Fransmart’s Dan Rowe on the Coming Franchise Boom in Retail
Food, not very long ago — but before folks figured out how to spell “coronavirus” — was considered the answer to the incursion of e-commerce in the shopping district, along with fitness centers. Neither could be duplicated on the web, and people loved good food and meeting their friends at the next hot restaurant.
Then came the virus and the lockdowns, and the clientele just disappeared. While many restaurants tried to stay in business with “ghost kitchens” — kitchens that cooked strictly for the take-out crowd, or by hooking up with web-based delivery services like Door Dash and Seamless — even with their lenders bending over backward to keep them alive, the last year and change has been murder on eateries. More than 110,000 restaurants have been lost nationwide to the pandemic, according to March statistics from the National Restaurant Association.
That was then. Now, there’s — excuse the expression — hunger for eating out again. And Dan Rowe, CEO of Alexandria, Va.-based consultancy Fransmart, calls 2021 “the year of the franchise,” meaning that real estate professionals and consumers should expect to see a fresh growth in franchise restaurants, due to all of the eateries that didn’t make it through the pandemic, or that emerged wobbly and financially unstable.
That’s what Fransmart does. It invests in and guides new and growing franchises into the American zeitgeist. Rowe, himself, was one of the leaders in driving the “fast-casual” concept in food, a step up from the McDonald’s and Burger Kings of the world.
He was an early-stage investor in Five Guys, and Fransmart helped grow The Halal Guys from a single food cart to a global brand. Current clients include the Brooklyn Dumpling Shop; MUTTS Canine Cantina (food for you and your dog); and Curry Up Now, which, as you probably guessed, is Indian food served fast and casual.
Rowe spent a few minutes in late April answering questions from Commercial Observer. Of course, there are lots of folks who are both sad and mad about franchises taking over for struggling mom-and-pops, and he discussed that, too. Here is the interview, edited for clarity.
Commercial Observer: What is Fransmart, and what does it do that traditional retail brokers don’t do?
Dan Rowe: Fransmart is a restaurant franchise development company. We invest in restaurant concepts when they’re really small, and grow through franchising.
I was a franchisee first, so I knew what worked and what didn’t. We sold over 5,000 franchises around the world. We’re the ones who launched franchising for Five Guys, a whole bunch of brands. So, our shtick is to try to get to the next big thing very early.
We’re also finding equity investors. Our fund is called Kitchen Fund. And we’re involved with Sweetgreen and CAVA, a whole bunch of really good brands across the country. So, really, our niche is finding emerging, early-stage brands, growing them from a couple of stores to a couple of hundred, and finding a liquidity event.
You guys see this as “the year of the franchise.” Why do you feel that way?
There’s a ton of people who had their lives turned upside down because of COVID. A lot of people looked at that life destruction and decided they want to be self-employed. They wanted to start calling their own shots. They didn’t want to work for a company and have somebody else dictate their future.
So, for us, we had record numbers of new franchisees buying our brands. It’s also never been a better time to be a tenant. Because there have been so many restaurant closures, you got 30 percent or 40 percent of the restaurant retail industry closed or severely hampered. I was in Scottsdale, Ariz., this morning doing a real estate tour and you see a lot of vacancies in centers, but there’s also that much retail that is still in business — but they’re so far behind in their rent, that the landlord is willing to get rid of them and provide those spaces for a new tenant.
It’s never been a better time to be a tenant looking for space. It’s getting better for landlords, but it’s been very difficult for the last year and a half for landlords.
Between the restaurants going out of business, and the ones behind on their payments and their banks are losing patience with them, what happens?
And there are regulators. The banks have to bend over backward, because they want to control their default rate. So, a lot of time, what investors are doing is, they basically are coming up with as much flexibility as they can without throwing off any red flags to their regulators. For example, they’ll let a tenant delay paying a payment or they’ll go interest-only on a payment — any number of things the bank will have you do rather than doing zero, because they have to disclose that to their regulators. And it’s the same way with landlords.
Most landlords are highly leveraged. But they borrow every cent that they can so they can go buy more real estate. But they have covenants for the amount of rent they are supposed to get, and default rates and all that stuff. So, you got a lot of landlords who are masking how they really are, so they can stay within compliance with their lenders.
And it’s the same with lenders. You have lenders who are basically masking how things are going with their clients because they don’t want to show bad news.
Everybody is hoping things are going to get better in a few weeks. So, a lot of times, landlords and lenders are saying, ‘OK, this quarter, we’re going to allow this kind of payment structure, whether it’s no-pay or interest-only, or whatever it is.’ Really, it’s just a way to kind of kick the ball down the field.
Their heart’s in the right place. They’re hoping things are going to go back to normal, and that tenant will pay their rent again, and they will pay their debt service again. A lot of them will, but some of them won’t. What they’re doing is, they’re abating the rent or delaying the rent. So, if a guy can’t pay his $5,000 a month today, next year, he’s got to pay $10,000.
You’re going to see a lot of problems because of that very thing.
Of course, PPP [Paycheck Protection Program loans] helps a little bit. I’ve never seen landlords so helpful to their tenants as they were helping their tenants get PPP. They wanted them to get government money, because a certain amount of that was allowed to go to the landlords. It’s unlike anything I’ve seen in 30 years.
You’re going to see a lot of people, already operating on thin margins, going to go underwater. It’ll be easier for them to go bankrupt and start over than it is to dig out of that hole.
