Parsley's Shop Fast Franchising

Noel Parsley, owner and operator of twelve convenience stores in St John's, Newfoundland, was preparing for a meeting with his partners in Canadian Marketing Retailers (CMR). The meeting had been scheduled for August 22, 1987, to finalise the details of the franchise agreement that Noel would offer to prospective franchisees of Parsley's stores. The main issue to resolve was to determine the appropriate franchise fee for the average store.

Noel recognised that this fee represented not only the franchisee's investment, but also a payment to CMR for the goodwill and reputation of the Parsley name. He wondered how much a potential franchisee would pay for that name and for the franchise package that CMR was offering.

Industry Profile

The convenience store industry had undergone many changes in the past ten years. The latest industry reports indicated that the number of convenience stores in North America had doubled during that period. Independent operators, including

This case was prepared by Professor Ann Dillinger, formerly of Memorial University of Newfoundland, and Professor Gary Gorman of Memorial University of Newfoundland for the Atlantic Entrepreneurial Institute as a basis for classroom discussion, and is -not meant to illustrate either effective or ineffective management.

Copyright © 1992, the Atlantic Entrepreneurial Institute. Reproduction of this case is allowed without permission for educational purposes, but all such reproduction must acknowledge the copyright. This permission does not include publication.

those operating convenience stores under franchise agreements, accounted for sales of $4.5 billion in Canada in 1986, which represented approximately 7.1 % of grocery stores sales, up from 4.8% ten years before. Derek Rideout, President of Mac's Convenience Stores Ltd, said, "The retail food industry is really polarized between the superstores, which offer very good prices, and the convenience stores, which offer good service and convenience in location." Figure 1 outlines the increase in sales of all food stores in Canada from 1985 to 1986, broken down into regions and corporate /independent operations.

Figure I - Source: "1987 Grocery Store Operations", Canadian Grocer 101 (7) July'87 p.16

Operating performance also varied among the superstores, the independents and the convenience stores as illustrated in Table 1. Convenience stores, on the average, had the greatest percentage increase in sales, the highest gross profit margins and the best utilisation of labour costs.

Table 1

Grocery Store Results
By Type and Size

Source: "1987 Grocery Store Operations", Canadian Grocer 101(7) July 87, p.16.

The St John's market exhibited many of the same traits as those of the industry. Retail selling statistics for 1986 indicated that there were 400 convenience stores in St John's, with average sales of $1.216 million and an average selling area of 4,387 square feet.1 None were being operated strictly as franchises, although there were a number of buying groups that had formed primarily to take advantage of bulk purchasing. In addition, most gasoline stations had expanded into the convenience store business. As a result, Noel believed that there were too many stores operating for the size of the population.

1 Retail Selling Area Survey, Small Business Statistics Statistics Canada, 1987

The product mix of convenience stores in Newfoundland differed from other provinces. Beginning in 1980, small, independent grocery operators were permitted to apply for a license to retail Canadian beer. This had altered the sales profile of these stores. Prior to that time, grocery sales had accounted for 30% of total revenue. With the introduction of beer to the product line, grocery sales had fallen to 15%, although the actual volume of grocery purchases had not decreased. Beer sales now accounted for 32% of the total sales. Lottery tickets were another category that contributed greatly to the store's sales figure, but not to its gross profit percentage. According to Noel, "If you had a store doing $300,000 in 1980 without beer and tickets you had a good store because you would make 30-32% as a gross profit. Now with sales of $1 million, gross profit is closer to 20%."

The convenience store customer also had changed considerably in the 1980s, a reflection of the demographic and social changes which had occurred. The proportion of children and teenagers big food consumers - had declined and couples were having fewer children. Experts in the retail food industry believed that these changes had steered more business to the well-stocked comer store and away from the traditional supermarket. They believed that with smaller families, it became less economical to cook for two. Customers therefore expected convenience stores to have a much larger selection and variety of products, better service and better locations. The urge for a good movie, a good book and a quick bite could be satisfied around the clock in most major Canadian cities.

Company Background

Noel Parsley had a long history in the grocery/ convenience store business, having worked in his family's grocery store from 1960-1971. Noel had been a realtor at Royal Trust in 1975 when he bought his first property and built a convenience store at Pearson Street (Exhibit 1). Between then and 1979, he opened and operated five additional stores in the St John's area (1977 Thorbum Road, the Goulds and Logy Bay Road; 1978 - Topsail Road and Pennywell Road). The five new stores did not perform well due to low margins, inadequate management control and low customer traffic, and in 1980 Noel sold four stores. He kept the Pearson St and Tborburn Road stores. Noel was responsible also for establishing the Red Circle organisation in 1980. This was a buying group in which independent convenience store operators participated in cooperative purchasing, distribution and marketing. Noel severed his connection with the Red Circle operation in 1984.

