Franchisers Pin Hopes on Minority Entrepreneurs
They’ve been deemed nothing less than “the future of franchising.” Once rare in the largely white male world of franchising, minority franchisees have become one of the industry’s hopes for long-term growth.
Suburban locations have largely been picked clean by retail franchises, and the downsized managers that once formed a ready pool of would-be franchisees has dried up in the heat of a strong economy. So more than ever, minority entrepreneurs represent an untapped source of talent. They are also serving as an entree to urban minority neighborhoods shunned by retailers for decades.
And in an era when more and more of the nation’s consumers are nonwhite, diversifying the industry makes simple demographic sense.
From fast-food restaurants and motel chains to tax preparers, janitorial companies and vitamin hawkers, franchisers increasingly are marketing their businesses through minority publications and trade fairs. Some have launched financing programs catering to minority recruits. Others are pairing with community development organizations to plant stores in urban zones where state and federal tax breaks apply.
“We have realized that demographics are changing,” said Debbie A. Smith, vice president of emerging markets for the Washington-based International Franchise Assn. “Minority groups that have historically been overlooked have spending power. Suburban communities have been over-saturated. The next stage is to take a look at urban America. Who is in those communities? They tend to be predominantly minority.”
Industrywide, minority participation remains low because the required financing is prohibitive; minority entrepreneurs tend to have less equity to leverage than their white counterparts. Also, many franchisers do not market their programs to minorities. Still, efforts to mine minority talent have intensified.
For some corporations, such as Denny’s and Texaco Inc., the initiatives were born out of necessity after high-profile discrimination scandals in the mid-’90s. But for many, the push to lure minority franchisees has taken on the tone of cold economics.
“There’s a saying in tennis: You hit the ball where the guy’s not,” said Russell Smith, director of global franchise sales for Athlete’s Foot, which increased its ranks of minority and women entrepreneurs from 11% in 1996 to 28% today, about a third of those minorities.
Other corporations are stepping up to the plate: When Leighton Hull phoned Denny’s in search of a franchise opportunity in 1995, barely a year had passed since its $46-million settlement of two class-action discrimination suits, and the restaurant had only one African American franchisee. Today, Hull owns 10 restaurants in California and Hawaii, including three in Ventura County. And one-third of Denny’s franchisees are minorities.
“My feeling was there were some growth opportunities with Denny’s,” said Hull, president of Oxnard-based Golden West Foods. “They were looking to diversify, and they need a few good people.”
AFC Enterprises Inc., parent to Churchs Chicken, Popeyes Chicken & Biscuits and Cinnabon, has also made diversifying a core mission, hoping to match its largely minority customer base with minority owners. Forty-nine percent of Churchs franchisees are minorities, as are two-thirds of those who have come on board in Southern California in the last year, company officials said.
This year, a business development director was named solely to mine California’s minority markets, and the corporation joined the Los-Angeles-based Asian Business Assn. to search for recruits. Both Athlete’s Foot and Churchs work to help finance minority entrepreneurs or direct them to funding.
Some corporations--most notably McDonald’s--have reached out to minority franchisees for decades. But for most, the efforts are young, and industry statistics show it.
Although minorities are starting independent businesses at three times the rate of the overall population, their growth rates still lag in franchising. According to a report released last year by the Small Business Administration, minorities accounted for only 9.6% of the 53,000 franchisees surveyed, down from 12% of those surveyed in 1992. The study, prepared by Chicago-based Women in Franchising Inc., drew on 1996 data and showed African Americans gaining slightly since 1992, Latinos holding steady and Asians losing ground.
“It’s piss poor,” Women in Franchising founder and President Susan P. Kezios said of the industry record. Kezios, who also heads the Chicago-based American Franchisee Assn., said many franchisers don’t track minority representation and do no minority recruiting. Others offer unfavorable financing arrangements in their minority programs, she said.
But key to the dismal showing, most agree, is financing. Many minority entrepreneurs have more difficulty securing initial financing, which can run as steep as $1.5 million for some franchises.
According to the study, franchisers with no financial assistance programs had only 3.7% minority participation, but those that offered direct assistance such as loans, loan guarantees, equipment leases or waivers of franchise fees had three times that.
In some industries, such as hospitality, the costs are highest. South Asians of Indian descent dominate the motel industry, but representation of other minorities is almost nonexistent.
