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THE CHANGING FACE OF FOOD

by Simon Lord,
last updated 20/08/2014

McDonald’s are selling pies, school kids are buying sushi, you can eat like a caveman at your local café and Kiwis hold world sales records for two global burger chains. What’s happening in food franchising?

Image supplied by Columbus Coffee‘People always need to eat – it’s why food never goes out of fashion.’ That’s a common view that has made food the most popular sector in franchising for over 60 years. But while food itself may not go out of fashion, consumer tastes, menu ranges, delivery options and costs and margins certainly change. That makes choosing a food franchise quite a challenge for new entrants. Here’s our guide to current trends.

Healthy vs Unhealthy: What Sells?

You can hardly turn on the TV or surf the news-sites today without being aware of concerns about the obesity epidemic in western countries, the prevalence of Type 2 diabetes in New Zealand and scary stories about what’s really in our food. Given that the blame is usually put on the big brands (the most newsworthy targets),­ it’s no surprise that, in many cases, those same brands are publicising their healthy eating credentials. McDonald’s has made much of the reduced sugar and salt content in its products, and launched an entire website to answer consumer questions – strategically spending part of its advertising budget to promote the fact.

New brands are also emerging which specialise in what are perceived as ‘healthy’ food styles: wraps, salads, baked-not-fried products, Asian and Mediterranean cuisines, fruit juices, smoothies, and frozen yoghurts. There’s an increasing emphasis on low-carb, gluten-free, free range as well as Fair Trade ingredients as people remember, ‘You are what you eat.’

It’s worth noting that many of these trends gained ground at the same time as the price wars among the major players which followed the Global Financial Crisis (see below). As well as being a genuine response to changing tastes, the emphasis on food quality also helped food retailers to justify prices and preserve margins.

Yet at the same time, many brands – in some cases, the same ones ­– have also been promoting the sort of products that raise the blood pressure of healthy eating campaigners to dangerous levels. KFC’s Double Down Burger – two slices of deep-dried crumbed chicken with bacon, cheese and sauce ­­– is the most notorious example here. Despite reports saying it would take ‘an hour of intense exercise’ to burn off its 1939kj, it became a best-seller for KFC during its original promotion and was later added to the menu on a long-term basis. Pizza franchises offered stuffed crusts, McDonald’s was criticised for bringing back Georgie Pie and two chains, Wendy’s and Carl’s Jr, set world records for first-week sales at their stores in Christchurch and Henderson. So are consumers really changing to healthy eating, or are they reacting against being told what’s good for them?

Expanding The Menu

Peter Webster says that it’s not a question of one or the other. As General Manager (Operations) of Columbus Coffee, he’s in a good position to see changing trends at first hand because cafés have been major players in the eating-out revolution in recent years. ‘When Columbus opened its first café in Auckland 20 years ago, the focus was all on coffee – you might have biscotti with your latte but that was about it,’ he says. ‘But now cafés have become the places to go for everything from breakfast to full lunch and, often, on into the evening. Some are licensed and many – like Columbus – have chefs on-site preparing fresh food in every store. In some ways, cafés have evolved in New Zealand to fill the gap between fast food and full-service restaurants.’

Part of that evolution has required Columbus to address the demands for healthy eating options in its increasingly-educated target market, and it has chosen to do so head-on. Last August, after a year-long project, it launched a collaboration with Healthy Food Guide magazine (readership: 400,000!) which saw a range of low-fat, low-sodium items added to the menu of its 50-plus stores around the country. In addition, the Healthy Food Guide team also helped Columbus review its existing menu items, adjusting ingredients, cooking techniques and portion sizes to improve results across the board while retaining the all-important margins. ‘The result has been very popular with our customers who like knowing they can get something that will fit in with their nutritional guidelines at Columbus, whether that’s a caveman-style paleo breakfast or a gluten-free cake,’ says Peter. ‘But they don’t necessarily do it all the time: one day a customer will have a healthy wrap, the next day they’ll feel like eating a sausage roll. Whichever they choose, they’ll know it’s been freshly-prepared on the premises and will have been made from good ingredients. I think that’s what we’re seeing – a trend to healthy food without abandoning the old favourites. People enjoy having the choice.’

