Giant steps for black franchises: savvy entrepreneurs are moving beyond one-outlet status to develop megafranchise businesses.

Savvy entrepreneurs are moving beyond one-outlet status to develop megafranchise businesses.

BLACKS IN THE FRANCHISE industry are like ripples on the ocean: They're moving with the current, but even added all together, they barely make a wave. Or Course, there are exceptions.

Shaking up this year's BLACK ENTERPRISE FRANCHISE 50 (our annual listing of franchise companies with the largest number of black-owned units in their systems) are three African-American megafranchises, all developed during the last 20 months. Larry Lundy launched the largest African-American franchise start-up ever, purchasing 31 New Orleans-area Pizza Hut restaurants in February 1992 for an estimated $15.5 million. Atlanta-based NDI Video Inc., headed by chairman C. Alexander West and president Al Carter, solidified its position as the nation's largest black-owned Blockbuster Video franchise in April 1992, when it purchased 23 video outlets in Baltimore, Syracuse and Rochester, N.Y., for an undisclosed sum. And, in a groundbreaking deal sealed in June 1992, Warren Thompson acquired 31 Washington, D.C.-area Bob's Big Boy restaurants from the Marriott Corp. for $13.1 million, and agreed to convert them into Shoney's, the first of which opened last November. With these deals in hand, all three companies are now poised to enter next year's elite group of the nation's largest black-owned businesses: the BLACK ENTERPRISE 100s.

Lundy, Thompson and the NDI team are the personification of the franchise dream, particularly for African-Americans. Theirs were among the most significat franchising deals in 1992, representing major gains in opportunities for blacks in the industry. These accomplishments are also the fruits of some isolated corporate efforts to expand minority franchising opportunities, fueled largely by industry groups such as the International Franchise Association (IFA) in Washington, D.C., and the newly formed American Franchisee Association (AFA) based in Chicago. Despite these splashy signs of progress, African-Americans continue to be woefully underrepresented in franching: Only 5.6% of the 74,273 franchise units represented on this year's BE FRANCHISE 50 are black-owned--a slight increase from last year's list. And, although the year marked a renewed interest in franchising as an anchor of black economic development, the industry--like all others -- labored under the constraints of a protracted nationwide recession.

The Numbers Game

In 1991, franchises employed 7.2 million people in more than 60 industries. Gross sales for 1992 were $813 billion, according to the IFA. That's an 8% increase over 1991.

Striving entrepreneurs continue to pursue what is perceived as the avenue to sure-shot success. A new franchise opens every 6.5 minutes of each business day, according to the IFA. And no wonder. Franchises have unmatched appeal for potential business owners: They tend to be low risk, well defined and operator-ready. Franchises offer the unique advantage of entrepreneurial independence without fitful isolation. And, unlike most small businesses, franchise start-ups are almost fail-proof: According to the U.S. Department of Commerce, less than 5% of franchises failed on an annual basis between 1971 and 1987. In fact, in many industry segments, more than 85% of franchised units opened since 1986 were still owned in 1991 by the person who originally bought the outlet (see chart, "Opportunities You Can Count On"). The number of franchises keeps growing and they continue to outpace the Fortune 500 companies in providing new jobs.

For African-Americans, affordability remains a key issue in the pursuit of franchise opportunities. Franchise companies offering low start-up costs, such as Coverall North America Inc. (No. 2 on the BE FRANCHISE 50) continue to attract minority attention. The nearly 200 black-owned units since last year. Meanwhile, McDonald's Corp. (No. 3 on the list) reported a comparable drop in the number of black-owned units, even though the total number of Mickey Ds increased last year. The average start-up cost of a McDonald's outlet? Try half a million dollars.

Industrywide, the statistics are even more dismal--and increasingly hard to come by. The U.S. Department of Commerce stopped tracking the number of minorities in franchising back in 1988, in part because most franchisors were loathe to cooperate, or had little, if anything, to report. At the time, Commerce's Minority Business Development Agency (MBDA) projected that 14,000, or a meager 2.5%, of the nation's 550,000 franchises would be minority-owned by 1990. (Note: That number includes all minorities, not just African-Americans.) "Franchising In The Economy," an Arthur Andersen & Co. study conducted between 1989 and 1992 for the IFA, found that 9.5% of the 366 companies surveyed were minority-owned. The industrywide truth probably lies somewhere between the two. Whatever the figure is, it's nominal.

Thanks largely to the advocacy of groups such as the Alliance for Minority Opportunities in Franchising, created last year by the IFA, franchisors are talking more than ever before about ways to increase franchising opportunities for minorities and women (see sidebar, "Franchising Reaches For Minorities"). But talking and doing are not synonymous. A 1991 IFA survey found that of 180 respondents, just 35% have minority business development programs, 41% target minority franchisee propects, 49% target employee recruitment efforts to minorities and 54% utilize minority vendors, suppliers and media.

