Retail franchises have long been dominant players in the pet industry. However, while joining a pet store franchise or franchising an established retail concept may be attractive options, neither move should be made without significant due diligence.
From McDonalds to Ace Hardware, franchises have long been a significant force in American retailing. The pet specialty industry is no exception. The two top pet specialty franchises, Pet Supplies “Plus” and Petland, are among the most successful retail players in the industry, ranking high atop Pet Business’ 2009 list of “Top 25 Pet Specialty Chains” in North America, with 230 (now 236) and 184 locations, respectively. In fact, both franchises fell within the top five in the past three editions of the “Top 25” list, behind only PetSmart, PETCO and Pet Valu (a Canadian pet specialty franchise).
It’s not surprising that franchises have fared well in the pet industry. For consumers, the brand recognition offered by franchise stores often implies quality and value. On the other side of the equation, for retailers, buying into a franchise offers not only instant brand recognition that’s sure to attract shoppers, but also valuable guidance and support services from seasoned retail pros. Finally, for successful pet store operators, franchising a retail concept can be a great way to grow their success exponentially for a fraction of the cost that would be involved if they were to expand the business on their own.
Of course, all of the benefits that come from operating a franchise location come at a cost. Buying into one of the prominent pet specialty franchises will require a considerable initial investment–anywhere from $200,000 to $1,000,000 [see sidebar entitled “What’s the Cost”]. This includes many of the start-up costs that come with launching any retail business, but also additional franchise fees that can range from $25,000 to over $30,000. What’s more, most franchisees must also pay ongoing fees and/or royalties that can reach up to five percent of the store’s sales.
While buying into a franchise or franchising a successful retail concept may seem like attractive options, there are many considerations that must be made before any moves are made in either regard. Because of the significant investment (in both capital and effort) involved in both situations, the prevailing wisdom seems to be “do your homework.” Depending on which side of the equation a retailer falls on, this will mean evaluating each available franchise opportunity to see if it would be a good fit, or investigating whether or not an established store would be viable as a franchise situation.
Franchises Faring Well
The current recession has impacted just about every retail segment, including pet stores. However, the widely recognized recession resistance of the pet products market has somewhat shielded pet specialty retailers from the worst of the economic storm, and that includes the industry’s top franchise players.
According to Mark Lauten, vice president of franchising for Farmington Hills, Mich.-based Pet Supplies “Plus”, the company’s retail outlets have made it through the past 24 months in great shape. “We’ve never been stronger than we are today,” he says. “I’ve had numerous franchisees report record sales for [2008 and 2009].”
Other pet specialty retail franchises reported similarly strong sales despite the general economic malaise that has affected consumer spending since 2008. “Even in today’s volatile business climate, the interest in pet and pet supplies continues to impress us and it also gives us great hope for the future,” says Steve Huggins, franchise development manager for Chillicothe, Ohio-based Petland Inc.
While several of the pet specialty franchises did see a nominal number of store closures over the past two years, for the most part, these were attributed to the shortcomings of individual store operators, rather than the recession’s impact on sales. What has been a bigger concern to the franchise players has been the tight capital market, which has put a crimp in many of their growth plans.
“New sales in the franchise category have slowed,” notes Anne Barr, president of the Dallas-based Franchise Opportunity Specialist consulting firm. “Most of that is because of the economy–not because of the brands or because of the franchise industry, but because people can’t get funding.”
This sentiment was echoed by Larry Bedell, franchise consultant for Kansas City, Mo.-based Three Dog Bakery “The capital market has just been horrendous, and the inability to borrow money is what has slowed us down,” he says. “We have several potential franchisees that simply can’t get the money to open a bakery as easily as they could have 24 months ago.”
Roman Versch of Glendora, Calif.-based Labrador Franchises, Inc., which operates the Pet Depot franchise, has also noticed that securing start-up loans has become significantly more challenging. “Any franchise funding that has recently been done has taken longer as the banks are very cautious and require more collateral and cash contribution to the projects,” he says.
However, despite the tough climate for financing, all of the franchises Pet Business spoke with reported some growth over the past two years, including 12 new locations for Pet Supplies “Plus” and nine store openings for Three Dog Bakery. What’s more, each cited aggressive growth plans for 2010 and beyond. For example, Bedell says that Three Dog Bakery’s goal is to go from 50 to 250 locations over the next five years.
Buying into an established franchise can be a very attractive option for many entrepreneurs. After all, the franchisor has already done much of the heavy lifting required to build brand recognition and an operational system that has proven successful. By opting in, a new franchisee instantly benefits from these efforts, as well as the ongoing support services provided by the franchisor.