The Columbus approach has been mirrored by many food businesses in the past few years, with the 2013 Consumer Foodservice in NZ report from the Euromonitor research service finding that: ‘Fresh and high-quality ingredients became important, along with menu choices which offered both low-priced simple meals along with more premium higher-priced options. Those operators which expanded their menus to offer a wider choice performed well in 2012, as did operators which offered healthy food options such as low-fat, low-carb and gluten-free products.’ The report also noted the addition of items such as wraps to many menus, including those of McDonald’s and Burger King.

The Market Is Growing Again

  In fact, food sales generally are looking up: the good news for food franchisees and franchisors is that the eating-out market is growing again. The recent retail sales data from Datamine, which is based on electronic card transaction figures from Westpac, shows that spend in the café/restaurant/bars category in February 2014 was up 6.6 percent over the same month last year, and 6.3 percent over the same quarter. Figures from Statistics New Zealand likewise show more than 5 percent growth for every quarter but two between September 2011 and December 2013.

‘Growing sales is a positive sign, but of course it’s not the whole picture,’ says Daniel Cloete, Westpac’s National Franchise Manager. ‘Food businesses are dependent not just on sales but on sustaining good margins (see page 54). Happily, these have also shown signs of improvement over the last year or so. For those franchises which have the right mix of customer appeal and business model, and which have taken the opportunity to adjust their offering to meet changing tastes, the future is looking positive.’

Dean Madsen, Daniel’s colleague, explains that although high-end restaurants suffered immediately when the Global Financial Crisis hit, there was a ‘down-sizing’ of the eating-out experience which meant that many middle-of-the-road and fast food franchises continued to do well for a couple of years. ‘Then the competition stiffened and you started to see a shift to price-based promotions,’ he says. ‘McDonald’s introduced its Loose Change menu and Pizza Hut launched $4.99 pizza. These were aimed at gaining more customers, although at lower margins. What the big boys do affects everyone else in the industry so that had a major impact for six to nine months ­– long enough for many people to say, “That was a lousy year!”

‘But over the last year the focus has moved away from the discount model and back on to new products and flavours, so margins have recovered and franchisees are looking forward to better times ahead. The lesson for everyone, though, is that when they buy into a business, they do need to ensure they have enough capital to get through a rainy day.’

New Tastes, New Delivery

With the food sector bouncing back, then, what new flavours should potential franchisees be looking for to tempt the Kiwi taste buds? The most obvious new segment to emerge in recent years is Mexican, with brands such as Mexicali Fresh and The Original California Burrito Company establishing Tex-Mex style food chains in New Zealand for the first time. The Original California Burrito Company has folded, seemingly brought down by financial issues larImage supplied by Mexicali Freshgely unconnected with its trading, but Mexicali Fresh is going from strength to strength. The brand has advanced dramatically from the early days in 2005 when, before the staff at its first store could be trained in making a burrito, they first had to learn what a burrito actually was – a cultural divide that the American founders of the chain had not expected.

The Mexicali Fresh experience is in stark contrast to that of Restaurant Brands, which for many years looked at importing the Taco Bell system to operate alongside its KFC and Pizza Hut brands. With Mexicali Fresh and others offering a perhaps less bland experience, it may be that Taco Bell’s time has now passed – if it ever existed. While Restaurant Brands’ CEO Russel Creedy still hasn’t ruled out the possibility, he has recently talked about looking for Asian brands instead. Currently, few such brands have taken hold in the franchise space in New Zealand, despite our increasing Asian demographic. To some extent, the ease with which independents can operate in this market makes it hard for franchise brands to gain traction and offer a significant advantage. This lack of barriers to entry is also one of the reasons given for The Mad Butcher’s withdrawal from developing Yögg, its frozen yoghurt franchise.

Where Restaurant Brands has scored a huge win is in the (non-franchised) Carl’s Jr. brand, which has found a lucrative niche in what many might have regarded as one of the most over-crowded markets of all – burgers. Carl’s Jr fits neatly into the space between the family burger outlets like McDonald’s and the gourmet chains such as BurgerFuel – a grown-up experience for bigger appetites. The company has been criticised for targeting lower socio-economic groups with its store location policy but there is no doubting its success.