In 1980, Mr. Parsley had essentially started over. A management system was developed for the remaining stores which included standard bookkeeping, stock control, inventory and cash controls. New cash registers were installed which provided sales breakdowns into 30 departments and allowed much better control and analysis of operations. With the new management system in place the stores prospered, and between 1980 and 1987 Noel opened stores in ten new locations (Exhibit 1). All stores were controlled with the same management system and operated according to the same policies and procedures. The location of every store was carefully considered. Noel believed that each should be a "neighbourhood" store, and this concept was used as the major marketing theme of the firm: "Your Friendly Neighbour."

Current Operations

Noel Parsley was Chief Executive Officer of three firms involved in the twelve Parsley's stores: Parsley's Ltd, which operated the stores; Parsley’s Real Estate, which owned the properties; and Canadian Marketing Retailers (CMR). CMR was to be the eventual franchisor of the stores. Aside from ownership, development and strategic planning duties, Noel oversaw a substantial amount of routine operations, such as receiving deliveries and inspecting stores. Other members of the management team included an operations manager, who ensured that the stores were running smoothly, and an office manager, who was responsible for paying bills, liaising with suppliers and tracking short-term financing. Store managers were responsible for: day-to-day operations and staffing; buying from designated wholesalers; pricing under the corporate guidelines; documenting daily cash reports; depositing daily receipts; and recording lottery and beer sales. The average store (2,000 square feet) sold between $700-750,000 annually and had an operating profit of $50-60,000 annually. An average of 6,118 customers per week were served, with sales averaging $2.20 per customer. Inventory carried averaged $40,000, with 0.9% shrinkage.

The decision to franchise the stores was made for several reasons. First, Noel believed that franchising was an attractive way to finance expansion of the firm. The benefits to the corporate parent would include quicker expansion without heavy debt, increased revenues, and an enhanced public image. Second, Noel believed that a convenience store would be most profitable with an owner/operator having a vested interest in the store's success. Owner/operators would get to know their customers better and understand how their stores fit into the neighbourhood. Finally, additional outlets would allow for further economies of scale in purchasing, which would reduce the cost of goods sold. Noel estimated that the combination of active involvement by the franchisees and volume discounts on purchasing would improve gross margins by 5%.

On a more personal note, Noel wanted to become independent from the routine operations of each store and relinquish these responsibilities to the franchisees. Noel had become more involved and interested in the real estate business in recent years and wanted to spend more time developing properties to lease to franchisees and with other related business.

The Franchise Agreement

The purchaser of a Parsley's franchise would be purchasing a "turn-key" operation (Exhibit 2). In the case of the existing twelve stores, the franchisees would be buying businesses with proven records of profitability. For the new outlets, the "turnkey" concept meant that the stores would be built, stocked and operated (for about three months) by Parsley's before they were turned over to the franchisees. Each store would have an established clientele, reputation and identity on which the franchisee could build.

In addition to the initial franchise fee, the franchisee would be required to purchase the store's inventory, valued at about $40,000. CMR would retain ownership of the real estate, fixtures and fittings and the franchisee would lease the premises for $2,000 per month. The franchisee would agree to follow Parsley's guidelines pertaining to product, price, service and layout. The franchisee also would agree to pay a 3% royalty on annual sales to the franchiser.

The franchisee would benefit from established relations with suppliers and distributors and the savings inherent in buying co-operatively with other stores. The franchisee also would have access to training from Parsley's in management practices, marketing, and accounting. All personnel would avail of a corporate training program to learn about the existing control systems. Promotional materials and co-operative campaigns, offered by suppliers and administered through a professional advertising agency, were also available to the franchisees. An advertising fee of $50 to $250 per month would be charged to the franchisee. The amount charged was determined by the total budget allocated to advertising and each store's share based on sales volume per store. The franchise agreement would be for five years and renewal for an additional five years would cost $1.00. After ten years, a second franchise fee would be negotiated between the two parties. If no agreement could be reached, it would be sent to a third party arbitrator to determine its fair market value. Exhibits 3 and 4 illustrate the advantages of the franchise. Based on an analysis of the existing stores, the terms of the franchise agreement and the expected results for the first few months in operation for a new store, Noel compiled a pro forma income statement for the average store (Exhibit 5).

The Strategy

Franchising the existing stores represented the first stage of Noel Parsley's strategy. He also planned to develop and franchise 38 new stores by the end of December, 1992. While a number of these new outlets might be started from scratch, Noel saw acquiring competitive locations as the more likely method of expansion.

He had arranged for a promotional package (Exhibits 2, 3 and 4) to support his own personal selling efforts, but the requests from potential franchisees had come so quickly that he barely had the chance to use it. Interest in the franchises had been building in the St John's area since word had gotten out that Noel was looking into the possibility of franchising the stores and Noel believed quick action was necessary to capitalise on this interest.

Exhibit 1

Exhibit 2

Exhibit 3

Exhibit 4

Exhibit 5

Parsley’s Franchise
Pro Forma Income Statement