The Best-managed Franchises in America
My question, asked of 120 of America's best-known franchisors, was simple: tell me about the superstars in your system. Who are the hot performers, the operations that dramatically outperformed the system average? What is it that makes them so special?
To my surprise, the answers were simple, too, and almost always the same, whether the business was fast food or maid service or hair care. Forget location or the ability to follow the franchisor's program or mere hard work, although all of those are necessary. The best franchises succeed the same way the best independent businesses succeed: management makes people care.
Starting with my choice for the top franchisee, here are the best I found. Profiles of the four runners-up to Gary Grace can be found in [Article link].
Operator: Gary Grace, 47
Number of units: 20
Projected 1989 sales: $7.5 million
Unit sales exceed avg. by: 30%
Profit margin: 18%
Ask Gary Grace why his 20 Supercuts haircutting salons are consistently the top performers of the franchise chain's 540-odd outlets, and he'll send you to spend a day riding the freeways east of Los Angeles with 31-year-old Becky Malie. With corporate headquarters in San Francisco, 14 shops around L.A., and the other 6 in Hawaii, Grace can't be everywhere at once, no matter how much airline time he logs, so he depends on managers like Malie to create the uniform working environment that keeps his return on investment high.
Malie is the finest fruit of Grace's management-development system, a nine-year veteran who started as a stylist in Grace's third salon and rose through the ranks. Today, as southern California general manager, she shuttles the company van from shop to shop, from the wealthy beachside condos of Marina Del Ray in the west to the tract houses in San Bernadino far to the east, making sure that about 50 receptionists, 135 stylists, 14 shop managers, and 3 senior managers are all working toward the same goals.
By 11:00, when Malie pulls into the parking lot in front of the Riverside shop, the asphalt is shimmering under the gray sky of a California summer. She breezes into the shop, a familiar henna-haired whirlwind of cheerleading and chat, admiring the earrings studded in a row on the new receptionist's left lobe or complimenting a stylist on a flattop cut to textbook precision. Everyone is "hon." She knows when they started, what they're good at, and whether they've got a boyfriend, husband, or kittens at home. She teaches them focus, to see the shop as she does, the way a customer would. Is everything clean? Is the wait too long? If there are magazines scattered in the lobby waiting area, she'll pick them up; if there's a spot on the receptionist's glass counter, she'll point it out, then wipe it up herself.
At most shops Malie is more friend than supervisor, cutting a few heads to help with a morning rush or providing names of licensed applicants from the beauty schools. But Riverside is different. With the manager out on maternity leave, the daily operational responsibility has fallen to two shift managers, both novices in their early twenties, just a few years out of beauty school. They'll need extra help. So she teaches them the way Grace taught her -- the way they, in turn, will be expected to teach the 14 or so stylists in their shop. You never tell someone what to do; you show her and explain why. Did a complimentary tote bag just arrive from one of their shampoo suppliers? Why not give it away in a contest for the person who sells the most product for the rest of the month? Malie makes the poster herself. A problem with stylists who "forget" to clock out for lunch breaks? "I'll coach you on that, hon," Malie promises, pulling out a management-supports form, which they work through together, identifying the problem, its impact, the appropriate response, and the final result.
"It's a simple system," Malie says. "Repeat things over and over, constant feedback, and constant follow-up. Make it happen; be the best damn cheerleader anybody's ever seen."
Feedback and follow-up -- detail, detail, detail. They're the key to success in any Supercuts or in any other kind of franchise. Every service business is the same; each depends first and foremost on management's ability to develop and motivate the employees who have actual customer contact. At Grace's Supercuts that's done one-on-one -- by shop managers, by Malie, and by Grace himself, who calls daily and visits each shop every month or two, and still knows all 320 employees in both California and Hawaii by name. But it is not the personal touch alone that makes Grace the Supercuts leader. More important is how he's taken the basic Supercuts formula and improved it, refining and expanding the systems and incentives over nine years of operation.
