Finding the win-win in franchising
By Catherine E. Toth
Advertiser Staff Writer
Seven years ago Dennis and Mona-Lisa McRae were barely getting by. He was disabled; she lost her job. They were living off food stamps and wondering how they were going to pay next month's rent.
Jeff Widener • The Honolulu Advertiser
Until Dennis McRae had an idea.
Dennis and Mona-Lisa McRae went from food stamps to a net worth of more than $1 million in seven years, thanks to their Subway franchises.
"I didn't have the know-how to run my own business," said the 53-year-old Army veteran. "And I wanted something that was no-fail, because I can't afford to fail. I wanted a win-win situation."
That situation, he found, was owning a franchise.
A service-disabled veteran, Dennis McRae was able to get a $75,000 grant through a veterans program to help him buy a Subway sandwich shop in Kailua.
Within two years the couple had enough credit to get a $75,000 loan backed by the Small Business Administration and bought a second store in the Waikele Shopping Center. They used the profits from their first two stores to buy their third Subway in Kailua's Blockbuster Center. In November 2004, the couple sold their first Subway location, so now they run only two.
Their net worth exceeds $1 million. The once-struggling couple is living in a gated community atop Makakilo, paying for two college tuitions and planning to open a bed-and-breakfast someday.
"Our lives changed a whole lot," said Mona-Lisa McRae, 54.
"We went from food stamps to a self-worth of more than $1 million ... We're blessed."
That's the allure of franchises: operating an established business and reaping the monetary rewards.
According to the International Franchise Association, franchising has had a $1.5 trillion impact on the U.S. economy, directly employing almost 9.8 million people with a payroll of $229.1 billion.
Hawai'i is home to dozens of franchises, from It's Just Lunch dating service to 7-Eleven stores. Tourism traffic can propel sales at some Hawai'i franchises to the top of their company.
The Cold Stone Creamery ice cream shop in Waikiki, for example, is one of the top three sellers for that company, said company spokesman Kevin Donnellan.
"Most definitely the Hawai'i (franchises) are generating a higher-than-average sales volume in the entire system," Donnellan said.
But operating a successful franchise is not always as easy — or as profitable — as it was for the McRaes. Owners say that running a franchise is like operating any small business — you need capital, business savvy and a willingness to work long hours often for small paychecks. And even that doesn't guarantee success. Often franchises don't work out due to poor location or competition from rivals.
The first hurdle is often capital. Total startup costs can range from $20,000 or less to more than $1 million, depending on the franchise and real-estate agreement, according to the IFA. Most average around $30,000. Many franchises also require owners to have a net worth of $400,000 or more.
For example, Candy Bouquet, which specializes in floral-like bouquets of gourmet chocolates and candies, can be run from a home and cost as little as $11,500 to start. The cost to open and operate a McDonald's restaurant, on the other hand, can be as high as $1 million.
It cost Brandon Hughes more than $100,000 to open Hawai'i's first Cartridge World franchise in 'Aiea last April. And so far, he hasn't been able to cut himself a paycheck.
"It's been a personal challenge for me, to bring in money," said Hughes, 33. "Every month I look at (the numbers) and realize I spent $15,000 but only brought in $5,000. How can that be possible? How can I continue on? This is nuts. This isn't supposed to be how it works. But when you think about it, it really drives you to work harder."
Deborah Booker • The Honolulu Advertiser
Hughes decided to operate a franchise, rather than start his own business, because he wanted to work with a tested concept. While Cartridge World, an Australia-based franchise, is fairly new to the United States, the company is growing rapidly, opening more than one new store every day.
Cheryl Loo works out at Liberty Fitness in Kailua. She also owns the fitness center, one of five in the nation.
Though Hughes has no experience in this retail industry, he believed that the concept of refilling empty printer and toner ink cartridges would take off in Hawai'i.
"The consumers win because it's cheaper than buying new cartridges. The environment wins because we're reusing the product. And we win," Hughes said.
Believing in your product or service, whether you're operating a franchise or your own business, is critical for success, said Eddie Flores, president of L&L Franchise Inc., which boasts about 120 franchise restaurants, most of which are on the Mainland and operating as L&L Hawaiian Barbecue.
"For any successful entrepreneur, you must love your business," Flores said. "You must love your work. There's no 40 hours anymore. ... If you don't like it, you'll never make it."
Being passionate about the business played a huge part in Lei Kaniaupio-Spadaccini's decision to open a Robeks Fruit Smoothie & Healthy Eats in Market City Shopping Center in Kaimuki.
She and her husband, Dmitri, believed in the franchise's commitment to serving up healthy alternatives to fast-food snacks.
It cost between $250,000 and $300,000 to open a Robeks here. The couple got partial funding from an SBA-backed loan and additional assistance through the Office of Hawaiian Affairs.
They have to pay 7 percent of their sales back to the parent company in royalties and another 2.5 percent for marketing.
"Initially, I thought, 'Oh, my gosh,' " Lei Kaniaupio-Spadaccini said. "But when I think about what we get for that — they supply everything, anything we need."
But starting the franchise wasn't their biggest challenge.
It has been going up against the deep pockets of Jamba Juice, which operates about two dozen stores in Hawai'i and has an established brand nationwide.
"Our competition is very, very wealthy," said Kaniaupio-Spadaccini, 42-year-old mother of two. "(Jamba Juice) is a huge conglomerate. Money is never an issue. For us, we're just a family."
Competition can be brutal, with rival franchises opening down the street or sometimes on the same city block. While most franchises have restrictions on the distance between franchisees, some aren't clear cut.
Subway doesn't enforce any territorial rule, said Les Winograd, spokesman for Subway Restaurants, adding the company approves franchise locations on a case-by-base basis.
That concerns some Subway franchise owners who say they can deal with competing against similar products, just not the same one.
"Fighting against the same product, it's hard to do," Dennis McRae said.
Owners take out huge loans to pay for startup costs. And often franchise owners find they can't afford to quit their day jobs. Just yet.
Cheryl Ann Loo still works as an employment specialist for the state, even though she opened Hawai'i's first Liberty Fitness center in Kailua about three months ago.
"The dream is working there full-time," said Loo, who works at the fitness center during the evenings. "For some of us, we still need the income of a full-time job."
Loo and her longtime boyfriend, Paul Vander Werf, invested about $60,000 so far to open Liberty Fitness, a franchise similar to Curves that offers women a 30-minute circuit training workout system. Since the Kailua center was only the fifth to open in the nation, Loo and Werf cut a deal with Liberty Fitness to waive shipping costs for the exercise equipment.
With plans to expand — either open more locations or increase services offered at the Kailua center — the couple will likely take out a loan to pay for additional expenses. For now, they're relying on savings accounts and other private funding.
They say the investment is worthwhile, especially considering fitness and weight-loss franchises are expected to be one of the fastest growing segments this year, according to Entrepreneur Magazine.
Curves, which leads the industry, grew 37.3 percent last year and boasts more than 3 million members.
Liberty Fitness Kailua has about 100 members. Loo hopes to grow that to 250 this year.
"Fitness for me is lifelong," Loo said. "I've always wanted to improve my weight and appearance. It's part of my lifestyle."
And finding a way to build a career based on her lifestyle is really what drew her to opening a Liberty Fitness, where she gets to work out every day — on the job. She has already lost weight.
"This is actually my commitment to fitness," Loo said.
Reach Catherine E. Toth at 535-8103 or ctoth@honoluluadvertiser.com.
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