Two years ago, George Naddaff was driving through Watertown,
Mass., when he spotted a line of customers snaking out the door of
a local restaurant. As an entrepreneur and former Boston Chicken
franchiser, he pulled over to investigate.
Inside the restaurant, Lo Fat Know Fat, he found a crowd of
patrons ordering chicken-meatball wraps, "air-fried"
french fries, fruit-filled smoothies and other healthful fare. He
was impressed not only by the number of customers and the taste of
what he sampled, but also by a store within the restaurant selling
vitamins and other supplements.
Over the course of a week, he cased the operation, returning at
night and on the weekend to gauge customer traffic. For 10 years
Mr. Naddaff, 74 years old, had been searching for something that
could match his early success with Boston Chicken -- while avoiding
the problems encountered by those who owned it later.
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Much of the success of taking a small, local operation and
expanding it into a national brand depends on making the right
choice to begin with, and then, setting up an expansion plan that
suits that choice. For Mr. Naddaff, Lo Fat Know Fat had
promise.
Growing Appetite
The timing for such a restaurant chain was "on the
money," Mr. Naddaff says. A rising health-consciousness, in
the face of increasing national obesity rates, worked in its favor.
Mr. Naddaf also saw affirmation of the concept in moves by
fast-food chains to healthier menu options. And, for rapid
expansion, you could move quickly because you didn't have to
waste time convincing customers of the value of the product.
To check his instincts, he enlisted the help of Perry Lowe, a
professor of marketing at Bentley College, a Waltham, Mass.,
business school, who ran an analysis of the business for four
months with his students. They found that the average customer was
between 18 and 34 years old, that many customers were traveling
five miles to eat at the restaurant, and that many ate there four
times a week.
"I was just being careful to make sure it wasn't an
illusion," Mr. Naddaff says.
Mr. Naddaff approached the restaurant owners with a deal: He
would pay the $150,000 salary of a longtime restaurant executive
who would help them strengthen their operation. There was a
handshake agreement that Mr. Naddaff would acquire the concept, and
create a franchising company at a later date.
Body-Building Start
Lo Fat Know Fat's owners had no plans for a national brand
when they started out. Co-owner Tim Kurtz, a former bodybuilder,
and his original partners, his wife Joliana, and Michael Jervais,
opened a sports-supplement store in 1996 called Flex Appeal. The
store was an immediate success, with first-year sales of
$250,000.
Over the next few years, they considered selling prepared foods,
such as wraps and smoothies, too, but it wasn't until 1999 when
Chris Pappas, a chef who was also a former bodybuilder, joined the
team, that they developed their low-fat, high-protein menu. By the
second year of operation, revenue from the food side of the
business surpassed that of vitamins and supplements.
Mr. Kurtz says representatives from several restaurant companies
had approached him about expanding the business, but he liked Mr.
Naddaff's enthusiasm, his management colleagues, and his plan
to franchise the operation.
The original store in Watertown had been successful for several
years among local residents. In 2003, its fourth year selling food
as well as supplements, the 2,000-square-foot operation generated
$2.5 million in sales with operating income of $600,000. The
company opened a second store in Shrewsbury, Mass., in December
2002 with the help of Mr. Naddaff's hired gun, and had sales of
$1.5 million and operating income of $300,000, in its first
year.
The results were encouraging. Mr. Naddaff and his analysts
believed that the success of the second store proved the concept
wasn't dependent on a single location. And, because the
Shrewsbury store has attracted an older crowd of people, mostly
between the ages of 34 and 55, they also believed that the concept
of healthy fare had wide demographic appeal.
Moreover, the health-supplement sales would provide an
additional edge, Mr. Naddaff adds, bringing in more revenue and
effectively lowering overall payroll costs for the operation.
Late last year, Mr. Naddaff recruited two young entrepreneurs
and formed KnowFat Franchise Co. In February, the team acquired the
rights to the restaurant and supplement-store concept, in exchange
for a 20% equity stake in the company for Mr. Kurtz and his three
partners.
Rapid Rollout
The group began to seek funding from individual investors in
February, and stopped in April when it had raised $3 million, $1
million above its original goal. It also assembled a five-member
board of directors made up of three KnowFat Franchise executives,
as well as Robert Grayson, a former CEO of a Limited Inc. division,
and Greg Horn, a former chief of General Nutrition Cos. Mr. Grayson
and Mr. Horn are both investors in the franchise company.
KnowFat is now putting aggressive expansion plans in place. The
company intends to sell 24 franchises in its first year, 70 in the
second, 130 in the third and 195 in the fourth, for a four-year
total of 419 units. On that schedule, by the fifth year of
operation the franchise company anticipates it would generate about
$31 million in profit on $73 million in revenue for itself, on
projected revenue from all the stores of more than $600
million.
Expanding companies, however, can make the mistake of trying to
grow too fast, says Jeff Rosenfeld, managing partner of Kessev
Finance, a Minneapolis financial-planning company that works with
franchisers and franchisees. "The first thing you want to do
is dominate your home market, then your regional market, and then a
bigger chunk of territory," says Mr. Rosenfeld. "Then you
can start dominating the entire country."
Expanding slowly into contiguous markets lets a company figure
out whether the concept must be adjusted to regional tastes, and
also lets a company leverage existing television and radio
marketing that may reach new customers. Franchisees can also take
advantage of existing relationships with suppliers and bankers in a
region.
First Come, First Served
But Mr. Naddaff and his management team say it's important
to gain a dominant position before competitors move in, especially
in key markets or regions, which Mr. Naddaff identifies as Florida,
California, Texas, Chicago, Denver and the Northeast.
"We're going to go after those markets real quick,"
he says.
The management team expects the company to be in five or six
major cities across the country within the first year. To
accomplish this, it plans to sell area licenses exclusively to
people who already own multiple restaurant businesses -- anywhere
from five to 100 stores -- in a particular area.
So far, the company has distributed 42 uniform offering
circulars to prospective franchisees who traveled to the company to
hear its business pitch. The area developers would have the right
to open stores on a predetermined schedule and prepay an amount to
help ensure that they will.
"This is the cornerstone of our geographic strategy,"
says Eric Spitz, president and co-CEO. "We are really looking
to grow this concept quickly and get a footprint out
there."
The advantages of using area developers are that by selling the
rights to multiple units, it is relying on seasoned operators who
have a successful track record running restaurants, and it costs
the company less on average to sell each franchise.
The company wants to make a big splash in the Boston area,
selling 10 to 15 individual franchises to be opened over the next
18 to 24 months. With the nearby restaurants, the company says, it
will be able to more easily provide guidance to the operators.
Find the Gym
Local real estate can be a pitfall for new franchise companies.
It's crucial to think about where to situate the businesses
locally. The KnowFat management team is recommending that
franchisees set up restaurants near gyms, office parks and
colleges. The company also plans to provide extensive marketing
help to franchise owners.
"We tell potential franchisees that the first thing to do
is map out all of the gyms," says Gary Jacobus, KnowFat's
chief operating officer. "If you locate in the middle of five
or six gyms, that's perfect."
Finally, any business concept has to be adjusted before it can
be replicated on a franchise basis. In KnowFat's case, the
number of menu items has been reduced, but seafood options and a
kids' menu have been added, says Mr. Kurtz, who has taken on
the role of vice president of nutritional trends in the franchise
company. The supplement store has also broadened its offerings to
appeal to a broader range of customers.
"Everything we've done so far is making the concept
stronger and making it have more mass appeal, while still not
alienating the regular customers that we have," says Mr.
Kurtz.