Impressed, Sir Speedy's top brass recruited Tallent for an "image redesign" task force. "The old image was out-of-date, from the logo and colors to the business itself," Tallent says. Then came two more task forces: one to design an electronic network, and another to link Sir Speedy to the Internet.
The upshot? Sir Speedy is moving into the electronic age, using digital networks to link its nearly 900 locations. "Traditionally, you create something, you print it, and you send it off in trucks," Tallent says. "It's now create, distribute, and print. I can take an order in Nashville and send it to six other Sir Speedys around the country, which print the product where it is destined to go anyway. The customer has only one person to deal with -- me -- and I make the job of getting the product to six cities easy, but I use electronics rather than Federal Express."
Now running a couple of Sir Speedy locations, Tallent will gross a combined $1.6 million this year, nearly twice the industry norm for two stores. Not surprisingly, Tallent reinvests 80% of earnings in new technology. "There are very few printers in the country as far along as we are in technology," says Tallent, "and nobody our size in Nashville is even close."
Whereas Tallent integrated his business with technology to save money for customers, Paul Schulte and Steve Borgmann designed their company to save money for themselves and control as much of the business as possible. Their strategy of vertical integration has helped them amass a highly profitable group of 46 Super "8" economy motels.
Schulte and Borgmann, both of them building contractors, pretty much backed into their franchise. In 1976 Borgmann's construction company built a Super "8" in Nebraska. The owner showed him the pro formas and persuaded Borgmann and his friend Schulte to become Super "8" franchisees themselves. They built their first one in Preston, Iowa, two years later. "The formula worked, so we built motels one at a time after that, financing them with limited partnerships," says Schulte. The partners found that they could build more cheaply than their competitors, who relied on outside contractors.
By 1990 they had 27 Super "8" properties and two companies under the umbrella of their Simplex Motel Group: Motel Developers Inc., which builds the units, and Spartan 8, which owns them. Simplex Motel Group manages the units. "We're one of the few motel developers in the country that can do it all -- the feasibility studies, the site selection and acquisition, the construction, and then operating them once they're open," says Schulte. Last year he and Borgmann took the company -- now called Supertel -- public, raising $17 million to fuel expansion.
Their strategy of vertical integration makes for healthy financial results. Despite a severe downturn in the lodging industry during the early 1990s, Supertel's revenues have grown at a compound annual rate of 14.8% over the past five years, while operating revenues have expanded by 20.4%. In 1994 the company reported sales of a little more than $25 million, with a pretax operating margin of $6.5 million, or 26%. By comparison, margins in their sector -- limited-service budget motels -- average 5.8%, according to Smith Travel Research.
Cost Control
Every month, franchisees face a sobering reminder of how important it is for them to preserve their margins. If they don't keep costs under control, they risk mailing away their profits when they write the check to the franchisor. Monthly royalties and marketing fees, after all, typically range anywhere from 2% to 10% of gross sales, not profits . That puts added pressure on an operator like Bill Hall, who owns 55 Dairy Queens in Texas.
Hall is a former certified public accountant who spent six years with Arthur Young (now Ernst & Young). The challenge he faces day to day, he says, is controlling costs while getting enough of a return to justify the time and money he invests in the business. "The idea of increasing counter prices because my backdoor costs are up has gone by the wayside," he explains. "Today the competition determines what I can charge."
That's why he has teamed up with other Dairy Queen franchisees in Texas -- there are 200 of them, with some 800 stores -- to maximize purchasing power. For example, he and his Texas colleagues don't buy much product from Dairy Queen International. Instead, to obtain the best deals on everything from hamburger patties to paper cups, they've contracted with a company called Food Services Purchasing Co-op. The co-op negotiates on their behalf with all manner of vendors. Buying for thousands of restaurants, including KFC and Taco Bell nationwide, the co-op can cut better deals than Hall could on his own.
"We'd rather focus on the sales side than try to save every nickel we can on the purchasing side," he says. "But having the co-op gives us a comfort zone."
The co-op actually buys all the food and supplies, and then resells them to wholesalers for distribution. Obviously, the wholesalers need to make money, but here, too, Hall has a strategy. "In my opinion, if you split your business up between too many wholesalers, you won't be a big enough piece of their action to demand decent pricing and service," he says. He buys almost everything from a single wholesaler, McLane Food Service, which delivers to his stores.
"McLane knows that I can't raise my prices just because they raise the price to me, because guys like me will go out of business," he says. "If the vendor is your partner, he'll watch his own costs. It has a ripple effect."