“What the African American and Hispanic potential franchisee will look at is what are the alternative uses of the funds they have. . . . You could buy five Dunkin’ Donuts for one hotel,” said Michael Leven, president and chief executive of Atlanta-based U.S. Franchise Systems Inc., which acquires and markets franchises for Microtel, Hawthorn Suites and Best Inn Suites.
Leven founded the Asian American Hotel Owners Assn. a decade ago to fight discrimination against Indian motel owners. His company is a corporate sponsor of the National Assn. of Black Hospitality Allies Inc. and has sold five franchises to African American and Hispanic owners, but progress has been painstaking.
Despite the hurdles, the potential in franchising is not lost on minority business organizations and civil rights groups: More than 50 cents of each dollar spent by U.S. consumers ends up in the coffers of franchisers, according to the International Franchise Assn.
“People really don’t realize it, but in the morning they may get up and go to a Dunkin’ Donuts. During lunch they may go to a Subway or McDonald’s. They stop at the convenience store on the way home and the carwash they go to may be a franchise business,” said George Herrera, president and CEO of the U.S. Hispanic Chamber of Commerce, which is working with franchisers to locate qualified candidates.
Among the interested corporations: Churchs Chicken, Accor Economy Lodging and Choice Hotels International. A meeting last month with Choice has led that chain to talks with a Latino economic development group in the Bronx, where the dearth of lodging is so stark the court system houses nearly 20,000 jurors a year in neighboring Manhattan.
Part of the appeal to both parties: The Bronx is part of a federal empowerment zone that would bring tax and other benefits to the franchisee. Other franchisers such as Blimpie, Athlete’s Foot and Churchs have also targeted empowerment zones.
Tax benefits for Los Angeles’ empowerment zone only took effect this year and could provide an incentive to franchisers to locate stores here.
Franchisers stress they are seeking qualified minority candidates for all locations, not just underserved urban zones. But the drive to conquer inner-city markets has led to cries of redlining. Minority franchisees have sued Kentucky Fried Chicken, Wendy’s and Burger King alleging they were confined to low-income minority communities. The corporations deny the allegations.
Some entrepreneurs, such as Hull, have found success in suburban markets. But others have tackled neglected urban areas willingly, creating jobs and fostering a sense of community unmatched by corporate-owned stores.
Take Patricia Williams. With seven restaurants in predominantly African American neighborhoods--five in Lynwood and Compton--Williams employs more than 560 people. Her store near the Compton Civic Center became the city’s first new restaurant in 50 years. And a Lynwood restaurant offered that city’s first indoor playground.
Williams grants bonus checks to workers who bring home A’s on their report cards, and sandwich coupons to children who master reading through local literacy programs. Her employees served as tutors at one former restaurant--a homework center program she plans to launch at the new Compton location. And she dishes out college scholarships twice a year.
Although her restaurants were smeared with graffiti when she started, the trust she has earned reduced vandalism dramatically. That trust paid off in 1992, when buildings surrounding a restaurant she then owned at La Brea Avenue and Rodeo Road were burned to the ground during the Los Angeles riots.
As rioters approached, Williams emptied the safe and cash drawers, unlocked the doors and went home to bed. A new shipment of food stocked the fridges. That night, a call from her daughter awakened her. The store was on TV.
“They were interviewing a looter,” Williams recalled. “And he said, ‘We’re not going to touch that store because a sister owns it.’ . . . The people who were doing the bad things knew our restaurant and what we were doing in the community.”
Williams has seen steady sales increases since she bought out her then-husband in 1989, including 15% last year. Although financing for her initial stores was not easy to find, Williams said the McDonald’s name helped her get it.
Still, although franchising offers the brand name, product development and marketing talent unavailable to independent entrepreneurs, it is no cure for business woes.
Dale Ma launched his first San Fernando Valley Burger King in 1978 and now owns four healthy restaurants. But the road has been rutted. A McDonald’s opened down the street from his second store. And now, on the heels of a costly remodel, Burger King has come up with a new image. That means Ma may have to fork out an additional $100,000 to change his look.
Said Ma, “You become dependent upon the marketing and direction of the corporation.”
More Coverage
* Franchisees are banding together to shift the balance of power. C8
* International Franchise Assn. chief discusses women in franchising. C8