“The main attractions of a franchise for an entrepreneur are the training and support, and the fact that it’s a proven concept,” says Barr. “Those things make it very attractive for somebody going into business for the first time.”
Some of the support services offered by just about every pet specialty franchise include finding the right location for the store, training store managers, developing and updating staff training materials, creating advertisements and in-store marketing materials, and managing POS data. In addition, being part of a franchise enables a new startup to benefit from buying power that a small, independent operation simply would not have.
For Mellisa Raposo, owner of Mellisa’s Pet Depot in North Dartmouth, Mass., going the franchise route has proven to be an invaluable help in getting her fledgling business up and running. “My husband and I had totally different backgrounds, so we weren’t savvy in the pet industry,” she says. “So, when initially setting up and opening the store, I wouldn’t have known where to start had it not been for the help of the franchise. They gave us all of the support that we needed to get the business going. I couldn’t imagine trying to do this all on my own and being successful at it.”
In addition, Raposo credits the Pet Depot franchise for helping her store not only survive, but also grow during the recession. “It was kind of scary for us, because it was only about eight months after we opened when all hell started to break loose [in the economy],” she says. “But with the support of the franchise and their guidance on how to market the store and their suggestions on different things we could try to be successful, we’ve had phenomenal growth considering the recession. We’ve gone up every single month we’ve been in business.”
While joining a franchise will be particularly attractive to an entrepreneur who is new to the business, the concept is not solely limited to startups. Just about all of the franchisors Pet Business spoke with said that they have worked with (or would be willing to work with) established pet retailers on converting their stores into franchise locations.
“That’s called a conversion sale,” says Nick Bibby, founder of Bibby Group, a Shreveport, La.-based franchise-consulting firm. “It’s feasible if it’s a decent franchise brand. If the person who owned the independent store was missing something that the franchisor has–whether it’s business systems, advertising, good suppliers–it could make sense.”
Unfortunately, such conversions may not be an option for most established pet stores, especially if they’re looking to hit the proverbial “reset” button after falling on hard times. “Most of the time, you’re going to look to start a new business through a franchise, not rebrand something you already have,” Barr says. “The reason for that is you’re still going to have to pay a franchise fee, you’ll still have to follow a system, you’ll still have to pay royalties–there are still costs involved. If an existing retail pet business is hitting on hard times, they’re probably not going to have extra money in their budget to convert to a franchise.”
Pet Depot’s Versch agrees that by the time an established pet store has fallen on hard times, it may be too late to consider a successful conversion. “We have had some stores contact us about converting and found that by the time they call us, it was too late for them to make an upgrade financially,” he says. “I find that owners of stores in trouble tend to have deep set bad habits, misguided perceptions on the industry and poor attitudes. It’s easier to train fresh, excited people.”
However, he says that a conversion sale isn’t an idea that Pet Depot would reject out of hand, but the state of the business prior to the conversion would be a serious consideration. “It’s not something we pursue, but we do offer a great existing store conversion program that allows a store to pay royalties only on the sales increase over their past base sales,” he says. “If a store would be interested in joining our franchise to improve product mix, margins, administrative analysis or manufacturer support, do it before it gets too hard to do anything about it. Often, a store that is profitable can get an expansion /upgrade loan from their bank backed by SBA to help in the conversion upgrade process.”
Of course, buying into a franchise won’t be the ideal choice for everyone. In addition to the considerable expense involved in operating this type of business, there can be strict regulations on what products the store can sell and how the store is run. Often, entrepreneurs may find such constraints to be onerous. What’s more, once a contract has been signed with a franchise, there is often little that a franchisee can do to leave the fold unless they sell the business; and even then, the franchisor will likely have to approve the buyer before a sale can be made.
Before You Sign
Whether they are start-ups just getting into the business of pet product retailing or established independent pet retailers, anyone who considers buying into a franchise situation should carefully consider the parameters of such an agreement. “Basically, what you’re trying to find out is, ‘Can I be successful if I bought this franchise?’” says Barr.
The first step is to review the prospective franchisor’s franchise disclosure document. “When you investigate any kind of franchise, you’re going to get a disclosure document–it’s the law, you have to get it,” she says. “That franchise disclosure document is the bible of the industry. It’s going to have all of the nuts-and-bolts information in it. You’re really going to need to go through that disclosure document with a fine-tooth comb and ask a lot of questions of the franchisor and/or a franchise attorney.”
The nuts-and-bolts information that Barr refers to includes things like any fees collected by the franchisor, as well as any operating and marketing requirements. In addition, the disclosure document will include contact information for current franchisees, as well as anybody who has left the franchise over the previous 12 months.
