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'Like some yogurt with that sandwich?' TCBY's new alliance with Subway signifies co-branding of America.

Question: how do you start two separate restaurant franchises, pay a smaller combined franchise fee than you would for either chain separately, and save money on back-room and overhead costs, all at the same time?

Answer: You run both restaurants from the same storefront, sharing money on counter space, refrigerators, rent,personnel and utilities. In the retail food industry it's called co-branding, and as trends go, it's hotter than a fresh basket of fries.

Witness the March 26 announcement that Little Rock-based frozen dessert retailer TCBY Enterprises Inc. and sandwich powerhouse Subway Restaurants will join forces, in effect, by allowing approved Subway franchisees to sell TCBY products in their stores, and vice versa. The impact of this announcement is potentially huge.

Around the world, there are 2,718 TCBY franchises and 12,692 Subway stores. Just for the sake of argument, if you assume that 10 percent of the Subway stores will add TCBY franchises, the franchise fees alone would pull in about $6.3 million for TCBY. Throw in the 4 percent royalties - guessing that co-branding store sales might be around 25 percent of the average TCBY stand-alone store's because the selection is often more limited, and considering the revenues of the average TCBY store - and you're talking about a new annual revenue stream of $13 million.

Neither company will project the financial benefit of the alliance, or even predict the percentage of franchisees who will co-brand, but both sides stand to reap a sizable benefit.

"I think co-branding will play a very significant role in the future growth of our company," says Jim Sahene, president of TCBY Systems Inc., the company's franchising arm.

In the rapidly changing restaurant industry, though, a major deal like this is no guarantee of success for TCBY, especially since its partner, Subway, has been working on a similar deal with Yogen Fruz WorldWide Inc., the Toronto-based firm that leads TCBY in worldwide frozen yogurt franchising with about 2,920 outlets.

According to a March 11 Reuters news article, Yogen Fruz is proposing to expand by teaming up with Subway and PepsiCo Inc.'s KFC unit. Reuters quoted First Marathon Securities analyst Perry Caicco as saying Yogen Fruz had been testing with Subway in 20 U.S. locations within the last month, but the project was still in the initial stages.

Popping Up Everywhere

Almost everyone is co-branding.

Since August, the Ohio-based hamburger chain White Castle has been adding Church's Fried Chicken Inc. franchises to existing restaurants. PepsiCo, which owns both KFC and Taco Bell, recently has been co-branding the two concepts with each other. Arby's has been teaming up with T.J. Cinnamons for cinnamon rolls and coffee, bringing the breakfast eaters into the store; and for dinner, Arby's has teamed with the ZuZu Handmade Mexican Food chain and P.T. Noodles, which serves pasta dishes.

The big benefit of co-branding, says the trade publication Restaurant News, is in canceling the "veto vote" that occurs, for example, when one person in a party of four wants burgers and doesn't care for Mexican, or vice versa, thus swaying the decision.

As lucrative as co-branding can be for the restaurant chains involved, it's even better for the franchisees. Sahene says that in TCBY's previous co-branding efforts, sales of its dessert products are up 15-30 percent in every location where another brand has been introduced. It seems the whole really is greater than the sum of the parts.

Sometimes, sales simply go nuts. Like in Hoover, Ala., where TCBY joined hands with a Wall Street Deli location. Before the Wall Street Deli was opened, the owner had experimented by co-branding a local, "no-name" barbecue franchise with TCBY products. That didn't work out. But when the owner paired Wall Street with TCBY, the TCBY sales rose 40 percent to a pace of about $30,000 a year.

"That's very, very successful co-branding," Sahene says.

According to Sahene and other retail experts, one of the big keys to co-branding is to pair restaurant concepts that complement each others' weaknesses. For example, Sahene says, TCBY makes 60 percent of its sales after 6 p.m., so it could use a partner who is strong at lunch. Enter Subway, which makes 70 percent of its sales before 6 p.m.

TCBY doesn't sell sandwiches, and Subway doesn't sell desserts. Both are nationally established brands. From a franchisee's perspective, what's not to like?

"It is consumer-driven," says John Skerritt, co-branding development manager for Subway Restaurants. "You will be seeing more of this industrywide. It makes sense for the operators to attract additional customers for their product line. Basically, it is providing more convenience to their customers. Our development agents are excited about the opportunity. TCBY certainly is a leader in their product category. This is the first of what we hope will be several co-branding alliances we will form with other brands."

On the Bandwagon Early

TCBY has been co-branding since 1987, when it joined hands with Florida Exxon stations. In the last four years, the company also has signed agreements with oil companies Fina, Citgo, Texaco, Shell and BP, often sharing space with other restaurant concepts. In regular restaurant spaces, TCBY has now co-branded certain locations with Taco Bell, A&W, Subway, Wall Street Deli and Nathan's, a hotdog concept.

As of March 2, TCBY had 314 locations under development - most of them co-branded, the company says.

Of course, TCBY isn't the only Arkansas company finding success in the world of co-branding. Gas stations have been doing it for several years. Coulson Oil Co., for example, recently has been combining popular fast-food restaurants with fueling stops.
The Yogurt-Cold Cut Connection


Standard Franchise Fee $20,000 $10,000

Co-branding Franchise Fee $5,000 $4,000

Royalties 4% 8%

Marketing Fees 3% 2.5%

Number of Stores 2,718 12,692

Total 1996 Revenue $290 million $3.2 billion

Average Annual
Store Revenue $107,407 $252,127

Sales Pattern 60% 70%
 after 6 p.m. by 6 p.m.

Sources TCBY Enterprises Inc., Subway Restaurants

The Little Rock examples are the Shell Superstop at Chenal Parkway and Markham Street, which includes a Burger King; and the Superstop at Kanis and Shackleford roads, which has a Blimpie Subs and Salads.

In the gas station arena, says company President Mike Coulson, there are two basic types of co-branding setups. "One is where a [convenience store] chooses to become a franchisee of a restaurant concept and operates that franchise itself. The other way of doing it is a landlord/tenant arrangement, where one chooses to add a quick-serve restaurant, but chooses not to be the franchisee."

Coulson has done both and now has some 15 co-branded convenience stories, he says, including Blimpie, Burger King and Crystal.

"It's a lot easier to lease space out," Coulson says, though he adds it's usually less profitable.

"Probably the biggest mistake is not allowing for adequate parking," he says. "You've got an existing small convenience store and you add a quick-serve restaurant of some brand value out in the marketplace. If it does what it is supposed to do ... some of your existing business may suffer."

Co-branding is one of those sea changes in the industry that dashes some operators against the rocks.

"Thirty years ago for sure, gasoline was bought at a gas station, where there were service bays and oil changes were performed," Coulson says. "And somebody walked out and pumped that gas for you. In the '70s, our industry evolved into self-service gas and convenient food stores. Those who didn't make the adjustment are no longer in the gasoline business.

"Today, we're merging with the quick-serve restaurant industry. If you don't figure it out, you may not be in the gasoline industry 10 years from now. You either adapt, or you die."
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Title Annotation:TCBY Enterprises Inc.; Subway Restaurants
Author:Haman, John
Publication:Arkansas Business
Date:Apr 7, 1997
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