Subway Sandwiches, a Milford, Conn., fast-food restaurant franchisor, is an example of a company that has made the most of targeting minorities as potential franchisees. Subway, which asvertises franchise opportunities regularly in minority publications, claims the No. 1 slot on this year's BE FRANCHISE 50, reporting an impressive 1,343 black-owned franchise units.

Targeting, however, does not necessarily translate into deal making. Susan P. Kezios, who started the AFA and is president of another franchisee advocacy group, Women in Franchising, says she is "not seeing any perceptible change" in the number of minority start-up franchisees. A 1992 survey conducted by the women's group found that of the 60,342 franchise units (representing 450 franchise companies) highlighted in the study, 2,095--or 3.5%--were black-owned. As grim as that is, Kezios warns that these numbers are deceptively high. The 450 franchise companies represent a small fraction of the franchise industry. she says: "These are the ones with something to report."

Although their numbers are not tracked, each year, hundreads of ambitious blacks, eager to latch on to that one opportunity that will transform them from employee to entrepreneur, seek their fortunes in franchising. Like Lundy, who says he planned for two years and saved for two decades, they do their research and aim high. Many of them get nowhere, besieged by the same traditional barriers faced by any small minority start-up: limited opportunities within certain corporate systems; inadequate access to financial resources for purchasing and operating a business; discriminatory pricing and leasing practices that unfairly inflate those costs; and lack of access to prime business locations. (For the franchise industry segments most likely to provide financing, see chart, "Will You Help Me Get Started?")

Ironically, in an industry known as much for its inaccessibility to minority entrepreneurs as for its knack for making millionaires, being black proved an asset in all of the ground-breaking megadeals outlined above. Allan Huston, president and CEO of Pizza Hut Inc., says flat out that were Lundy not a minority, "the opportunity would not have been presented to him." No doubt, being an aggressive corporate insider helped too. But the fact is, Pizza Hut has been buying back franchises, not selling new ones. These are money-making businesses, after all, and companies are highly protective of their own profitable territories.

Lundy's, Thompson's and NDI's deals were fueled in part by direct moves to expand the opportunities for blacks and Hispanics in their parent companies. But such openings are extremely limited. When Marion A. Lewis, president of Atlanta-based Premiere Pizza Co., and his partner, Chicago businessman

Andre Rice, tried to expand their $5.5 million Pizza Hut Holdings beyond the eightt franchises they own, the parent company balked. And, although Lundy expresses a strong desire to increase his markett geographically, Huston--who offers only the highest praise for Lundy--says that such a proposition "wouldn't make such sense right now," sounding doubtful that it ever would.

(Because only current owners of Pizza Hut franchises are eligible to purchase restaurants, Pizza Hut officials declined to respond to this year's BE FRANCHISE 50 survey.)

Given now tight franchising opportunities are for highly successful inside players, it's not tough to imagine what unproven minority franchise aspirants are up against.

Snagging A Piece Of The Franchise Dream

Those minority franchisees who have snagged their piece of the pie have complaints. For Lundy, franchising has made good on its oft-touted promises. While he certainly had the resources and business acumen to start a company from scratch, Pizza Hut offered less risk, along with built-in product recognition and a time-tested system of training, production and development.

Lundy, who swept floors in his father's gas station while growing up and then spent the next 20 years in corporate America, says running his oen company "is like a vacation compared to that." He still works 12-hour days and 7-day weeks, but now it's at his own discretion, Lundy says with relish. And, yes, it has made him a millionaire. "I wake up in the morning sometimes and pinch myself to make sure I'm not dreaming," He declares.

Warren Thompson, CEO of Reston, Va.-based Thompson Hospitality, has also realized a dream. Not only was this an entrepreneurial coup for Thompson--who has 11 restaurants up and running and plans to open two more this month--it represents a major departure for Shoney's, which is in the midst of satisfying the terms of an unprecedented $105 million settlement in a race discrimination suit reached earlier this year. Once completed, sales of the converted restaurants (which cost Thompson $13.1 million) are projected at $40 million. His acquisition pushes Shoney's up to No. 25 on the BE FRANCHISE 50 list, up from No. 46 (with only four black-owned outlets) last year.

NDI also appears to be flourishing. President AI Carter says that plans are in the works to build 18 to 20 additional Blockbuster Video stores over the next two years. Their sales for the last fiscal year were up 10.2%, leveling off at around $20 million. NDI's video franchise also showed a 16% cash-flow improvement, notes Carter, who adds that NDI is considering several other franchise opportunities. Blockbuster Video is No. 16 on the BE FRANCHISE 50.