As ubiquitous as franchised haircutting salons seem today, the original Supercuts Inc. combined several new ideas when Grace bought his first unit in 1980. Unlike traditional beauty salons, which usually sell shampoo, haircut, and blow-dry together as an expensive bundled package, Supercuts stressed one basic service, a quality haircut at an affordable $6 price. Stores were open 78 hours each week, sited in strip malls, and advertised heavily on TV. Unlike conventional stylists, expected to earn through commissions after developing a clientele, Supercuts' stylists were paid an hourly wage, with benefits, vacations, and holidays. After a week's training, they were taught to cut a few styles with a precision method, then put on the floor and given wage incentives based on volume.
It was the classic franchise formula -- standardize for high volume to give customers quality, value, convenience, and consistency. But Grace went several steps further:
* He deepened and broadened the performance incentives, rewarding stylists through a management-evaluation program that measured not just the number of heads they cut per hour, but how well they performed over a full range of responsibilities -- from showing up on time and smiling to communicating new services to customers or keeping the number of "adjustments," unhappy customers, to less than 0.5%. In addition, by changing or expanding the categories in the evaluation form, he developed an effective way of making sure the company's overall focus was clear to each employee.
* He doubled the education component, adding a week of pretraining just to make sure new hires were comfortable with the large comb and small shears used in every Supercuts. The cost was negligible, just one week's salary, with the payoff in employee confidence. Then he added again, this time quarterly workshops for all employees, with training in customer service and continuing education "on what's hot and what's new." Besides keeping stylists on the cutting edge, it would build an esprit de corps based on shared excellence.
* He started a company newspaper and gave a yearly awards bash to build morale. He sent each employee a handwritten card on her birthday. They could have more than jobs with him, if they wanted; they could have careers. To build his staff, he spread responsibility: each shop manager was expected to hire, train, and evaluate the stylists in her shop, and each assistant manager had the same duties for the receptionists. Then he developed a management apprentice program to let stylists prepare to climb up, assuring himself of enough ready talent that he could promote from within.
* He introduced brand-name product sales and still more incentives, commissions, and contests galore -- and in the process dramatically increased his net.
The results, year in and year out, have been dazzling: 1988 sales in Grace's shops averaged $375,700, some 30% higher than volume franchisewide, with margins running between 18% and 20%. In an industry plagued with employee turnover, 9 out of 20 of his managers have been with him since the beginning, while another 7 have more than five years' tenure. Product sales consistently run 50% over the national average and bring $300,000 -- about 25% of his total profit -- straight to his bottom line.
The genius of franchising, at its best, is the partnership it creates -- spreading responsibility and reward away from the corporation down to the individual unit owner. Grace's success has come from pushing that partnership one step further down, building unity of purpose and depth of management that could do any CEO proud.
In 1980, when Grace, then 37, opened his first franchise, he had no intention of owning a chain of haircutting salons, let alone running them. Trained as an accountant, he barely knew a shag cut from a shag rug. Besides, he already had a new small business of his own, a consulting office he set up in his hometown of San Francisco after years in the corporate fold, managing investments for a handful of individuals and doing a bit of franchise consulting. Supercuts was a client, a fledgling franchisor selling its package as a passive investment requiring, at most, eight hours of his attention each week.
Grace started with one significant advantage. Unlike most potential franchisees, forced to make projections from the vague outlines of a uniform franchise-offering circular, he'd had access to the corporate books. "Given the required investment range, it was clear you could be wrong by a very large factor and still do well," Grace says. "I figured, if I can do as well as the company's stores, I'll think I've died and gone to heaven."
Grace's projections, in fact, were very wrong. He'd hoped eventually to net some $100,000 a year on a start-up investment of $75,000. After the initial shakedown, it turned out that his first two stores produced more than a 100% return far more quickly than he'd hoped. His third store showed a 150% return on investment in its first year. Grace was convinced he could become "a major player" -- if he could find the locations, capital, and personnel to do it. Although the Bay Area was largely spoken for, Los Angeles, an hour away by plane, was still untouched. He could cherry pick, looking for high-visibility, high-traffic strip malls. He was willing to pay rents far higher than the franchisor recommended -- assuming, correctly it would turn out, that the prime location would guarantee an equally higher return. Although he had no capital of his own, he had an investment client with some money to play with.