I found it interesting that most of the brands you publicize are food chains and restaurant chains. But you don’t pigeonhole yourself as a food franchising agency. I’m curious why that is.
Forever, we have been approached by non-food franchise brands. And many of our existing franchisees are already franchisees of other non-food brands, and part of their portfolio theory is to own multiple brands — both food and non-food — in the franchise space. We specialize in working with big, multi-unit franchisees. And I’d say a good third of our franchisees are multi-concept, with some of their portfolio non-food.
We started to look for some non-food franchising. We have a home-based franchise called Golden Heart [Senior Care], which is home-based health care. We have retail that goes after secondary markets, called PayMore.
For us, it offers that flexibility of brands that we can work with. I don’t have a burger brand in my portfolio, because I’m quite proud of what we did with Five Guys. And, until I find something that’s better than Five Guys, I’m not doing it.
The same way with Chipotle (which is NOT a Fransmart brand). Until I find a better national burrito brand, I’m not doing it.
There’s only so many food concepts that we can get. You will see our portfolio growing with both food and non-food. The relationship with franchisees is the same. It’s still business assistance, and processes and procedures.
It’s interesting that you have slots. Five Guys keeps you from going after Smashburger or Shake Shack.
We don’t have a contractual non-compete. A lot of the burger brands we see out there, in my opinion, are just not as good as Five Guys. I just don’t want a brand in my portfolio, a secondary brand or tertiary brand. Just because I can sell a burger franchise doesn’t mean I should. I want to work with the next big thing. We look for concepts that have really high sales and really good margins.
What do you see as the impact of the pandemic on food retailing?
You have to look at spectrums of restaurants. Fast food and full service are both lower value on the spectrum, but they’re the best, which is where our portfolio is. You basically have to feed people where they want to be fed, when they want to be fed, and how they want to be fed. With COVID, you have to make people feel very smart and very safe using your concept.
Our premise, because of the government regulations, was also another tweak. Think about Tom Colicchio or any celebrity chef. Those restaurants are the ones that struggled the most.
The ones which had all the increases were all the quick-service and fast-casual guys: like McDonald’s, the Wendy’s, the Starbucks, Panera. Everybody, all their sales were up, due to the underlying foundation: there’s 350 million people in America, and everybody wakes up hungry and they’re going to eat something.
You just took the same number of people and reduced their options. Like, you took a sporting event, and everyone goes out for a hot dog or a Coke during intermission, and the lines are really long. That’s what’s happening right now with a lot of fast food and fast casual. So, those guys are really killing it.
And, also, the whole disinfecting and disruption with ghost kitchens and stuff like that. That’ll turn out to be a big nothing. Only about 5 or 10 percent of the total people chasing that will actually do well, the rest of them are going to go away. The whole idea of creating a ghost kitchen business was because a lot of restaurants were not doing off-premises well. And, because of COVID, they had to become experts at it.
So, now, you saw Grubhub, or one of those guys, cut their fees in half. So, these off-premises guys cut their fees to the restaurants in half. They don’t do that because they want to. They do that because they have to. Because restaurants are getting better at it.
People are going out again, but they have fewer places to go. There are fewer competitors. So, restaurants are starting to increase their prices, and they’re starting to reduce the number of items on the menu. Customers, right now, are just happy to get a table. They’re not so price-sensitive.
I was at Carrabba’s [Italian Grill] the other night and the Carrabba’s menu was down to two pages. They have a full-service, carry-out area; they have curbside pickup. For a lot of people, that’s the only way they’re going out to eat.
Tell me the status of the one-off shop on the corner-type restaurants and stores that people tend to feel sentimental and nostalgic about?
I feel the same way. I have some restaurants that are my favorites, and retail stores, and local neighborhood shops and restaurants, the independent stores that you went to all the time. There was a Mail Boxes Etc.-type store, but a local version of it. I quite liked it.
I’m still very much a fan of mom-and-pop retail shops and restaurants. But, unfortunately, a lot of them aren’t going to make it. At the end of the day, I’m still going to need my services. I’m still going to want to go to a restaurant, and I’m partial to going to an independent, to the extent that I can.
I live in New Jersey, and we’re bombarded for ads for Pizza Hut, Domino’s and Papa John’s. But it’s Jersey — we have more Italian people than Italy. There’s a pizza place on every corner that’s as good, if not better, than those franchises. And they somehow survive.
Most of those chains are going after the value-oriented customer, people who want quality. Quality is a relative term and value is a relative term. I would probably be an Angelo’s customer, even if it were slightly more expensive.
Throughout history, independents have survived. The closure rates, though, are happening faster with independents than they are with the chains. There are a lot of reasons. When PPP came around, the National Restaurant Association actually had to go to Capitol Hill lobbying for their members to get money. That’s a benefit of being a member of the association.
Most independent restaurants don’t have that. They don’t have that kind of support structure. And I would say the same about independent hotels, independent service businesses. When you’re part of a chain, you have a whole organization that has aligned interests, and you are all paying to have this co-op approach for support and services.
Do you think Fransmart poses a threat to the one-off retailer?
No more than anything else. We actually take one-off retailers and make chains out of them. So, in a way, those are my markets. My card is defined by one-off independents that do something better than everybody else. And I’ll help them make a chain out of them. I’m proud of that.