FRANCHISING: NEW POWER FOR 500,000 SMALL BUSINESSMEN

THE garish profusion of hamburger stands, fruit-juice parlors, pancake emporia and muffler-repair shops stretches for ten miles along Ventura Boulevard in Los Angeles' San Fernando Valley. It could be called Franchise Row. Though hardly a landscape to captivate the eye, the phenomenon is increasingly common to cities and suburbs. Franchising--an arrangement by which local entrepreneurs lease their firm name, product and operating methods from large chains--has become one of the fastest-growing sectors of U.S. business. Through franchising, thousands of independent small businessmen have acquired improved techniques, new economic power and a greatly enhanced chance for survival.

The system thrives because it combines the incentive of personal ownership--the best goad man has yet devised to spur hard work--with the managerial talents of big business. For a fee (average: 3.8% of receipts), the typical franchise operative buys professional expertise he could otherwise scarcely afford--notably, cost controls, promotion and buying advice, and tested operating methods. The main advantage for the parent company is that franchising enables it to expand while putting up little of its own capital.

Spreading Ranks. With scores of new franchised outlets opening their doors every day, the industry has lately been expanding by about 15% a year. The nation's 500,000 franchise operators enjoy a $90 billion-a-year business, accounting for 10% of the total U.S. output of goods and services and a remarkable 28% of retail sales.

Franchising's leading practitioners include Hertz car-rental agencies, Walgreen drugstores and Coca-Cola bottling plants, as well as thousands of gasoline stations and all new-auto dealers. In recent years, the ranks have been joined by both Sears, Roebuck and Montgomery Ward, which together have franchised 1,300 small-town catalogue-order outlets. Franchising has spread to businesses as disparate as art galleries, nursing homes, dating bars, travel agencies, shoe-repair shops, lawnmower-sharpening services and dental-technician schools. There is even a franchised diet service (Weight Watchers, Inc.) and a franchised system for correcting nocturnal bed-wetting (Enurtone Co.). Recently, the fastest growth has been concentrated in the quick-service food field. It includes such enterprises as the 93-outlet H. Salt, Esq. Fish & Chips operation --whose founder, Haddon Salt, brought the idea from England in 1964--and the 110-outlet hot-dog-and-beer operation called Frank 'n' Stein.

Franchisers have lately been reaching for other names as well. Country Singer Roger Miller is developing a string of King of the Road motels; Racing Driver A. J. Foyt is starting a franchised auto-repair operation. Television's Johnny Carson heads a new chain of restaurants called "Here's Johnny's." Now retired from baseball, Mickey Mantle devotes his time to myriad business interests, including a chain of franchised "country cookin'" restaurants. New York Jets Quarterback Joe Namath is chairman of a restaurant venture called Broadway Joe's that brought out a public stock issue this month even though it has opened only one outlet. Despite what he called "a rough night" at his Manhattan bar, Namath made a ceremonial 11 a.m. appearance at Chemical Bank New York Trust Co. to accept a $1,800,000 check for the underwriting proceeds. His own 145,000 shares in the venture have a paper value of $2,000,000.

Super Joe is only the latest promoter to discover the potential for instant riches in the stock market. Ponderosa System Inc., a successful Ohiobased steak-house chain, floated a public offering in February. Overnight, the 205,025-share holding of President W. James Kirst, which originally cost him $252,432, leaped in value to $5,125,625. Before Minnie Pearl's Chicken System --named after a star of Nashville's Grand Ole Opry--made a public offering last spring, directors and officers bought nearly 1,000,000 shares at 500 each. Grandly renamed Performance Systems, Inc., the chain has sold some 1,200 chicken franchises, is branching into transmission-repair services and child-care centers. Following a three-for-one split, the current stock price of $17.50 makes the management's original $500,000 stake worth about $50 million.

Applied to Anything. Franchising's growth possibilities seem boundless. John Galardi, 31, started out as a 500-an-hour counter boy in a Los Angeles tacos parlor a decade ago. He worked long hours, saved diligently and became a part owner, an investment that he has since parlayed into a chain of 50 Der Wienerschnitzel hot-dog stands and 190 other franchised outlets in 20 states. Today, Galardi puts his personal worth at "a couple of million." Over the past decade, Al Lapin Jr., 41, has built an investment of $25,000 into Los Angeles-based International Industries, a $40 million-a-year franchiser (pancake shops, business colleges, shirt stores). Last week Lapin agreed to pay $220 million in stock to acquire Ramada Inns, a chain of more than 200 motels. Like many an executive of conglomerate companies, Lapin takes pride in his ability to "put together a management package and apply it to any kind of service."

To Merle Levine, who has run one of Lapin's International Pancake Houses in downtown Los Angeles for three years, that package is a sound one. For a total investment of $65,000, Levine receives accounting, tax and marketing help as well as the use of International Pancake's name and advertising programs--and he earns over $20,000 a year. Other franchisees may need to invest as little as $300 to distribute disposable plastic aprons for the Poly Prim Plastic Corp. or as much as $1,000,000 or more for a Holiday Inns franchise.

Monitored Motels. The franchiser's influence on its outlets is often pervasive. Holiday Inns, for example, monitors its motels to make sure that they spend at least 2.6% of room revenues on soap, towels and other guest supplies. Because of such vigilance, the industry claims, fewer than 10% of all franchises fail in the first 18 months of operation, compared with 50% for small businesses as a whole. Chicago-based McDonald's Corp., which sells 2,000,000 hamburgers a day (and grossed $335 million last year), boasts that not one of its 1,100 outlets has ever lost money. To keep the profits flowing, McDonald's takes pains to pick ambitious managers, then sends them to its "Hamburger U" in Elk Grove Village for a three-week cram course in how to keep the overhead as lean as the beef.

In many localities, franchisers are pinching independent businessmen, often to the point of forcing them out of business--or into a franchise network. At the same time, the food-franchise field is becoming unmistakably crowded, raising the question of just how much fried chicken and hamburgers the public can consume. Many Wall Street analysts expect a shakeout, with marginal operators either going out of business or consolidating with bigger competitors. In another form of consolidation, many leading franchisers, including Kentucky Fried Chicken and Howard Johnson, have repurchased a number of their franchises. Howard Johnson says that in the future most, if not all, of its new motels and restaurants will be company-owned. Besides being more profitable, explains President Howard B. Johnson, company-owned outlets "enable you to maintain better quality control on service." For the same reasons, Holiday Inns last week was negotiating to buy up 100 of its 898 franchised motels.

The Dominant Form. In one sense, such activity only underscores the success of franchising. It means that the leading operators have amassed so much money that they no longer need franchising for inexpensive expansion. In any case, the trend gives so few signs of slowing that officials of the International Franchise Association predict that the industry will eventually become the dominant form of retailing. Even as Howard Johnson and Holiday Inns have moved to cut down on franchises, two competitors, Sheraton and Hilton Hotels have been rushing headlong into franchising. So anxious is Hilton to enter the field that rather than develop its own outlets from scratch, it has arranged to franchise existing hotel and motor inns under its own name.

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