firms received just 4%. (See "The World's Biggest Fire Sale," June 1991.) To be successful, the IFA's Alliance must be sensitive to that trend.

Meanwhile, two franchise acquisition deals made earlier this year are likely to significantly boost the number of black-owned units on next year's BE FRANCHISE 50 list. In February, Pizza Hut announced that its vice president of restaurant development, Larry Lundy, would assume ownership of 31 Pizza Hut restaurants in the New Orleans metroplitan area. (See "Lundy Buys Franchises," In The News, May 1992.) Lundy plans to build four additional stores by the end of this year.

And in June, Thompson Hospitality Inc., a black-owned Shoney's restaurant franchisee, purchased 31 Bob's Big Boy restaurants from Marriott Corp. Warren M. Thompson, CEO of Thompson Hospitality and former Marriott Restaurant Group executive, plans to convert at least 26 of the 31 Bob's Big Boy restaurants to Shoney's eateries within two years.

Getting Over The Hurdies

Obtaining financing, learning management skills and overcoming racism are still serious hurdles for African-Americans who aspire to franchise ownership. "A friend of mine took a leave of absence from AT&T for a year to start his franchise," notes GNC's Lee, "but he couldn't get a loan to start it up. I was turned down bythree banks, and I ended up using $50,000 of my own savings to start my franchise."

Minority franchisees often make their purchases with greater leverage than do white franchise owners, which increases their cost of doing business. Many black franchise owners argue that the numbers provided by the franchisor on the amount of capital necessary to start and maintain the franchise are often inadequate.

Many black franchisees also believe that they're often set up to fail. Several industry observers contend that franchisors need to be more committed to creating an environment to retain black franchisees. "Churning franchise fees, which is a process where the franchisor sells a particular location over and over again rather than adjusting the business to the particular locale, seems to occur most often with minority franchise locations," says Kezios.

Another major roadblock is that black franchisees are often steered to inner-city locations. These locations often suffer from a poorer economic base, and higher rents, theft rates, and security and insurance costs. Although white-owned franchises in these areas suffer from the same problems, they, unlike black franchisees, are more likely to be offered opportunities to move to better locations.

Although obtaining and running a franchise remains difficult, it's still worth the battle. Even in the face of a crippling recession, the industry has managed to grow. Let us hope that for the remainder of the decade and beyond, more African-Americans franchise owners will share in that growth.

COMPILING THE FRANCHISE 50

The BLACK ENTERPRISE FRANCHISE 50 is an annual ranking of the top

50 franchise companies by the number of black-owned franchise units in their respective systems. This is the sixth year that the list has been published.

The 1992 list was developed based on the results of a national survey of franchise companies. Survey responses were further verified by editorial researchers, who conducted phone interviews with franchise company officials, franchise owners, trade associations and industry analysts. All numbers are until May 27, 1992.

The BE FRANCHISE 50 report and list focus primarily on business format franchises, which are characterized by an on-going business relationship between the franchisor and franchisee. Product and trade name franchise companies (automobile dealerships and gas stations, for example) were not surveyed for the list.

The total number of franchise units does not include overseas outlets or company-owned units. Franchisors with identical numbers of black-owned units are ranked, greatest to least, by their respective percentages of black-owned units. Because a franchisee may own more than one franchise unit, the actual number of black franchisees within a given franchise system may be significantly less than the number of black-owned units.

Franchise start-up costs may vary from the figures provided by the franchise companies listed. This depends on real estate or lease arrangements, the number of units purchased, payment schedules for fees and royalties, net worth requirements, sources of financing and other variables.

Some companies do not appear on the list because they had too few or no black-owned outlets. Others failed to meet the BE FRANCHISE 50 survey deadline. in addition, several franchisors declined to report the number of black-owned franchise units in their systems.

Some of these companies stated that they kept no such records on their franchises--which, in and of itself, is a significant indication of the importance they place on gauging and expanding access to franchise ownership opportunities for blacks and other minorities.