Hot Topic: A new look at old problems
Franchising: Business Builder or Breaker?
BY ERINN MORGAN
A blueprint of the optical retail world of the future may include more franchising options than ever before. How will that impact the industry and how can it benefit ECPs?
Americans live in a franchised world. From Dunkin' Donuts, Ace, and TCBY to Mr. Rooter Plumbing and Two Men and a Truck movers, the growth of this platform is increasingly filling in the retail cracks across the country. Today, one in every three dollars spent by Americans on goods and service is spent at a franchised business, according to the International Franchise Association (IFA).
A franchise is the agreement or license between two parties giving the right to market a product or service using a trademark or trade name. The franchisor is usually paid fees for the rights and provides rights and support to franchisees. Currently, there are nearly 800,000 franchised businesses with 3,000 franchise parent companies in more than 80 different industries nationwide, the IFA reports.
Unlike other industries, the growth rate in optical franchising has taken a significant downturn in the last decade. The number of optometrists working at franchised locations sank from 9.9 percent in 1999 to 2.1 percent in 2005, according to the American Optometric Association's "Caring for the Eyes of America" survey. The decline appears to be due to a lack of focus by optical franchisors—and a lack of interest from ECPs.
| Roundup: Optical Franchisors & More |
|---|
| FRANCHISORS COHEN'S FASHION OPTICAL UNITS: 100 stores (including 20 corporate locations), primarily in the Northeast U.S., with some in Puerto Rico. HISTORY: Started in 1927 by Jack Cohen; today it is run by brothers Bob and Alan Cohen. CURRENT FOCUS: Cohen's is focusing on opening new franchised stores. FRANCHISE FEES: The franchise fee for both new and converting stores is $10,000 (good for 10 years). Franchise royalties are 10 percent and advertising royalties are 4 percent. CONTACT: Karen Miller, director of franchise operations, 516-465-6963 or visit the website, www.cohensfashionoptical.com. PEARLE VISION UNITS: 800 national locations split between company and franchise stores. HISTORY: Founded in 1961 in Savannah, Ga., by Dr. Stanley Pearle, one of the first optometrists to offer comprehensive eye exams and eyeglasses in one place. The company entered franchising in 1981. CURRENT FOCUS: "Pearle has gone through multiple parent companies over the years, but Luxottica's acquisition has been very important because of the vertical integration, so now we can focus on building the business," says Bill Vaughan, director of franchise development. "Our goal is to rapidly build the infrastructure to be a better franchisor so the doctors can spend less time worrying about trends and more time with patients." The company plans to open 15 to 20 locations in 2008 in "the right markets with the right doctors." FRANCHISE FEES: New franchise fees range from $15,000 to $30,000. After four years, royalties are 7 percent of dispensing volume—no fees are charged on ophthalmic volume. In the first year of franchising, the base of business is protected from any royalty; year two, indexes up to 3 percent; year three is 5 percent; year four is 7 percent. CONTACT: Bill Vaughan, director, franchise development, 800-PEARLE-1; www.pearlevision.com. STERLING OPTICAL UNITS: 110 Sterling stores across the country (including 10 corporate locations) plus 40 Site For Sore Eyes franchised locations in Northern California. HISTORY: Sterling opened for business in 1907 and started franchising about 20 years ago. The parent company, Emerging Vision, runs both Sterling Optical and Site for Sore Eyes. CURRENT FOCUS: Franchised store growth is also a focus here. "We just added 10 Kentucky and Louisiana store conversions in the last 90 days," says Scott Finn, vice president of business development at Sterling. "We really are in a growth spurt. You will see, over the next five years, that Sterling will experience significant growth." FRANCHISE FEES: The royalty is based on a siding scale—it starts out at 2 percent in the first year and ranges up to 8 percent in the fourth year. The franchise fee is $20,000 for a new franchise and $10,000 for an existing store. The advertising fee is 6 percent. CONTACT: Scott Finn, director of business development, 800-856-9664; Sterling Optical: www.sterlingoptical.com; Site for Sore Eyes: www.siteforsoreeyes.com. OTHER TEXAS STATE OPTICAL UNITS: 101 doctor-owned locations HISTORY: TSO was established in 1936 in Beaumont, Texas. Until 2001, TSO was a traditional franchise model that went through a series of different owners. In 2001, TSO's optometrists entered into an agreement to purchase their offices back from the franchise owner and became a member-owned organization. This eliminated franchise and royalty fees, plus dictates from a central office. Today, it is an organization of doctor-owned and operated eye care practices in Texas, Louisiana, Arkansas, and Oklahoma. FEES: As a privately held company, TSO issues shares of common stock to members, who can purchase a fully refundable share for $4,000. CONTACT: John Marvin, president, 877-953-7600; www.tso.com. TODAY'S VISION UNITS: 23 stores in seven Texas cities HISTORY: Opened 23 years ago, Today's Vision started out as a franchised model, started by two ODs in Houston. Today, this chain takes a different approach with licensees (not franchisees) that benefit from group purchasing, marketing, and merchandising. FEES: N/A CONTACT: Greg Watson, executive director, 713-461-3937 or 713-202-5454; www.todaysvision.com |
"We went through hell with franchising," says Kevin Katz, OD, chairman of the board at Texas State Optical (TSO). The business went from franchised model to an optometrist-owned network in 2001.
