When it comes to press releases that tout impressive numbers of new store openings that American restaurant chains intend to franchise internationally, a Cornell University study offered a warning: Don't believe the hype.

In examining some 142 development commitments between American restaurant franchisors and their master franchisees in other countries, researchers at the Center for Hospitality Research at Cornell's School of Hotel Administration found only six deals in which the franchisee ultimately fulfilled or exceeded the announced number of anticipated branches.

Of the 142 deals, only 55 still were in force at the end of their development periods. And those 55 had yielded a median of only three functioning restaurants, despite more sizable projections in earlier announcements, the study discovered.

One of the prevailing reasons that international development deals don't attain their intended fruition is that the American franchisors tend to choose as partners the native franchise candidates who espouse the most ambitious growth plans, according to the study's author, associate professor Arturs Kalnins. What's more, the numerically larger development deals carry a higher likelihood that the franchisee will not come even close to hitting the number of units initially proposed, Kalnins found.

But after reading and analyzing the study in hopes of extracting domestic parallels, franchise veterans seeking to find development implications for U.S.-only goal-setting disagree about the conclusions Kalnins reached in "Biting Off More Than They Can Chew: Unfulfilled Development Commitments in International Master Franchising Ventures."

Some--like Stan Friedman, executive vice president of Wing Zone, an Atlanta-based brand that has grown from six units in 2000 to nearly 80 today and plans to open about two more U.S. units per month for the next several years--consider the study to have shortcomings of its own.

"Whether it is international or domestic, it comes down to the territory and the franchise partner that is going to work it, and what this study missed was the human factor," Friedman said.

He also was bothered by what he saw as the report's veiled accusation that franchisors are money-hungry predators eager to collect up-front fees based on the size &the deal and move on.

"It's not the number of units that you open that counts," he said. "It's the number [of dollars] that the units throw off that counts."

But J. Marc Mushkin, senior director of franchising at Del Taco Inc., the 360-unit chain whose goal is to double in size in the next five years, mainly through franchising, said the study brought to light a rarely examined topic many franchisors would prefer to not talk about.

"Finally, someone has exposed the truth behind all the hyperbole out there regarding international--and in many cases domestic--franchise development deals," Mushkin wrote in correspondence with Kalnins.

He informed the Cornell professor that Del Taco's philosophy is that small deals are far more realizable than the kind of new-unit commitments often made in master franchising pacts.

Mushkin wrote that he and Del Taco's president, Ron Petty, had "learned the lessons you describe, having spent the last few years signing up developers (domestically only) to very small deals by industry standards."

In further affirming Kalnins' findings, Mushkin continued: "We have often remarked internally that the big deals just never work out, so we're committed to aligning our development schedules with what we believe is actually possible. What a concept!"

But Matt Shay, executive vice president and chief operating officer of the International Franchise Association, said he was unimpressed with the study and found it lacking in significant lessons for American restaurant franchisors.

According to Shay, many announced deals fail to reach their development goals because of market forces and economic circumstances.

Although Kalnins didn't discount those factors in his report, the statistics he cited can be viewed in more than one way, Shay contended.

"I don't know if we glean any particularly useful insight in reporting that the number of units announced in a press release are fewer than the number of units that are actually created," Shay said. "Looking at his own numbers, I think it is pretty impressive that 40 percent [the 55 deals out of 142] came to bear [fruit, in the form of an average of three restaurants].

"I don't want to be dismissive about this research, but I don't think it is a big surprise to anyone that market forces often get between the lofty goals of a franchise agreement and what is actually opened, domestic and international," Shay said.

Lee Knowlton, senior vice president of operations for Cold Stone Creamery, the Scottsdale, Ariz.-based franchisor that recently announced a plan to expand its 1,200-unit ice cream chain by adding 150 outlets in Japan over five years, said the study underscored the importance of selecting the right partner.

"I think some companies are [falling short of] their projections, but at the end of the day, those projections don't have to be so inaccurate if they are picking the right franchise partners," he said. "I think it is better to go forward with the right partner than just rushing in with someone who does not share your company's core values."

Despite the market forces that may derail franchising goals, the worth of franchisors' words comes under scrutiny when they routinely overstate their franchise development goals, according to Ron Paul, president of the Chicago-based foodservice consulting and research firm Technomic Inc.

"The downside to routinely overstating your development goals," Paul said, "is that one or two years down the road, when you are out selling franchises, and the prospective candidate says to you that he read in Nation's Restaurant News and other publications that you were going to have 100 units by now and you only have 20 and he asks what happened, what are you going to tell him? It reduces the franchisors' credibility when they are reporting things that have not come to fruition.

"Franchisees tend not to trust franchisors anyway, so all that does is raise the level of mistrust."

In comparing and contrasting domestic development deals with Cornell's international findings, Technomic randomly selected 28 U.S. fast-food and tableservice chains that announced new store projections in the fourth quarter of 2004. As of the end of the third quarter this year, 70 percent of the chains were on track to meet their numbers, a far better fulfillment rate than Cornell found. Full-service chains led the pack domestically, with 85 percent expected to hit their development goals by the end of 2005, Paul's firm found.

But some overestimation was clearly evident in Technomic's study.

For example, in the fourth quarter of last year, Wendy's projected that it would grow domestically through the addition of 250 to 270 corporate and franchised stores. But by the end of the third quarter this year, the chain had grown by only 80 restaurants, fewer than a third of its forecast expansion. In a bullish projection, the Wendy's-owned Baja Fresh Mexican Grill announced last year it would grow by 25 to 30 branches by the end of 2005. But as September drew to a close, the 302-unit chain had added only seven stores.

Ruby Tuesday, which projected in the fourth quarter of 2004 that franchisees would open 35 to 40 stores this year, can only count seven new franchised outlets added as of the end of the third quarter.

Cornell's Kalnins said he is contemplating doing a similar study on domestic expansion but already knows that the differences between the two will be stark.

He said the most puzzling irony in his research is that American restaurant franchisors apparently are more prone to overestimate development deals in places where they know nothing about the local market.

As a case in point, he cited an executive of an American franchise brand that was looking to open in Malaysia and Singapore and planned to launch exactly 121 outlets where the chain currently had none.

"I asked him why such a precise number, and he told me because the biggest restaurant chain in Malaysia and Singapore had 120," Kalnins said.
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