Hard to Believe, but Southland Has Room for More Franchises

For better or worse, Southern California is a magnet for franchising.

The region teems with franchised hamburger joints, taco stands and frozen yogurt shops as well as chains of hair stylists, grease monkeys and curtain cleaners. Not to mention maid services, emergency medical clinics and physical fitness centers.

That’s all fine if you’re on the prowl for a quick fajita pita or a lube job, but for people interested in buying or opening a franchise here, there are questions to consider. Is Southern California hopelessly overpizzaed and tacoed to excess? Or does the area simply have a nearly insatiable appetite for the retail chains?

The answers are likely to make architecture critics wince: Experts say that in most of the roughly 60 types of businesses that offer franchises, there is lots of room in Southern California for more competition.

To be sure, market conditions are trickier than before.

“Prime locations are getting tougher to come by, and the price of those locations are higher here than in other parts of the country,” says Edward Kushell, the head of Franchise Consulting Group in Los Angeles and a former president of the International Franchise Assn.

And someone opening another old-fashioned fried chicken or hamburger outlet, even at a good location, is likely to have a tough go of it.

But grill Mexican-style chicken and you might have a hit. Consultants say that in the fast-food business, ethnic and gourmet foods are getting hot. Chains that offer home delivery, such as Domino’s Pizza, are expanding, too.

Franchising is also flourishing in the personal and business services fields. With the rise of the double-income household, more and more people have the money but not the time or inclination to clean the house, polish the car or even watch the children. Consequently, outfits such as day-care chains are sprouting. In addition, California has a particularly hefty share of auto repair outfits and weight-loss clinics.

Sales Growing

In the business world, franchised temporary help firms--providing everything from secretaries to engineers to lawyers--are increasingly helping companies hold down their payrolls while managing peak workloads. Some experts say quick copy shops, on the other hand, have about hit the saturation point.

The boom in franchising locally dovetails with national trends. In a study conducted for the International Franchise Assn., the Naisbitt Group found that a third of the nation’s retail sales are chalked up by franchise outlets. And it projected that franchises will account for 50% of all retail sales by the end of the century.

Although no city-by-city statistics exist, many franchising experts say Southern California has more franchises per capita than any other part of the country. And the state ranked No. 1 in the U.S. Commerce Department’s most recent franchising survey; the study located 28,319 outlets in California in 1985, far ahead of No. 2 Texas, which had 20,457.

Inexpensive Labor

The experts say Southern California has fostered franchising because of its car-oriented life style and the ample supply of workers, particularly recent immigrants, who will work for low wages.

This area also long has been a testing ground for new ideas in retailing.

“People are more open to new ideas and changing trends,” says Santa Monica franchising lawyer Russell L. Berney. “It’s a good environment to take your shot.”

Successful franchise owners usually aren’t big risk-takers, however. In fact, the relative security of a franchise is its most tantalizing attraction.

By some accounts, 65% of independently owned businesses fail within five years of opening. But according to the Commerce Department, only 5% to 10% of all franchises close--for any reason--during that span.

Backup Comforting

That kind of assurance was what drew Saleem Baakza, co-owner of a company that has two Numero Uno Italian Restaurants outlets in Los Angeles, into franchising three years ago. Like most franchise owners, Baakza, 38, long had a yearning to open his own business. But he didn’t want to risk his life savings on a long-shot investment.

Besides, the idea of getting logistical help from a franchising company was appealing.

“When you run into problems, there’s always someone you can call,” says Baakza, who worked for hotel and food firms before going out on his own.

Other franchisees point to the advantages of the parent companies’ training programs and consulting services, along with the increased buying power and advertising clout.

Independence Lost

“They can bring in people with a lot of expertise who I wouldn’t be able to afford,” says Joyce Vinje, part owner of four Scandia Downs bedroom furnishing shops in the Los Angeles area.

In exchange for that expertise, however, franchise owners forfeit a large measure of their independence. An outlet in Pacoima could be required to stock the same merchandise as a sister franchise in Peoria, Ill., and both might have to buy all of their supplies from the parent company.

“If you have the inventive, creative spirit . . . don’t apply,” says Sherman Oaks consultant Donald Wilson. “You have to be a follower if you want to be a franchisee.”

Costly Entry

Franchisees also pay dearly for the right to join a chain. Just to enter the business you have to pay the parent company what’s known as a front-end fee. Then you might need to acquire real estate, equipment and supplies. In the case of a McDonald’s, all that easily can add up to more than $500,000.

Further, franchisees are required to pay royalties of 2% to 10% of their sales and national advertising fees of perhaps another 1% to 3%. Smaller, miscellaneous fees pile up, too.

Moreover, as franchising companies get bigger, they often pack outlets closer together in weaker locations.

“I have seen some of the better companies get into locations they have no business getting into,” says Kushell, the Los Angeles consultant.

Consequently, profit margins can be thin.

Franchising has also been fraught with scams. A 1984 report put out by the Council of Better Business Bureaus and the North American Securities Administrators Assn. estimated that swindlers fleece U.S. investors of more than $500 million every year through bogus franchising schemes and other supposed business opportunities.

Stiff Demands

Alan Weinger, an enforcement lawyer with the California Department of Corporations, says rip-off artists here prey especially on new immigrants “who don’t understand what they’re buying.”

“They put down $10,000 or $20,000 to buy their cleaning franchise or another type of franchise, and then the company just takes off, and leaves them high and dry, or doesn’t give them adequate support,” Weinger says.

Berney says even legitimate franchising companies frequently place onerous demands on their affiliates. He says they might, for example, require outlets to add products that will increase revenue--and thus bring higher fees to the parent company--while trimming the franchise operator’s profit margin. Some fast-food restaurant operators, Berney says, have had that experience with salad bars.

Clashes Common

In fact, clashes between parent companies and franchise owners are common. Rarely, though, do they get as intense as they are at Pioneer Take Out, a Los Angeles fried chicken company being sued by dissident operators for alleged fraud and misuse of funds.

All told, franchising remains attractive for many people. The typical candidates are victims of corporate layoffs or 40-ish executives who are frustrated with or bored in their jobs. In Southern California, Asian immigrants--whom franchising companies widely regard as hard working and not very litigious--often migrate to franchising, too.

“There’s no shortage of people willing to jump in with two feet,” Kushell says. “They keep coming, and coming, and coming.”