"When the original owners sold the company, it went through many incarnations of ownership, including a man who owned a supermarket chain in New York. In the end, the problem was that they just wanted to make money and didn't care about optometry," he says.
RENEWED INTEREST
Within the last year, franchisors have shown a renewed interest in this business model. "We are aggressive on growth right now," says Scott Finn, vice president of business development at Sterling Optical and Site for Sore Eyes. He predicts significant growth over the next five years.
Housed under the Luxottica umbrella of businesses, the 800-store Pearle Vision Center is also growing its franchise sector. "Luxottica's acquisition has been important because of the vertical integration and optical knowledge they offer," says Bill Vaughan, Pearle's director of franchise development. "Now, we can focus on building the business.
Karen Miller, director of franchise operations at Cohen's Fashion Optical, says the 100-store company is also in a growth mode.
Many ECPs are finding that the three franchising options—buying an existing location, converting your own location, or building a new location—are increasingly tempting.
For Andrew Freilich, OD, and his wife, Heather, buying a franchise has meant growth in their net salaries. The couple purchased an existing Sterling location two years ago and have built annual business from $500,000 to close to $2 million.
"We did it by just putting the time in, not turning any patients away, and providing great customer service," says optician Heather Freilich.
Other ECPs agree that driving the patients' experience is one of the biggest draws. "I have control over the whole experience for the patient," says Bill Porter, OD, owner of a Pearle franchise in Pembroke Pines, Fla.
BOTTOM-LINE BENEFITS
Both franchisees and franchisors agree there are definite financial benefits to this business format.
What's in it for you? Franchisees cite many benefits from their business platform, including a blend of independence and the support of a brand behind them.
For some, this translates to profits. Notes Pearle's Vaughan: "Our average gross margin is 69 percent and the average net dispensing sales volume is $732,000. And this number doesn't include eye exams or clinical fees."
| The Search for Answers: Web Resources |
|---|
| • International Franchise Association: www.franchise.org Excellent background information on franchising is available here, plus a listing of franchise opportunities. • Franchise Trade: www.franchisetrade.com This site includes information on everything from franchise consulting and business loans to franchise associations. • Franchise Business Review: www.franchisebusinessreview.com Includes a variety of interviews with franchisees and franchise reports that rate and review many of the leading franchise opportunities. • American Franchisee Association: www.franchisee.org AFA is a nationwide umbrella organization of franchisees; its goal is to improve franchising and protect members' business investments. |
| The Pros & Cons |
|---|
| The Upsides ECPs cite many benefits to becoming a franchisee. • WORKING FOR YOURSELF: As successful Sterling Optical franchisees, Heather Freilich and Andrew Freilich, OD, say they love the rewards of running their own business. "The more we put in the more we actually get out, as opposed to working for someone else and getting the same level of everything," says Heather. • SUPPORT AND SECURITY: "Steve is a wonderful doctor, but he's not a manager and neither am I," says Pennie Platt, wife and business partner of Seven Platt, OD, who opened a Sterling franchised store in California, Md., less than a year ago. "We wanted to go in with some help, especially with all the insurance issues in this world." Others point to an excellent educational system as a boon. "In the beginning, I flew up to Cincinnati and they spent four days going over every aspect of the business," says John White, OD, who purchased a Pearle franchise in Paramus, N.J. "You can call them anytime with questions and they will even fly in if they need to. That's the biggest reason I wanted a franchise." • RETAIL EXPERTISE: The retail support aspect parlays itself into a major benefit for optometrists who want to focus specifically on the optometric and patient care end of the business. "We're not here providing guidance to doctors in relation to their craft," says Bill Vaughan, Pearle Vision's director of franchise development. "We are the soft side and that's what we will continue to focus on." • NAME RECOGNITION: Buying into a brand name usually means the marketing machine is well in place with solid brand recognition as the result among consumers. "Pearle has an exceptional reputation; the name stands for quality," says Bill Porter, OD, who is building a Pearle franchised store in Pembroke Pines, Fla. "This is another reason why I am very comfortable franchising with them. For me, the image is quality and great eyecare. That was an important issue." Vaughan agrees: "The most important thing we offer is the power and cache of the Pearle brand that has been around for 47 years and has a multi-million dollar ad campaign behind it." Most franchisors charge their franchisees a royalty fee for advertising, which includes both dollars for national and local marketing. • PRIME LOCATIONS: "The biggest benefit to us is that Cohen's is able to help us get the best locations," says Elaina Zavilensky, who owns eight Cohen's Fashion Optical stores in the New York metro area. "This is the biggest issue. Most of our stores are in a mall or a very busy area and we wouldn't be able to get the leases on our own." • PRODUCT DISCOUNTS: Because of their store