by Simon Lord
last updated 18/05/2015
BORNE to the USA
by Simon Lord
last updated 18/05/2015
When the news broke in January that US company Franchise Brands had taken a stake in New Zealand’s very own BurgerFuel, the reaction of the financial markets was immediate and ecstatic. BurgerFuel’s share price immediately jumped from $1.50 to $2.70 and by the next day had more than doubled in value.
The news impressed many in the franchise sector, especially the local franchisors who were about to set off for the US themselves on a visit to the International Franchise Association convention. We talked to BurgerFuel Worldwide’s CEO, Josef Roberts, and some of those on the latest trip to find out more about prospects for New Zealand companies in the world’s biggest franchise market.
Who are Franchise Brands?
Franchise Brands LLC was created in 2005 as a vehicle for investing in emerging companies which are either already franchising or have the potential to do so. Its founders, Fred DeLuca and Dr Peter Buck, are better known as the creators and owners of Subway, the world’s largest restaurant franchise.
The deal will give BurgerFuel, which has already established itself in the Middle East, access to the vast experience of the people behind the success of Subway in markets around the world. Franchise Brands has initially taken a 10 percent stake in BurgerFuel Worldwide, with the option to increase its stake to up to 50 percent.
Why are they interested in BurgerFuel?
Josef Roberts and BurgerFuel founder Chris Mason connected with Fred DeLuca and Franchise Brands’ managing director Lisa Oak at the International Franchise Association’s (IFA’s) convention in Las Vegas in 2013. ‘They were looking for alternative concepts and we had one ready to show,’ Josef explains.
‘While the US food sector is saturated in many respects, the market for gourmet burgers is only just getting started there so it’s about being better than anyone else. BurgerFuel offers a high quality, healthier product and has always aimed to be ahead of the game with choices like gluten-free buns, low fat fries, vegetarian options and free range chicken.
‘The brand plays a key role, too – we’re a high energy business with a distinctive image and do things that other companies don’t. But, along with all that, we can also demonstrate that we’ve constantly invested in building a solid infrastructure behind the brand. We’ve not opened stores in a rush; instead we’ve steadily grown and demonstrated our ability to scale up our systems and marketing accordingly as we’ve entered new countries. And, of course, being a public company gives us a reassuring level of transparency and governance.’
What are the benefits?
Although BurgerFuel has successfully established itself in the Middle East, an earlier excursion into Australia was less successful, demonstrating the difficulties facing franchises seeking to enter more established markets. The deal with Franchise Brands gives BurgerFuel a significant advantage by giving them access to Subway’s area developers and franchisees in the US and other countries. ‘There are a lot of very experienced operators and developers within Subway, and BurgerFuel could give them the opportunity to expand their empires in a whole new sector,’ says Josef.
‘From our point of view, we gain access not just to those people but to the expertise and contacts Subway has built up in so many areas: operations, systems, support and, vitally, assistance with real estate, leasing and establishing supply chains. Those are huge challenges when entering new markets so it gives us a real head start. We’re now working with senior executives from Franchise Brands and Subway to put all the pieces in place. We’re not in a hurry – we’re taking the time to do our research and do it right.’
Josef says that while the new partnership has global possibilities, the immediate focus is on the US where there has been talk of opening 1,000 stores over 8 years. ‘That’s where we want to go – that’s the country to get scale,’ he says, firmly. ‘We’ll identify a region, a city or a state and establish ourselves there before rolling out nationally. That will enable us to test the market and the supply chains.’
Articles in the New Zealand media raised concerns that US agricultural protectionism could make life difficult for BurgerFuel, but Josef says that was somewhat exaggerated. ‘Look, BurgerFuel sells grass-fed beef in New Zealand and our preference is for free range, hormone-free, sustainable products. We want to maintain those standards, but we sit outside the price-driven commodity market so it’s not such an issue. We’ll export some products from New Zealand, especially at first, but ultimately it comes down to economics and consumer taste. BurgerFuel has always wanted to be an international brand and that’s where we’re going now.’