“That’s really a golden piece of information because you’re at liberty to talk to anybody on the list that you want to,” says Barr. “By law, they’re not going to give you a list of just their top franchisees. You have access to anybody and everybody that’s part of their franchise to talk with if you choose to.”
Speaking with current and former franchisees is an essential element of deciding whether or not a franchise is the right fit. “Potential franchisees need to ask a lot of questions,” says Barr. “My advice would be to build a spreadsheet and ask the same questions to all of franchisees they talk to. That will give them a good, broad base of information and will keep them from forgetting to ask someone a question.”
Unfortunately, according to Bibby, far too many entrepreneurs buy into a franchise without doing their homework. “Most people buying into a franchise buy based on salesmanship,” he says. “Maybe one out of 500 franchise buyers conduct any form of serious due diligence. Many will not even read all of the documents they’re given; they buy based on emotion–a very serious mistake.”
Franchising a Retail Concept
For the successful independent pet store owner, the idea of franchising a retail concept can be an attractive proposition, as it can be a great way to grow the business using other people’s capital. “Every business–especially every small business–has a limit of how much capital they can invest, and offering a franchise is a great way to build a brand with other peoples money,” says Bedell.
However, there can also be a negative aspect to franchising says Bibby. “The downside is that you are not in control, except through a franchise agreement,” he says. “So, if you’re the type of person who likes to control everything and cannot deal with quasi-partners (the franchisees) then company-owned stores are more appropriate.”
Michael Levy, co-owner of Pet Food Express, a San Leandro, Calif.-based pet specialty retail chain with 34 locations in the San Francisco area, is one entrepreneur who decided that franchising was not a good fit for his concept, for many of the same reasons offered by Bibby. “Bottom line, we want to keep the quality and reputation of [Pet Food Express] at the high level where it is,” he says. “We believe that the only way to do this is by staying within the geographic region of Northern California, where we can visit all of our stores weekly, bring our employees together on a very regular basis for continuing training, and be a true part of the communities where we have stores. We can still grow by opening many more stores in our region and retain full control of them.”
Undoubtedly, there are scores of successful pet specialty retailers out there who feel that their concept would make for a great franchise. However, the reality is, not every pet store can be successful under this model. Anne Barr says that there are some basic benchmarks that should be met before serious consideration is given to franchising.
“The rule of thumb that I give to everyone is you need to have at least two locations that are profitable and have been for at least a year or longer,” she says. “If you have that, and you’re thinking about franchising, then you’re probably in a good spot to consider it as a method of expansion. If you don’t have that–if you have one unit, and maybe you’ve been in business for two or three years, and you’re profitable–you’re still not ready yet.”
Bibby recommends that retailers go a step further and contract a franchise consultant to conduct a comprehensive franchise feasibility study, but urges caution when picking a consultant. “Most consultants in the franchise industry are nothing more than salesmen and brokers,” he says. “When approaching a consultant, you have to be very careful to be sure that you’re receiving feasibility, as opposed to just a sales pitch.”
To Bidell, the question that prospective franchisors should ask themselves is, can others be successful with the business model. “You cannot duplicate you,” he says. “Most independent retailers, in general, tend to be profitable and productive because of the experience they create in their store, because of their passion and their necessity to make it successful. You can’t duplicate that. You can’t take the experience that you, as a great operator, create and duplicate that with someone who doesn’t have the same passion for the product you offer.”
Even if all the signs seem to indicate that a concept would make for a great franchise, the retailer must consider the significant expense involved to get the operation up and running. Experts estimate that the cost of starting a franchise can cost anywhere between $50,000 and $250,000. This includes, among other things, hiring attorneys and accountants, creating a training program and materials, and developing a logistical staff. This monetary expense, as well as the incredible amount of work and risk that goes into building a successful franchise, should be enough to give a prospective franchisor pause, says Versch.
“Be prepared for the huge investment it takes to build a franchise operation,” he says. “Be ready to deal with a lot of things that can go wrong and cost tons of money. Be prepared to spend a lot of time away from your family. If you get it off the ground and survive the first few years, you will have earned your money.”
Of course, the franchise will begin to generate revenue once franchisees start buying in, but Barr warns that this doesn’t mean that the franchisor will be rolling in dough from the start. “The beauty of the franchise model is you get money up front from the franchise fee,” she says. “But part of that is already spent in the sales effort and part of it is going to be spent on staff and in training the franchisee, so you’re not making a lot of money on the franchise fee. The money [you will make] from any franchisee will come down the road, from royalties.”