volume, franchises can negotiate significant product discounts from vendors. This is passed along to franchisees. "Whatever royalties we pay to the franchisor we get back in discounts," says Freilich. "And it's flexible. We can buy outside the preferred vendors, buy through them, and also mix it up." Sterling's vice president of business development, Scott Finn, confirms this franchise feature. "We don't mandate who they buy from, but we do have preferred vendor partners," he says. "We like them to use about 50 percent of the preferred vendors if possible, but they can buy from whoever they want. They are running their own businesses." • MANAGED CARE PANELS: Many franchises also focus on helping their franchisees get on the third party panels they need. "They help you get on the insurance company panels that are tough to get on," says White. "This is important because about half of our business is in managed care and it's growing by 10 percent a year. I could see it being 75 percent of our business in less than 10 years from now." The Downsides Before signing on the dotted line, check out a few of the key factors that deter ECPs from choosing a franchised model. • ROYALTIES AND FEES: Initial franchise fees can range from $10,000 to $30,000, and some franchisors also charge royalty fees of up to 10 percent each year to maintain the franchise—plus three to five percent royalty fees for advertising. • HIGH ENTRY FEES: High-volume franchised businesses can be expensive to start up. For example, Pearle's director of franchise development, Bill Vaughan, says that the cost of entry for a Pearle Vision Center franchise ranges anywhere from $150,000 to $400,00 depending on the size and range of the project. "On average, our franchises with working capital are spending $300,000 to $350,000 but it's much less if they are just converting an existing practice," he says. • LACK OF OPTICAL FOCUS: Today's franchisors are mainly optical companies with a strong patient care background, but franchisees always run the risk of the parent company being sold to a company with a different focus. Greg Watson, executive director of Today's Vision, says this Texas-based company started out as a franchise but it switched to an optometrist-owned licensed model after a variety of problems soured things for its franchisees. Today, Watson, who refers to franchising as the "f" word, says the company's doctors can each make their own call regarding the way in which they would like to run their business. • LACK OF TOTAL CONTROL: Are you a control freak? Then franchising, where franchisees must comply to a certain set of guidelines, might not be for you. "Not everybody is cut out for franchising," says Pearle's Vaughan. • MAKING THE CUT: There are also factors that franchisors look for in an applicant. "We like to see liquidity a minimum of $50,000 to $100,000 in cash and a good debt-to-equity ratio," says Vaughan. "We don't discourage new ODs, but we are careful not to overextend somebody. They need a working fund to get through first year or two of startup." |
| Breaking Away: When Franchising Doesn't Work |
|---|
| As an optometrist with Texas State Optical (TSO) for over 20 years, Kevin Katz, OD, had seen the ups and downs of franchising. This included a plethora of owners, some of whom knew little about the optical business. "Some of them overpaid, so they squeezed the franchisees to make money off them," says Katz. Katz adds that many wanted the franchisees to advertise cheap prices to drive business in the door. "The franchisor ran the advertising; they took our money and gave us no say. We were always in conflict. They'd hire some ad person who used to sell McNuggets, and they wanted to see how to reduce costs," he says. In 2001, discontent TSO franchisees, gathered the support of the franchise's doctors and approached the owner with a buyout offer, which was accepted. Today, TSO is a privately held company with 101 members who license the Texas State Optical name. "We issue shares of common stock to our members," says John Marvin, president of the TSO network. "Members purchase a share for $4,000. They are buying ownership into the company. It's not like a $20,000 franchise fee; we buy that share back at any time if they want to cancel their membership." TSO offers some of the same benefits delivered by a franchised operation, include a strong brand name, education and training services, and product discounts. "The practice management education is the main benefit," says Marvin. "You can only discount yourself into success so far. Optometrists cannot build a profitable, substantial organization by getting an extra two bucks off a box of contact lenses." TSO's corporate office is funded through purchase rebates that are part of any new agreement we set up for things like telephone service and janitorial supplies," says Marvin. "Our annual revenues are $1 million, that's it. But the organization on the whole will do over $66 million in 2007." |
What's in it for the franchisors? In addition to tapping into franchisee's optical expertise and local knowledge, "we have found the high-touch, highly vested doctor is hard to replicate," says Vaughan. "They know their patients by name and can be interactive."
Still, there are many optician-owned franchises across the U.S. "Optical franchises are looking for ODs mainly, but opticians are also in the fray," says John White, OD, who purchased his Pearle franchise in Paramus, N.J., from two opticians.
Is this retail model right for you? Consider the options, and your goals, to reach your answer. EB
![]({"src":"/media/axagzig3/12008.jpg","focalPoint":null,"crops":[{"alias":"thumbnail","width":1110,"height":700,"coordinates":null}]})