Giant steps for black franchises: savvy entrepreneurs are moving beyond one-outlet status to develop megafranchise businesses - includes related articles on minority franchising and the Black Enterprise list of 50 highest ranking black-owned franchises - Cover Story

Black Enterprise, Sept, 1993 by Caroline V. Clarke

Savvy entrepreneurs are moving beyond one-outlet status to develop megafranchise businesses.

BLACKS IN THE FRANCHISE industry are like ripples on the ocean: They're moving with the current, but even added all together, they barely make a wave. Or Course, there are exceptions.

Shaking up this year's BLACK ENTERPRISE FRANCHISE 50 (our annual listing of franchise companies with the largest number of black-owned units in their systems) are three African-American megafranchises, all developed during the last 20 months. Larry Lundy launched the largest African-American franchise start-up ever, purchasing 31 New Orleans-area Pizza Hut restaurants in February 1992 for an estimated $15.5 million. Atlanta-based NDI Video Inc., headed by chairman C. Alexander West and president Al Carter, solidified its position as the nation's largest black-owned Blockbuster Video franchise in April 1992, when it purchased 23 video outlets in Baltimore, Syracuse and Rochester, N.Y., for an undisclosed sum. And, in a groundbreaking deal sealed in June 1992, Warren Thompson acquired 31 Washington, D.C.-area Bob's Big Boy restaurants from the Marriott Corp. for $13.1 million, and agreed to convert them into Shoney's, the first of which opened last November. With these deals in hand, all three companies are now poised to enter next year's elite group of the nation's largest black-owned businesses: the BLACK ENTERPRISE 100s.

Lundy, Thompson and the NDI team are the personification of the franchise dream, particularly for African-Americans. Theirs were among the most significat franchising deals in 1992, representing major gains in opportunities for blacks in the industry. These accomplishments are also the fruits of some isolated corporate efforts to expand minority franchising opportunities, fueled largely by industry groups such as the International Franchise Association (IFA) in Washington, D.C., and the newly formed American Franchisee Association (AFA) based in Chicago. Despite these splashy signs of progress, African-Americans continue to be woefully underrepresented in franching: Only 5.6% of the 74,273 franchise units represented on this year's BE FRANCHISE 50 are black-owned--a slight increase from last year's list. And, although the year marked a renewed interest in franchising as an anchor of black economic development, the industry--like all others -- labored under the constraints of a protracted nationwide recession.

The Numbers Game

In 1991, franchises employed 7.2 million people in more than 60 industries. Gross sales for 1992 were $813 billion, according to the IFA. That's an 8% increase over 1991.

Striving entrepreneurs continue to pursue what is perceived as the avenue to sure-shot success. A new franchise opens every 6.5 minutes of each business day, according to the IFA. And no wonder. Franchises have unmatched appeal for potential business owners: They tend to be low risk, well defined and operator-ready. Franchises offer the unique advantage of entrepreneurial independence without fitful isolation. And, unlike most small businesses, franchise start-ups are almost fail-proof: According to the U.S. Department of Commerce, less than 5% of franchises failed on an annual basis between 1971 and 1987. In fact, in many industry segments, more than 85% of franchised units opened since 1986 were still owned in 1991 by the person who originally bought the outlet (see chart, "Opportunities You Can Count On"). The number of franchises keeps growing and they continue to outpace the Fortune 500 companies in providing new jobs.

For African-Americans, affordability remains a key issue in the pursuit of franchise opportunities. Franchise companies offering low start-up costs, such as Coverall North America Inc. (No. 2 on the BE FRANCHISE 50) continue to attract minority attention. The nearly 200 black-owned units since last year. Meanwhile, McDonald's Corp. (No. 3 on the list) reported a comparable drop in the number of black-owned units, even though the total number of Mickey Ds increased last year. The average start-up cost of a McDonald's outlet? Try half a million dollars.

Industrywide, the statistics are even more dismal--and increasingly hard to come by. The U.S. Department of Commerce stopped tracking the number of minorities in franchising back in 1988, in part because most franchisors were loathe to cooperate, or had little, if anything, to report. At the time, Commerce's Minority Business Development Agency (MBDA) projected that 14,000, or a meager 2.5%, of the nation's 550,000 franchises would be minority-owned by 1990. (Note: That number includes all minorities, not just African-Americans.) "Franchising In The Economy," an Arthur Andersen & Co. study conducted between 1989 and 1992 for the IFA, found that 9.5% of the 366 companies surveyed were minority-owned. The industrywide truth probably lies somewhere between the two. Whatever the figure is, it's nominal.

Thanks largely to the advocacy of groups such as the Alliance for Minority Opportunities in Franchising, created last year by the IFA, franchisors are talking more than ever before about ways to increase franchising opportunities for minorities and women (see sidebar, "Franchising Reaches For Minorities"). But talking and doing are not synonymous. A 1991 IFA survey found that of 180 respondents, just 35% have minority business development programs, 41% target minority franchisee propects, 49% target employee recruitment efforts to minorities and 54% utilize minority vendors, suppliers and media.