After Grace's first 3 L.A. stores opened, returning 300% a year on a total investment of $190,000, he would have no trouble finding all the money he would need. Under the corporate name of Cynosure, he would eventually open 20 different units separated into 7 different legal entities, with Grace's ownership stake as high as 100% in 3 stores and as low as 21% in 6 others. "Gary Grace Enterprises," they answer the phone at headquarters; it is Grace, not Supercuts, that his investors bet on.
They leave management to him, too. "I don't write them memos," Grace says. "I send them money."
Grace loves being in the shops; it's the most fun he has in his 40-plus-hour workweek. From the beginning he counted on enough personal exposure to his team to guarantee they would handle things the same way he would. But he never considered moving south to L.A., and he has never had to, except for a few months at a time.
The relationship starts with one basic agreement: "You're the manager, responsible for making sure you have things the way you think they should be," he insists. "You can't say, 'Do something because Gary says so,' if you say you're the manager of the shop."
He'll be there to help, and so will Malie; 19 other store managers are just a phone call away. But it's up to each store manager herself to keep things humming. That means staying on the floor, in touch with everyone, cutting at least 85 heads a week, keeping the productivity and attendance charts in the break room up to date, and reminding Laura to try to smile a little more. Managers hire, train, and discipline. They decide whose productivity merits a raise beyond the established pay scale and who isn't performing to their standards and will have to be let go.
Formally, they conduct the evaluations of all shop employees every four months, filling out a six-page form reviewing goals, accomplishments, and opportunities to improve, with everyone graded from 1 to 10 on their contributions in weighted categories such as shop atmosphere, mastery of job, and teamwork. For stylists, it's a way to boost their income. Points earned over each four-month evaluation period translate into dollars in an annual bonus, up to $375, paid each December. An effective manager can do better still, adding more than $1,000 to her $20,000 salary. To make sure there are no surprises, managers conduct mini-evaluations each month as well, looking at statistics for categories such as volume and attendance, measuring each employee against goals she set for herself. It's an endless cycle -- feedback and follow-up -- starting each time with self-evaluation and ending in a lengthy employee-review session with the shop manager and with general manager Malie.
For Grace, the management-evaluation system is a way to communicate his corporate objectives. If he wants everyone to concentrate more on selling products, for example, he can make that a category in the evaluation form. If he's having a problem with cash shortfalls at the shops, he can increase the bonus points that managers earn for cash accuracy. The evaluation forms and the weights given each category change as needs and problems change. The forms are revised at least once a year under the direction of Grace's wife, Jose, who joined his executive-management team five years ago.
Grace always needs managers. At any given time he'll have one or two out on maternity leave and a third planning to move away. So he designed a multistep development program to encourage his best stylists to stay with him for the long haul. If a stylist does well on the floor, she can become a shift manager, with a 40¢ hourly raise and responsibility when the manager is off the floor. The next step is assistant manager, worth 75¢ an hour more, and responsibility for hiring, training, and evaluating the receptionist, just as the manager does the stylists. If she still likes the idea of management, she can join the apprentice program, spending one day a month for six to eight months going shop to shop, watching Malie troubleshoot.
It's a simple program, requiring only that the shop managers agree with the concept. It costs nothing more than a few days of salary for an apprentice or a modest raise for shift and assistant managers. But it has enabled Grace to make most of his promotions from within and know just what he's getting when he does. "We get to see people under fire," he says. "By the time we're ready to promote a manager, we've had enough interaction to know exactly where they're coming from."