Beyond those African-American franchises making news because of their expansiveness are those contributing to their communities survival and e conomic development. New York's Harlem has become a study of how franchising can help turn the tide from neglect and stagnation to prosperity and empowerment. George Rowan opened New York City's first Pak Mail franchise in February, offering local residents much needed postage, shipping and fax services, as well as additional post office boxes (which were sold out at the local post office).

His venture was especially noteworthy because of the unique financing that made it possible. He received a four-year, $30,000 loan from the New York Economic DDevelopment Corp., which covered half of his start-up costs. His was the first loan of that type given to a start-up--as opposed to an established--business. A program ear-marked for black entreprenuers paved the rest of Rowan's way. Thanks to the Bradhurst Neighborhood Revitalization Project, Rowan leases his 726 square feet of space at 50% of market value for the first five years. Other examples of how franchise are boosting Harlem's facade and its economic foundation are a black-owned Ben & Jerry's, which provides employment and revenue for a local homeless shelter, and two black-owned McDonald's, which have been revamped to incorporate Afrocentric themes, including

vibrant Kente cloth uniforms and African-American artwork.

The Downside

Headline-grabbing success stories aside, it has not been an easy year for minority franchises. For one, the downside to an ongoing industry surge includes increased competition. "The competition out there is tough," says Terrian Barnes-Bryant, the IFA's vice president of minority and women's affairs. "More and more you see a company that's been around for years suddenly have more emphasis on service with a smile and really treating customers with kid gloves. Companies can no longer rely on brand loyalty to bring a customer back. There are just too many other choices."

The unyielding recession hasa also taken its toll. "In the past few years, my client base has encountered a lot more problems than it had in the past, just due to the economy," says Aaron Shingler, founder of Washington, D.C.-based Shingler-Hollis Investment Group, which specializes in getting minorities started in franchising.

"Franchises are independent contractors," explains Shingler. When their businesses are in trouble, "some franchisors will try to work with you to pinpoint the problems and develop solutions. But they will not walk in and put cash in your business." Many people go int franchising viewing the relationship with the franchisor as that of a partnership. Shingler says blunty: "It is not."

For Harlow Fullwood Jr., the recession put a lock on planned business expansion. A former Baltimore police officer, Harlow transformed an old Arthur Treacher's franchise into a Kentucky Fried Chicken outlet in 1984. He added one store every two years, purchasing his fourth in 1990. Although Fullwood had found a prime loccation for his fifth, he watched Popeye's grab it when he decided to wait out the recession. "I planned for the downturn in the economy, as a good businessperson would," explains Fullwood, whose KFC chain grossed just over $3 million in 1992, but sales have fallen off by 20% in the last 18 months. "But I did not know it would be this long or this deep."

The economic crunch also contributed to a drop in sales for Cerritos, Calif.-based James T. Heard Management Corp. The company, which is headed by CEO Lonear Heard, was No. 90 on the BE INDUSTRIAL/SERVICE 100 in 1992 with $12.7 million in sales. This year the company, which owns six McDonald's franchises, did not make the list.

Blue Skies Ahead

Despite their difficulties, black franchise owners continue to perform essential roles in the black community, forging creative strategies to boost their bottom lines as well as the self-esteem of their customers. KFC's Fulwood, for example, says he and his wife, Elnora, continue to give in excess of $100,000 a year "to causes that will be meaningful to people after I'm no longer here." His Fulwood Foundation has adopted several public schools in Baltimore and, last January, the foundation sponsores its fifth annual Benefit and Recognition Breakfast at which 40 local nonprofit organizations were awarded grants.

Says business consultant Shingler: "Franchising still offers a legitimate opportunity for minorities, but you have to be very diligent with your research. You just don't turn the key and walk in and the money machine starts. Even with the best preparation, you don't really know what you're facing until you walk through the door."

Despite the clouds overhead, the IFA's Barnes-Bryant foresees a brighter future for minority franchisees. "Franchisors are no different for other business owners," she says. "They must decide how to maintain and grow market share. The African-American community can and does play a major role there. It comes down to looking at the census data and realizing where the future growth of the consumer base lies. Whether you sell cosmetics or computer services or nutritional supplements, those are all areas that African-Americans arre interested in."

As for black franchisees--existing and prospective--"We're becoming more business savvy," says Barnes-Bryant. "We're starting to think bigger and to think globally." Notting the successes of Lundy, Thompson and NDI's principals, she adds, "We're getting over our fears and our reluctance to shoot the moon."

And make waves.