Restaurant Chain Franchising on a Slow but Steady Rise

Fast-food chain Popeyes Louisiana Kitchen has 75 restaurants in Los Angeles, Orange and Riverside counties, and it plans to open 24 more despite the lagging economy.

Chicken-centric Popeyes, however, doesn't plan on launching the new outlets on its own dime. It's seeking franchisees — would-be entrepreneurs willing to take on the expense and risk of opening their own businesses.

"We just don't have the resources to build everywhere ourselves," said Greg Vojnovic, vice president of development of Popeyes, owned by AFC Enterprises Inc.

Restaurant chain franchising is on a slow but steady increase, and not just at Popeyes.

Yum Brands Inc. this year planned to turn about 400 of its company-owned restaurants into franchises, most of them KFCs. And in September the company agreed to sell two of its chains — Long John Silver's and A&W — to firms that specialize in franchising.

Glendale-based DineEquity Inc. recently agreed to sell 17 of its company-owned Applebee's to a franchisee, which the company said will help it save $11.3 million a year in lease obligations.

Jeff Press, 42, has heard the call to open his own business. He is preparing to roll over his entire 401(k) to open a Firehouse Subs eatery in the San Fernando Valley.

"I'm not naive to the fact that any business venture is a gamble," Press said. "But I'm investing in myself, in something I can pass on to my kids. I can't do that in corporate America."

The chains have stepped up incentive programs to help lure franchisees. Popeyes offered a deal to waive its $30,000 franchise fee for new owners and dropped the first year's royalty fees from 5% of revenue to 2%.

It's not a business for the faint of heart. More than half of franchise restaurants fail within three years, according to H.G. Parsa, a professor of Hospitality Management at the University of Central Florida.

Still, the would-be owners keep coming.

"We get many more franchising inquiries now than before," said Greg Delks, director of franchise development for Firehouse Subs. "Most are investing many times their net worth, but they're not skittish. They're higher risk takers and want to be in control."

Longtime franchisees caution that success, if it comes, will take time.

Developing a site once required less than a year but now takes up to two, said Aziz Hashim, who owns 10 Rally's burger outlets in Los Angeles and is considering launching Popeyes franchises too.

"In the past, you almost could do no wrong," he said. "But the environment now is much more unforgiving to errors. We cannot absorb mistakes because the economy won't allow us to."

Entrepreneurs who want to start out with just one restaurant might find it tough to get a loan, said Rahul Aggarwal, managing director at Brentwood Associates. The Los Angeles private equity fund's portfolio includes companies that own numerous Taco Bell and Pizza Hut franchises.

"More companies, particularly those who want to grow aggressively, are wanting to get in bed with experienced developers who have a lot of cash," Aggarwal said, "and can open multiple restaurants as opposed to one-off deals."

Jeff Baker, who helps his parents operate 33 KFC locations in Orange County and San Diego, said that competition is fierce among fast-food outlets that offer coupons and other discounts to attract customers who might be watching every penny.

"Every day, you see people with less and less money," Baker said. "With the competition out there, you can almost find a free meal every day of the week."

Some owners, even if they own multiple franchises, lose out. Pollo West Corp. and Mi Pollo Inc., owners of 13 El Pollo Loco restaurants in Southern California, filed for bankruptcy and this month auctioned off several stores.

"They were definitely impacted in the economic downturn," said Monsi Morales, an attorney with Peitzman, Weg & Kempinsky, the law firm working with the companies. "The whole fast-food industry suffered losses and is continuing to be stressed."

For existing franchises, the push to open new ones could also mean more competition.

But Roni Rovner, who owns two Popeyes outlets, is optimistic. Her Canoga Park location is doing well, thanks in part to its location on a busy street corner. But her Oxnard branch, hidden in a lonely shopping center that features an empty former Mervyns, is "dying," she said.

More outlets, she hoped, would mean more advertising and awareness of the brand.

"A hundred more franchisees in L.A. would mean we'd be on TV every month," she said. "More people would be aware of us, like they are McDonald's because everywhere you turn there's one of those."