That constant interaction, top to bottom year after year, is the company's greatest strength, as Grace best demonstrated in his campaign to boost product sales. In the two years since the program was formally launched, product sales have risen from less than 1% of gross to more than 10%, while contribution to net has soared from $20,000 to more than $300,000 today.
Product is a natural for Grace. Distributors for such lines as Paul Mitchell and Nexxus will warehouse and supply it, they'll provide trainers to teach the stylists to use it, and they'll organize trips for managers to shows to learn how to sell it. But Grace added his own management style, "a full-court press to get everyone to live, breathe, eat, and sleep product." He talked product all the time, in every meeting, every coaching session, and every phone call. "But I don't know how to sell," stylists would lament. "We don't want you to sell," he'd reply. "You're a professional. We want you to communicate about hair care."
Grace educated them formally as well, adding special retail seminars. He made retailing part of their evaluation process, worth 15% of their annual bonus points. For added incentives, stylists were given 15% on everything they sold, with checks for as much as $640 handed to them at each four-month review for maximum impact. He added contests, too, intramural and shop against shop: little ones, such as sell something, anything, every day for a month, and win a Supercuts T-shirt; and big ones, with receptionists competing for a trip to Palm Springs, stylists for a trip to Hawaii and an extra week of paid vacation, managers for a trip to Paris.
If you're a customer in one of Grace's shops, chances are, someone will sell you something -- if not shampoo or hair spray, then the brushes he imports on his own from Taiwan. If your stylist doesn't sell you a hair-care product, the receptionist or the manager will.
Beyond the repeated personal attention and the classes and the forms, every manager has her own favorite technique. Pam Beegle, manager of the Montclair, Calif., store, made product sales part of the ongoing "guest-service" campaign she developed. Glo Curci in Santa Monica takes a more competitive approach. With her eye on a trip to Paris, she organized a Let's Kick Ass Party at her house on a Sunday night, inviting all 27 staff members for pizza and beer and repeated exhortations to move product.
The one sure winner, month after month, is Grace's bottom line.
Today Grace is the Supercuts superstar. He's been elected to every board or advisory committee his fellow franchisees have, from president of the franchise association to the franchisee seat on the corporate board of directors. His franchisor praises him as "a pioneer" and now includes much of the Grace evaluation system and product sales program in the corporate package it sells.
But Grace's relations with his corporate partner have not always been smooth. They were selling franchises, after all, while he was selling haircuts. Like many franchisees, he went from the euphoria of early growth to mutual finger pointing when the growth slowed. Like most, eventually he was driven to join a franchisee association to try to guarantee what he considered his rights. But his conflict with Supercuts went much further than the conventional power struggle between franchisor and franchisee; it became a nightmare escalating to lawsuit and countersuit that would not be resolved until ownership of the franchisor changed hands. It was a classic education in franchising, repeated reminders of just how far apart the interests of franchisee and franchisor can be.
Grace's first lesson came early, in 1981. "How can you charge me $4.50 for this?" one customer complained, brandishing a bottle of Supercuts brand shampoo. "I can get it at Long's drugstore for $1.98." Grace was appalled himself. He was paying Supercuts Inc. $2.25 a bottle for the stuff. " 'We thought about telling you,' the corporate side said," he remembers, " 'but we decided against it.' "
Grace didn't want to rock the boat. They were both making more money and expanding faster than he'd ever thought possible. But the relationship soured with each step he took beyond the strict operational guidelines that corporate set. When he added a place for employee goals on the evaluation form, he found himself chided like a child caught coloring outside the lines. When he tried to introduce Nexxus products to his store, he was pressured to take them out, "or they'd put me on their 'can't expand' list of bad boys."
Grace tried to take the reprimands coolly, "eating my annual plate of crap, I called it," but that didn't help either. "I'd call the national office, and they'd ask me, 'When are you going to clean up your act so you can get more franchises?' " Even more intimidating were their veiled threats to take his share of the advertising dollars and spend them in another market.
