Franchises growing despite economy and credit crunch

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Bargain rents make metro Detroit a hot place to expand

 

From Freep.com

by Greta Guest

Free Press Business Writer

 

With local retail space going for bargain prices, several franchises are actively looking to expand in metro Detroit, including Biggby Coffee and Great Clips.

 

Cynthia Kratchman, a broker with Landmark Commercial Real Estate Services in Farmington Hills, said it’s a good sign for Michigan’s challenged retail environment.

 

“There seems to be more of a willingness to step back in,” she said. “It’s still very competitive in terms of pricing.”

 

Rents for retail space in metro Detroit are expected to fall 5.3%, while vacancies are expected to climb to 13.5%, according to Marcus & Millichap, a commercial real estate firm based in Encino, Calif.

 

Others looking in Michigan for new locations and franchisees include Snap Fitness, Hungry Howie’s Pizza, T-Mobile, Massage Envy and Del Taco.

 

Even though credit is tight, Kratchman said there are entrepreneurs who have the money for franchises. Community and regional banks also are willing to lend, said Bob Fish, CEO and founding partner of Biggby.

 

East Lansing-based Biggby has 20 signed franchise agreements throughout the states in which it operates and is looking to expand in the Detroit area.

 

Opportunities abound to go into business

 

Rose and Joe Glendinning, siblings who grew up in East Lansing, just opened their second Biggby Coffee location on Old Woodward in Birmingham.

 

They both left corporate jobs in 2008 and moved back to Michigan to become franchisees. Their first Biggby is in Bloomfield Hills; their new one opened last month. Rose, 29, had been an investment banker in Boston. Joe, 32, was a lawyer in Chicago. Both now live in Bloomfield Hills.

 

“When I told everyone at work that I was moving back to Michigan to open a coffee shop, they looked at me like I had 10 heads and was the craziest person ever,” Rose Glendinning said. “This has been one of the most exciting and hardworking experiences that I’ve had.”

 

Even though credit is still tight, local commercial real estate brokers say there are active franchise operations and retailers looking for prime sites in metro Detroit, including Jimmy John’s Gourmet Sandwiches, T-Mobile and Del Taco. There are 28,139 franchise businesses in Michigan, the International Franchise Association reports.

 

“There are entrepreneurs with money, and they are starting to surface,” said Cynthia Kratchman, a broker with Landmark Commercial Real Estate Services in Farmington Hills. “It could be they are buying a franchise or starting their own business.”

 

Bob Fish, CEO and founding partner of Biggby Coffee, which opened its first café in East Lansing in 1995, said the company now has 20 signed franchise agreements throughout the states in which it operates and it is looking for retail space. The lower rates brought on by the recession have helped franchisees pick up prime spots.

 

“It’s a perfect world for us,” Fish said. “You couldn’t ask for a better moment in time to open a business. Capital is still hard to find. People are finding more luck at banks that are more regional or community-based. In our world, I still think a lot of money comes from the friends and family network.”

 

The average cost to open a Biggby franchise is $250,000.

 

Fish said sales at stores open at least 13 months grew by 6%, to $40 million last year throughout the chain, which operates 107 stores in Michigan, Ohio, Wisconsin, Alabama and South Carolina. He attributes the success to less competition, as many independent coffeehouses and even chains such as Starbucks have closed stores in the last two years, and to the chain’s focus on getting to know customers.

 

“If things kind of suck every day, there’s nothing like going to a place where they don’t,” he said.

 

Mark Cory, a Grosse Pointe-based franchise placement specialist for FranNet, a franchise consulting firm, is working with franchises such as Great Clips, the value hair salon chain based in Minneapolis. Cory said he has seen renewed interest in franchises from people who are at a career crossroads.

 

“There are fewer employment options,” Cory said. “And maybe, to a lesser degree, there’s a sense that this is a good time to start a business because we have hit rock bottom and are starting to come out of it now.”

 

Great Clips opened its first franchise in Michigan in 2002 in Grand Rapids. It now has 88 locations in Michigan, including 50 in metro Detroit. It plans an aggressive expansion in metro Detroit, with plans for 120 locations.

 

“Even with all the economic issues in the Detroit area, we think it’s a great opportunity to expand the Great Clips brand,” said Steve Hockett, vice president of operations.

 

Costs to open a Great Clips range from about $109,000 to about $202,000.

 

Cory said other popular franchises include those that provide care to seniors. ComForcare, based in Bloomfield Hills, is looking for franchisees to offer nonmedical in-home care, as are Right At Home, a firm based in Omaha, Neb., and Synergy Home Care of Phoenix.

 

For businesses in which the franchisee works from home, the cost of opening a franchise is usually less than $125,000, he said. For those that require a retail establishment, the cost goes from $125,000 into the millions.

 

Other costs include a franchise fee and royalty fees that are usually set as a percentage of gross sales. Often, franchisees also pay for advertising.

 

Snap Fitness, a franchise based in Chanhassen, Minn., costs an average of $200,000 to start, said spokesman Patrick Strait. He said that Michigan has 68 locations opened, and 18 are in the process of finalizing paperwork.

 

Brian Ognian, vice president of franchise development for Madison Heights-based Hungry Howie’s Pizza, said the struggling retail real estate market has allowed the company and its franchisees to renegotiate deals with landlords. In some cases, landlords also are helping Hungry Howie’s to update existing stores.

 

“The landlord is happy to let us upgrade the image, and they are willing to help make that happen,” Ognian said. “They don’t want to lose a national tenant this year.”

 

The chain, which was founded in 1973 in Taylor, now has 561 locations nationwide, including 109 Detroit-area stores. It had sales of $280 million in 2008. The initial investment ranges from $160,000 to $408,000 for a carryout and delivery restaurant, including a $20,000 franchise fee.

 

“The economic times have caused some difficulties, but it has been a great opportunity for our company,” he said.

 

Yet tight credit has limited the number of companies looking for people to open franchises in Michigan.

 

“There is a good swath of people they could go after in the auto retirees,” said Scott Barrie, who handles investment sales at Friedman Real Estate Group in Farmington Hills.

 

“I think that are fewer people out there looking for franchises. People are scraping by. So that’s a big coin toss.”

 

Contact GRETA GUEST: 313-223-4192 or gguest@freepress.com

 

Original article: http://www.freep.com/article/20100428/BUSINESS06/4280324/Franchises-growing-despite-economy-and-credit-crunch