As we all know, franchised food and beverage operations are not new the casino resort environment. While not the first, Foxwoods Casino and Mohegan Sun, two of the largest Native American casinos in the world, have utilized and employed franchises for some of their food and beverage operations. These franchises include both full-service and limited-service operations and have introduced such brands as Hard Rock Café, Dunkin Donuts, Einstein Brothers Bagels, Johnny Rockets and Margaritaville to their respective casinos markets.
Franchises can bring a unique, well recognized restaurant and dining experience to a casino. As gaming markets become more and more competitive, differentiating your resort with nationally recognized restaurant and bar brands could make a very positive difference to visitation and, in turn, to the bottom line. In addition to providing a differentiating point from a competitive perspective, the franchise agreement is a great way for Native American tribes to provide economic development and diversity to their enterprise operations. The following article will present a primer on franchise food and beverage experiences including the prefeasibility and due diligence required, basic deal points and structures, benefits and pitfalls, and some keys to success that will allow the relationship between the franchise and the host casino to prosper.
DOES IT FIT?
That is the first question that casino operators should ask themselves when considering a franchise agreement. This takes many forms and includes both the physical plant and the demographic and financial fit. Franchises operate in many sizes and formats and it is important to define the space where the operation will be featured before exploring the opportunity. Does your casino have 500 square feet or 5,000 square feet? On the smaller end of this spectrum, it might be wise to consider limited service operations such as a Papa John’s or Dunkin Donuts. If you are exploring the idea of filling a 5,000-square-foot, it would be wise to consider full service operations similar to a Hard Rock and Margaritaville. Both scales can bring benefits to the casino.
Concurrent with physical plant decisions, the host casino should consider the demographic appropriateness for the market. It is just as important to make sure that the franchise being brought into the casino will resonate with the customers in the market. Additionally, if the casino is trying to differentiate itself, it is important to identify franchises that are sought after by the market or demographic that is being targeted. In the highly competitive Tulsa, Okla., market, two of the three casinos in operation all have either engaged a franchise to differentiate themselves or are in the process of engaging them.
On the other side, the franchisor will look at the market to make sure this is the right opportunity for them as well. “They [the franchisor] will look at the existing demographics of the region as well as the historic customer base and competitive set of the casino to ensure that there is a ‘brand fit,’” said Oliver Munday, vice president of development for Margaritaville Hospitality Group. “In addition, from an operational perspective, they will also look at the performance history of the facility and the [proficiency] of their existing food & beverage team. Some Native American casinos have developed their own in-house F&B facilities, and may have limited experience with third-party brands.”
Casinos must qualify financially to obtain a franchise. Financial qualification for a franchisee will vary from brand to brand and the size of the facility that is contemplated, but these should not differ from similar casino enterprises—indeed they cannot differ as required by existing U.S. franchise legislation. It is important to note that almost all Native American casinos will have the established financial needs to obtain any franchise.
Entering into a franchise is a serious commitment of time and money. As a consequence, any prospective franchisee must think deliberately about making the commitment. Strong brands can have a positive impact on existing facilities both in terms of overall image, customer experience, increased F&B sales, greater length of stay and increased gaming revenue. Both franchisee and franchisor need to understand what the brand is expected to do.
WHAT DOES IT COST?
Franchises cost money, but in the end they tend to pay for themselves through increased sales, visibility and patronage to the host casino and gaming floor. The basic fees for a franchise include one-time payments and ongoing payments. The initial payment varies depending on the concept and brand and can be as low as $2,500 and as high as $25,000.
Papa John’s, for example, charges an upfront fee of $5,000. This fee is refunded if the casino opens the location within the agreed upon timeframe established through the contract with the casino. “We like the casino market and are looking to expand into it further,” said Joe Smith, vice president of global development for Papa John’s. “In order to facilitate franchise deals, we recognize we have to provide a low cost of entry.”
While prices will vary, it is important for casinos to understand the upfront case and make sure that are not overpaying for a product that will benefit the overall resort. Upfront fees should be factored into the overall return analysis for the franchise.
In addition to the upfront fees, there are ongoing costs which are usually broken down into two types: royalty and marketing. Both fees are based on top-line revenues for the franchise. The royalty fee provides for the background support, training and expertise from the franchisor. Royalty fees typically range between 4 percent and 7 percent depending on the brand and concept. The marketing fees are paid to cover both national and regional/local marketing campaigns. Even though a casino conducts its own marketing campaigns and will likely feature the franchise in its marketing program, it will still have to participate in the brand’s national marketing programs. These fees traditionally range between 1 percent and 4 percent. In total, a franchise costs between 5 percent and 11 percent of total revenues to operate in the host casino.
WHY BRING IN A FRANCHISE?
A franchise allows gaming investors to own a business that potentially generates profits over and above the rental income stream that they might receive from a simple third-party lease transaction.
“A franchise agreement allows casino operators to access well established national and or international brands,” Munday explained, “bringing them to their facility and expanding their operation both in terms of customer base, guest experience and financial performance.”
For Native American operators specifically, owning a franchise can also provide employment opportunities for tribal members as well as invaluable experience as the franchisor trains employees in the intricacies of operating a successfully franchised brand. Franchises also allow investors to diversify their business ownership away from pure gaming revenues.
Some investors and operators find it difficult at first to contemplate businesses that essentially require you to use a system owned by a third party and to surrender control of the brand to that entity. We have found this particularly true in Indian Country as issues of sovereignty come into play. Over time however most tribes have come to the realization that having third party brands as part of a well-managed mix of F&B and entertainment offerings is a well tried and tested recipe for success.
“Mohegan Sun in Connecticut is one of the largest casinos in the U.S. and enjoys a comprehensive mix of branded offerings, including Margaritaville, which work together to make the resort the world class destination it is today,” said Mundy.
One of the keys to success for a franchise agreement is to understand that you have to work together to create a common goal. Papa John’s “looks to create a long-lasting relationship with a host casino,” Smith said. “Our goal is to be around at least five years from the inception of our agreement. We never want to be a one and done.” To that end, Papa John’s and most franchises work very hard to make sure that they create long-lasting relationships, or “marriages,” with their host casinos. At the end of the day, both the franchisor and host casino want to make money and can be aligned to do so.
“Successful franchising with Native American enterprises is all about mutual understanding and respect,” Munday added. Margaritaville has worked with some of the longest, most successful Native American businesses, including the Mashantucket Pequots, the Seminole Tribe of Florida, the Mohegan Tribe of Connecticut, and the Mississippi Band of The Choctaws. They believe a significant investment in understanding each tribe’s unique history and culture is critical to the process and will reap rewards for all parties.
While creating the long-lasting relationship, it is important for both the host casino and franchise to maintain consistency of product and service. A committed brand guardian will protect their brand and its intellectual property rights vigorously. Both parties need to enter the relationship knowing they need to respect the operations of the other; anything else is short sighted, ill advised, and will doom the partnership from the outset.