News Column

Hispanics Poised to Become the Next Big Thing in Franchising

May 2001

By Janet Perez, HISPANIC BUSINESS magazine

After years of working in the corporate sector, Fernando Otero decided to strike out on his own. Then came a really tough decision what to do next.

"Franchising actually was almost an accident," says Mr. Otero, of Davie, Florida. "Basically, I was browsing on the Internet and I came across Pillar to Post [a home inspection franchisor] three years ago."

That inauspicious start notwithstanding, Mr. Otero is part of an emerging trend in franchising. There's a dearth of research on diversity within the industry, but experts say that minorities, including Hispanics, represent franchising's next frontier.

"A lot of our members believe franchising is a good vehicle to develop a particular town or area because of the standards and operations it brings," says Marcel Portmann, vice-president of emerging markets and global development at the International Franchise Association in Washington, D.C. "Franchising in urban areas and the possibilities it can bring are one side of it. Obviously, creating minority entrepreneurs also is part of it."

Mr. Portmann's division at the IFA was created in the early 1990s to promote minority representation among IFA's membership. He says minorities, like other would-be entrepreneurs, are drawn to the independence associated with franchising, though others express a desire to give back to their communities.

"I've had people tell me that they have to leave their town or city to get a nice lunch or dinner or find somewhere to relax, because there's nothing in their region," he says. "They ask me, 'Why are we giving our money to somebody else? I would like to leave my money in my area, my neighborhood.' That's probably something that's going on all over the country, and the Hispanic market is growing tremendously because of it."

Franchising has a lot to offer the budding entrepreneur, says Mr. Portmann. For starters, the learning curve is often less daunting than those associated with companies begun from scratch.

"The benefit to the franchisee, of course, is that they can hit the ground running, not walking, when they open their doors," says Therese Thilgen, president and editor of Franchise Update magazine in San Jose, California. "They've had adequate training, and they've had the benefit of the operating system the franchisors support. The franchisors have already gone through all of the mistakes. Franchisees get the benefit of ongoing training and they have regular support. Depending on the size of the brand, they can have great branding too. And then they have economies of scale and supply ordering. For those reasons, franchising now has become a really big business."

Or, as the IFA likes to put it, "franchising is being in business for yourself, not by yourself." It was this support network aspect that convinced Mr. Otero to go the franchise route.

"Franchising has a heck of a lot of advantages," he says. "To say I'm a franchisee gives me credibility. When you tell some Realtors you are a franchisee, they look at you differently. They think, 'Oh, this guy is a businessman, he's not just a home inspector.' It's not Joe Blow with his shingle hanging off the front porch of his house. It's Joe Blow with a whole bunch of shingles behind him."

A 1999 U.S. Small Business Administration survey found that carpet, upholstery, and drapery cleaning franchises have the highest proportion of Hispanic owners (18.8 percent). In sheer numbers, however, Hispanics owned more fast-food restaurants. Those findings are borne out by anecdotal evidence. McDonald's has a Hispanic Owner Operators Association representing 178 owners nationally, for instance. Hispanics own about 650 McDonald's franchises nationwide.

Their focus has mainly been on food "because it's the first thing people looking into franchising think about," says Mr. Portmann. "One of our tasks is educating emerging entrepreneurs that there are 75 different industries out there, and not to think only about fast food, which just happens to require the highest investment because you need the real estate.

"Services such as commercial cleaning or residential cleaning are great alternatives because, in fact, many of these services are already franchised and employ Hispanics and other minorities. Typically [cleaning franchises] are more accessible because their fees are for know-how, and the rest is for equipment and maybe some type of vehicle. The investment is not as high as it would be to put up a McDonald's."

That brings us to cost, perhaps the biggest deterrent to minority franchise ownership. Franchising can be an expensive proposition. Expenses include fees, royalties, supply costs, employee salaries, and real estate. The size of the tab ultimately depends on the industry.

"You can get into a franchise for $10,000, or up to multi-millions if you move into the hospitality sector," Ms. Thilgen says. "In the food industry, you have a range, depending on whether it's a coffee kiosk in a mall to something that is going to require more build-out. It's all over the board. Even within some industries you might see a huge range, because franchisors are getting very creative in going to nontraditional locations. For instance, having a Pizza Hut in a mall versus opening one in an airport. At the airport it's smaller, so therefore the investment is different."

As a result, financing how much and how easily it's obtained plays a huge role in the diversification of franchising. Financing options are as varied as franchise opportunities themselves (see next story). Bank loans or lines of credit, government loans, and even help from the franchisors all are possibilities.

"Access to capital and financing options are probably the main barriers to any development, although we do have some options and programs in place to help develop that end," Mr. Portmann says. "Franchisors are realizing that this is an area of good development and there have to be some concessions made. Some of them are already putting programs in place that are very good, not just for Hispanics but for any minority group. Some of them waive the franchise fee, or at least lower it. Some will do financing internally. There is definitely more outreach. We are seeing it in our program."

Mr. Portmann singles out fast-food powerhouses such as McDonald's and Tricon, the owners of Taco Bell, KFC, and Pizza Hut, as being among the most progressive in terms of diversity. But some smaller franchisors also are starting to recognize the benefits of reaching out to minority communities.

"It's a matter of planting a seed, and the impression you give out to the minority community," he says. "If you are not helping the community not lowering your fees or giving advantages the rest of the community will say, 'Look, don't even talk to these guys, because they are not flexible and they won't work with us.'"

Because he wanted to keep his retirement nest egg secure, Mr. Otero opted to get a credit line from his bank by borrowing against his home. With no major overhead, he has long since closed that line.

"Being your own boss nothing beats that," he says. "I don't think I could ever go back to being an employee of any company. They would have to offer a lot of money for me to even consider it."

As he continues to build his Pillar to Post franchise, Mr. Otero has this advice for other Hispanics who decide to follow in his footsteps.

"You have to hang tough and you have to take the job seriously," he says. "There is no magic wand. If you want to make money, you have to work your tail off. Don't expect miracles overnight. When you decide to go with it, you have to research the industry, the business, the competition. And most importantly you need to know whom you're getting in bed with."

Source: HISPANIC BUSINESS magazine

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