Carl’s Jr. and Mexicali Fresh have one thing in common – they both operate in what is called the ‘fast-casual’ segment. Fast-casual restaurants are a more upmarket version of traditional quick service restaurants like McDonald’s which combine a counter service model with a more premium product and environment. Following the GFC, they became one of the fastest-growing parts of the food sector in the US, enabling customers to retain the eating-out experience while spending less money.

Meanwhile, there’s considerable interest growing in the casual dining/family restaurants segment, too. Old favourite Valentines has been remodelled, even older favourite Cobb & Co is under new ownership, while local chain Breakers has been joined by Australian franchise Hog’s Breath Café in the bar/café sector. US chain TGI Friday’s is also reportedly looking for sites. The casual dining sector is to some extent approaching the same market aspired to by cafés such as Columbus, Robert Harris and The Coffee Club, but is coming from the opposite direction as both segments seek to widen their appeal.

The takeaway area is also seeing the development of new items as operators stake claims to their niche. We’re seeing the growth of bagels (baked not fried – after that, how healthy they are depends on your choice of filling), smaller premium pizzas, and specialist outlets like Pie Face that offer a wide range of baked products. Existing operators are offering snack size fast foods at one end of the spectrum and family dinner packs at the other. All have coffee and other drinks as an important (high margin) part of their offering.

Finally, it’s worth noting that Entrepreneur magazine in the US has ranked a company called Fresh Healthy Vending among the fastest-growing franchises in its 2014 Franchise 500. Their machines feature such items as fresh fruit, juices, yoghurts and smoothies.

The Challenge of Change

While expanding the menu might attract the broadest possible range of customers – or attract existing customers to return more often ­­– it increases the challenge for operators. ‘Change is always a tricky thing to manage in a franchise group,’ admits Peter Webster of Columbus. ‘Franchisees need to be convinced of the benefits before they will come on board, especially if there are financial implications such as new equipment. When we launched the new menu we put a strong case to them for the changes and 80 percent of them came on board pretty much straight away. Feedback from them was fantastic and it’s now well-accepted across the group.

‘Of course, training the chefs in new recipes and different cooking techniques was interesting – chefs are generally individualists and they are always under pressure to produce things quickly. But part of what we were doing was returning to more traditional techniques such as sweating vegetables to get the best out of them and preserve flavour rather than adding salt, fats or sugars. We produced some training videos and now we’re going into every store ensuring consistent implementation on the core products and finding ways to get the best out of the local favourites. It’s worth noting that in the latest cafés which have opened with the new menu right from the start, the food sales have generally been fantastic.’

Smaller Footprints & On The Road

As always in the food business, costs are critical with food, labour and rent all under constant scrutiny. Of these, it’s probably rental costs that are creating the greatest changes. Retail spaces are getting smaller, with operators trying to achieve more sales from less space – something that puts the pressure on on-site cooking. In the major cities, we are increasingly seeing ‘hole-in-the-wall’ type businesses which have minimal frontage and, often, minimal space behind. Kiosks and ‘pop-up’ buildings are also proving popular, with The Coffee Guy and Muzz Buzz pioneering drive-thru kiosks on busy commuter routes. Such options minimise capital outlay and rents and can be prefabricated and fitted-out in advance to minimise the time between establishment and earning. They can even be moved to new locations if required.

Picture supplied by Mr Woo SushiFor ultimate mobility, of course, nothing beats the type of van-based operations which have been popular since the early days of Mr Whippy. In recent years, these have expanded both in the types of food they serve and the areas they service. A Cafe2U van, for example, might be sitting beside a main road in the early morning, driving round an industrial estate for mid-morning tea, servicing an office park at lunchtime, and at a jazz festival on Saturday night or a sports event on Sunday morning. As Adam Parore of Mr Woo Sushi suggests elsewhere in this issue, there’s another ready market in delivering to schools (where ‘healthy’ products such as sushi and wraps are likely to be encouraged over, say, pies) and even in the take-home market for evening meals.

