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Last Updated ( Wednesday, 16 July 2014 20:53 )
DATE_FORMAT_LC2=Wednesday,July 16 2014 12:00:00 am EDT   
The Nature and Nurture of Franchise Tenants

RonGoldstoneNAIFarbmanRon Goldstone

Franchises remain an important component of our economy – key contributors to our retail, entertainment and service industry groups and, thus, the shopping center landscape.

In fact, about 800,000 franchise businesses in the United States are estimated to provide 8.5 million jobs and more than $800 billion in annual economic output, according to the International Franchise Association (IFA). The IFA defines franchising as a "continuing relationship in which the franchisor provides a licensed privilege to do business, plus assistance in organizing, training, merchandising and management," in exchange for fees and royalties from the franchisee.

Shopping center operators should be alert to the opportunities—and challenges—of working with franchisees as tenants. Issues include the business experience and sophistication of the individual tenant, including the potential for greater variability in individual store operations compared with a national chain operator. They can also include the inevitable pushes and pulls between the dictates of a national franchise agreement and needing to conform to landlord rules while working as a strong partner with any shopping center's other tenants.

STANDING STRONG AS A BUSINESS MODEL

As might be expected, franchises are a very category driven business, subject to prevailing economic trends. Overall, franchises have improved from 2008 to today, with many categories being healthy.

Still, despite slower than expected growth in 2014 so far, franchises will create more jobs and grow at a faster rate in 2014 than the national economy, and contribute more to the U.S. Gross Domestic Product than the industry did in 2013, according to the IFA's latest reporting.

In its second quarter update to its Franchise Business Economic Outlook for 2014, conducted by IHS Global Insight, the IFA reported that franchise employment is expected to increase 2.4 percent in 2014, for approximately 200,000 new jobs, compared to total private sector growth of 2 percent in 2014. IFA also projects GDP of the franchise industry to grow by 4.5 percent in 2014, compared to a 4.2 percent growth rate the previous year.

It can vary by franchise type and geographic location, but industry researcher FRANdata reports that multiple-unit owners are responsible for more than half of franchises. This sounds realistic, given capital constraints and the current lending environment. Many of these more sophisticated franchise operators will have the experience and management skills to build out and run multiple locations within a geographic area, including multi-state operations.

WORKING WITH THE FRANCHISEE AS A TENANT

As with most any tenant, taking on a franchisee as a tenant presents challenges related to areas such as financing, operational skills, changes in consumer preferences and economic cycles.

There is always a capital risk. Some franchises can cost as low as $30,000 to $50,000, with others as high as $500,000. Operators face the same issues with respect to category, operations or location, as do non-franchise national and regional operators.

Certainly, there can be "competition" between the demands of a franchise agreement and the new ones of shopping center tenancy. In addition to any up-front franchise fee, franchises typically face royalty fees on gross sales, a national marketing fee, a local advertising fee and strict sourcing agreements. Add in employment demands and a need to meet mall standards like any other tenant and the franchisee's plate is quite full.

There is no way to gauge for certain, but in hostile times, either for the individual operator or the franchise as a whole, it is likely that a franchise operation could pull up stakes more quickly than a national chain with multiple lease agreements with major shopping center entities.

Thus, leasing managers should work closely with independent franchisees and their representatives, especially first-timers in a shopping center location. While the national franchisor might provide guidance, and even oversight in leasing, it is important that the new tenant understand the conditions and responsibilities of shopping center leasing. Overall, while business franchises have a higher success rate than individual franchisees, each deal must be reviewed on its own merits.

Without compromising franchisor requirements, ownership can also help the new tenant understand and take advantage of its shopping center positioning. Examples include participation in any merchant's association, valet parking programs, the center's web site and social media activities, pooled advertising programs and special promotions, the last being a big part of modern shopping center marketing.

Through good communications and a watchful eye, leasing and promotion managers can help new franchisee tenants get off on the right foot. Nurtured properly into the tenant mix, franchisees can be some of retail's strong innovators and engines for sales growth.

— Ron Goldstone is a senior vice president with Southfield, Mich.-based NAI Farbman, specializing in the commercial leasing/sales and hospitality sales division of the company's brokerage department.

 

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