It’s a statement that reminds me of something Josef said to Idealog magazine back in 2006: ‘To me as an entrepreneur you haven’t really made it until you can build a global brand. Take a brand from New Zealand and make it global! If I could achieve that, I would feel that I’ve made a contribution to New Zealand and also to myself.’
The Next Wave?
Auckland lawyer Stewart Germann has been a regular visitor to the annual IFA Conventions and this year led a small group of New Zealanders eager to find out more about the realities of franchising there.
‘Until you’ve been, it’s hard to understand just what a massive industry franchising is in the US,’ he says. ‘At this year’s Convention, which was held in New Orleans, there were over 3,400 delegates and the accompanying expo featured over 200 stands from service providers. It’s pretty high powered, but at the same time people are friendly and approachable and eager to talk.
‘We joined the Australians for a 3-hour briefing session at the start of the Convention and it was fascinating to hear the experiences from some of those who had already been doing the groundwork for launching systems in the US. John O’Brien from Poolwerx, which is an award-winning system in Australia, said they were on their third attempt to find the right partners there, with previous efforts being stymied by timing issues of private equity pull-outs. Getting the right partners is clearly vital, so don’t give up!’
In addition to the Convention itself, New Zealand delegates also enjoyed one-on-one meetings arranged by Stewart with a number of franchisors, consultants and lawyers as well as Steve Caldiera, the president and CEO of the International Franchise Association.
‘Stewart seemed to know everyone – he was awesome,’ chuckles Derek Lilly of Dream Doors. ‘I found the whole event extraordinarily valuable and if you’re thinking of taking a franchise to the US it’s great to have all the people you need to speak to there in one place. That’s not to say it would be easy: in fact, the US is clearly a minefield when it comes to legal and compliance issues and you need to build up a certain level of knowledge before you can even begin to know what you don’t know.
‘My impression is that if you can find the right partner to pair up with, as BurgerFuel have, you can save a lot of time and money and avoid a lot of the pitfalls. Attending the Convention has certainly changed my plans about how to approach the US and I’ve met some interested parties already. I couldn’t recommend it more highly.’
A Lesson Learned
Galvin Bartlett of Paramount Services agrees that America is a whole different world. ‘The size of operations in the US never ceases to amaze me. You know how it is – I was sitting with this really nice guy and explained we have 140-plus units in NZ. He sounded really impressed and then let it slip that he has 3,000 franchisees in his company!
‘For me, the most impressive speaker was Cheryl Bachelder, CEO of Popeyes Louisiana Restaurants which has over 2,200 stores. In 2007, the company was in trouble with unhappy franchisees, declining store sales and a low share price. She said that when she came on board, the most important challenge for her and her team was to identify whether the success of the business was reliant on satisfied customers, shareholders or franchisees. Ultimately, they resolved that franchisees were the key stakeholders: if they were satisfied and making money, they would look after their customers and the company would prosper. They then began to focus on listening to franchisees.
‘An initial plan to revamp the stores was rejected by franchisees as too complicated and too expensive. Rather than defend their plans, the franchisors listened and returned to the drawing board. It took them two years to come up with an alternative but, once implemented, the stores began turning around. Since then, Popeyes has increased sales and market share, franchisee profits have risen dramatically and the share value has followed. It all came down to listening to their key people – the franchisees.’
Stewart Germann believes that the US offers huge opportunities for New Zealand franchises ready to take the plunge. ‘From what I’ve seen, our better systems could more than hold their own in the US market, particularly if they find the right local partner.
‘Of course, you have to do your homework with a proper competitive analysis and entry plan and, before you start making noises, ensure your intellectual property is properly registered – you don’t want to have your ideas stolen before you start.
‘The other big thing to consider is where you commence operations. The US not only has Federal disclosure documents but 15 states have their own legislation, too. There are heavy fines for non-compliance so you don’t want to get it wrong. Pick your starting point, take advice and take care.
‘If you do all that, you have access to a market of over 300 million people and the opportunity to build a global brand. Companies like BurgerFuel are leading the way and it will be interesting to see who will follow in their footsteps over the next few years.’
Or, as Josef Roberts put it back in 2006 at the start of the BurgerFuel journey, ‘New Zealand is full of small businesses – it doesn’t need another one. Aim high!’