But when it comes to sales, there’s nothing to beat foot traffic going past the door and this is a market where the big landlords and mall operators have shown little inclination to reduce rents despite the challenges of recent years. ‘In fact, most leases have “ratchet” clauses which enable rents to go up but not down,’ warns Daniel Cloete. ‘This makes it all the more important that tenants do their homework properly and ensure that the franchise business model they select is truly able to cope with the pressures imposed by sales or seasonal fluctuations.’ (see Funding a Food Business)

The Multi-Unit Challenge

A US franchise commentator recently suggested that the days of the single-unit food franchisee – the owner/operator who works in his own store – were over. According to him, food industry franchisors were now only interested in large franchisees who would own multiple units, as they required less training and less support on an ongoing basis. At a time when many franchisors have found it difficult to recruit new franchisees because of financial and confidence issues, granting units only to multiple operators has a lot of appeal. It’s an approach that’s already being taken by Pack & Co, promoters of the Shaky Isles café brand, and is being promoted to some extent in Australia. Can we expect to see it grow here, too?

‘I think you need to look at what they mean by “multi-unit franchisees” in the US,’ suggests Westpac’s Dean Madsen. ‘They have some massive operators there who have literally thousands of units; the franchisees are corporations in themselves with whole extra layers of management. In New Zealand, Restaurant Brands is the only company that really operates the same way – our concept of multi-unit tends to be a lot smaller.

‘Here, McDonald’s encourages multiple ownership but I think their average would be three to four restaurants per franchisee. A few might have 5 restaurants and 250 staff, but at that scale being a franchisee is a totally different matter from being a single-unit operator. The multi-unit franchisee’s role is managing their managers, rather than managing the detail of the restaurants themselves.

‘From a franchisee’s point of view, owning multiple units might seem very attractive. After all, if you buy a franchise and it’s successful, why not invest in another? You have trained managers and staff and can enjoy some flexibility and economies of scale. But while that might work for two or three outlets, after that it all gets a lot more difficult. You need different skills and you need to put some sort of corporate structure in place. You need to be a CEO, not just a good operator. If you have those skills or can develop them then yes, multi-unit could be a great way to grow, but if you don’t then you’re just increasing the risks and storing up trouble and stress for yourself.’

Dean says that he can see why franchisors would be tempted to grant multiple units to good operators. ‘They already know and trust the system, they can get new outlets up to profitability faster and it takes away some of the risks for the franchisor. But I’d suggest it works a lot better in a highly-developed system like McDonald’s, where it’s a proven route, than it would in a lot of other franchises. Until a franchise has really strong, well-proven systems in place, it’s a real challenge to have multi-unit franchisees. That’s probably why we’ve really only seen multi-unit operators here in the big international brands like McDonald’s, Subway and Domino’s so far.’

Peter Webster also makes some pertinent points. ‘In the café industry, customers appreciate being greeted by the owner, and staff respond better if the owner is on site. From my days in the pub industry in the UK, I can tell you that independently-owned pubs probably traded 10-15 percent better than managed pubs. If you have 1500 pubs then a few percent here or there aren’t an issue because of the economies of scale you’re achieving elsewhere, but in a small franchise in a small country, it’s a very different matter.’

 So will multi-unit franchising take off in New Zealand or not? ‘To some extent, yes,’ suggests Dean. ‘We have some very strong locally-developed franchise systems here now, and some of them will have franchisees with the management experience and the hunger to grow. But I don’t see multi-unit franchisees taking over the food industry – as Peter says, New Zealand just isn’t large enough to make that happen.’

Finding A Healthy Business

For anyone looking to buy a food franchise, then, there is plenty to think about. It’s not just what’s hot and what’s not? Fashions change, so which franchises have shown that they are responsive to change and have proved they can roll with the economic punches? Which are affordable right now, and which offer the best long-term prospects? And if you dream big, which franchises might allow you to grow beyond a single unit to managing your own little empire?

In the following pages, you’ll find plenty of advice on how to find the right franchise, how to fund it and how to make it profitable. There are also profiles of many different types of food (and other) franchises. One thing is certain – whether the trend for healthy food keeps growing or not, there are plenty of opportunities out there to create a healthy business of your own.

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