By 1983 corporate was having some growing pains of its own. Franchised haircutting had become an industry, with fierce competition for market share, and Supercuts was lagging. The franchisor had tried to expand east, but failed to sell enough units to penetrate the markets, and cash flow was tight. So it raised prices, systemwide, from $6 to $8. Unilaterally.
The results were predictable. Dollar volume and the franchisor's royalty income went up. But unit volume, market share, and the franchisees' net all went down, as much as 20% for some shops, between 15% and 18% for Grace. The new TV campaign corporate unveiled that fall was no help to the units, either: image ads, soft-sell spots calculated more to sell new franchises than more haircuts, Grace complained.
"Now I was getting nervous. Sure, I was making $600,000 a year, but I'd made $750,000 the year before. I kept saying, 'Gee, things are sliding a bit, but if we can hold it right here, we'll be all right.' "
But the center would not hold. As unit volumes kept falling, pushing the weaker franchisees close to collapse, angry owners created a franchisee association, demanding more support, a say in personnel, and a change in advertising policy. Grace, hoping for conciliation, refused to join, "afraid we'd get so embroiled it would destroy everything."
Six months later he changed his mind, eventually serving as both an officer and director of the association in its increasingly bitter fight. The franchisees demanded change, a fair hearing, and a full audit of the advertising accounts. The franchisor demanded loyalty. When the association sued, the corporation countersued and put the business on the market.
In 1987, when Supercuts Inc. was sold to a group of investors, financing was contingent on a settlement of all suits, and the issues, responsibilities, and rights were formally resolved. "A classic check-and-balance system," Grace calls it: franchisees were given seats on an executive council, with a voice in policy and personnel decisions, and control of part of the advertising funds. "The new owners want to expand, and they need to keep franchisees happy. They said they weren't giving us anything they didn't think we should have. It has made relations much better than they were under the original owner."
Better, perhaps, but still stormy. In 1988 the association passed a vote of no confidence in the new owners, and talk of another suit filled the air. This time Grace had to excuse himself. As a board member of both sides, he'd be voting on whether to sue himself. Then the franchisor put Supercuts Inc. up for sale again, forcing the association to ask what it could gain from yet another new owner, this one, presumably, wildly leveraged.
For the moment at least, things have calmed down, and confidence has been restored. The sale offer has been withdrawn, and talk of lawsuits has ended. Instead, the franchisees have tried bringing a family therapist to their meetings, hoping to introduce "benefit-of-doubt policy" to keep them from tearing one another apart.
Grace, who toyed with the idea of buying the entire corporation for himself, tries to look at the bright side. "I think their hearts are in the right place," he says of the current owners, "although I'm not sure it will be enough. Some conflict is inevitable. We work off two different lines. They look at gross, and we look at net."
Freedom to pursue the net was the biggest change for Grace under new ownership. The new owners invited him to speak on boosting product sales at the company convention and cheered the plan to launch Superstyles, an attempt to raise the average ticket price by rebundling haircuts with a wash and blow-dry. Introduced last year, it is the most dramatic change he has made to the old Supercuts formula -- and it added another $30,000 to his bottom line.
He's free to grow again, too, after a four-year red light, and has opened three new units within the last 18 months. But his strategy is different from what it was nine years ago. The return will be lower, 30% to 40% on each shop, and the capital will be his own, plus what he can borrow.
He's not yet sure how to proceed, Grace says. "I could keep on doing a slow, level expansion, a shop or two a year. I've got the management to do that for a long time." Or he might take another "big chunk," a 25-unit new market rollout somewhere in the East, "although if I do that, the question will be whether I can spread my personality that far."
It would be a big step, he admits, "although I'd guess I could do 90% of what I'm doing here on the strength of the system." The secret will be to find the right leverage point, someone who could play his role, working one-on-one with each of the 25 new store managers.
He's already got one strong candidate in California general manager Becky Malie, although he'd have to develop another layer of incentives to make it fair. And he's got three candidates for her job. And a dozen more to take their spots. That's how the system works.