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Chain LeaderEditorial Archives2004 — May — Franchise Management

Master Plan
Surfer-themed Taco Del Mar grows quickly via master franchising.

Co-founder James Schmidt expects Taco Del Mar to grow 80 percent or more annually for the next few years.

"Keep it simple, stupid.” That’s part of the growth philosophy at Taco Del Mar, according to co-founder James Schmidt. The Seattle-based concept keeps things simple and grows quickly with master-development agreements.

Ironically, some of Taco Del Mar’s biggest competitors—Subway and Quiznos Sub—perfected this method, and regional chains like Coldstone Creamery and Blimpie use it to grow geographically.

But that’s OK with Schmidt. Attributing much of Taco Del Mar’s success to the master-developer model, he expects the fast-casual chain to grow 80 percent or more annually for the next couple of years. This year alone, Taco Del Mar will open 50 stores. The company’s goal is to blanket the Western United States, then the Southeast, Midwest and Northeast.

“We started Taco Del Mar in 1992, and we certainly never expected that we’d have 76 stores by 2004 with 20 in construction,” says Schmidt, who worked in restaurants as a kid growing up in a resort town in the San Juan Islands. He got his inspiration for the chain while studying marketing at the University of California at San Diego. He had seen shoreline shacks along the beaches, selling fish tacos and big burritos to hungry surfers.

Taco del Mar
75 franchised, 1 company owned
2004 Systemwide Sales
$38 million (company estimate)
Average Unit Volume
Average Check
Expansion Plans
50 by year-end

Today Taco Del Mar, with an average check of $6.72, sells fish tacos and other Baja-inspired dishes in an irreverent surfer-themed restaurant.

Copy That
“[Master franchising] is a successful business model that Subway has made even more effective. We thought, ‘Why not follow them?’ But, of course, we have to do better,” Schmidt says. “We have to offer more than the national guys, otherwise a developer will go with a proven player like Quiznos.”

He says Subway franchisees might complain that the corporation infringes on their territories by letting other franchisees move in too closely. Taco Del Mar sells a territory to a developer and then keeps others out, he notes.

Not that he has anything against Subway. In fact, Schmidt offers Taco Del Mar as an alternative to current Subway owners. “Those people are good at running a similar business, and they know how to sell,” he explains. The company seeks out master developers who already own five or six other stores.

“Master franchising is typically used in the United States for concepts that are seeking generally inexperienced franchisees who have low-investment thresholds,” says John Hamburger, president of Franchise Times Corp. “I think the main benefit of master franchising is that it frees up a lot of time for the franchisor.”

Fast-casual Taco Del Mar serves up fish tacos and other Baja-inspired dishes in a surfer-themed restaurant.

Because single-unit franchising is time-consuming, many companies sell a master franchise to a larger, more sophisticated group who can work with the subfranchisees. Master franchising also creates development incentives for the master franchisee. “This has the effect of spurring restaurant development at a faster rate than might be achieved under single-unit franchising,” Hamburger says.

Franchisees also benefit from the master developer’s experience, Schmidt says. Master developers are familiar with real estate, new construction and training employees, and they have a huge financial interest in the franchisees’ success.

“They have put down significant dollars to buy that territory. That’s a great motivator,” Schmidt points out.

Lance Jensen, an Oregon developer, became Taco Del Mar’s first master-license holder last July. Eight months later, he was one of eight master developers.

“When you can come by master-developer agreements, it’s great because they are hard to come by,” Jensen says. “Most franchise companies want to do things themselves. But it’s great for the company. I’ve sold a dozen stores since July, 10 of which will be open this year. Taco Del Mar wasn’t growing like that before.”

He says the masters have a great deal of incentive. “I put my time and my money into building this market,” Jensen says. “Taco Del Mar is growing because of my highly motivated attitude.”

For his part, Jensen says that he has never had so much fun at work. He had been a Dairy Queen franchisee for 15 years, maintaining two stores. “The day-to-day responsibilities became mundane for me,” he says. “Now every day I’m negotiating with real-estate companies, working with franchisees, helping people. That’s the fun part of restaurants.”

Staff prepares burritos and tacos to order in front of customers.

Hamburger says that a downside of the plan is that master franchising creates another layer between the franchisor and the unit operator. “I have seen many cases where this has created much confusion and even animosity between the subfranchisees and the franchisor,” he explains. “Franchisors, masters and subfranchisees may have differing views of how the business should be run.”

Schmidt contends that has never been a problem for Taco Del Mar, because the company has franchise operation managers that are in the market every month, meeting with franchisees.

The company also has franchise advisory councils in every market to give feedback directly to the corporation and the master developer.

Schmidt says it’s important to keep the lines of communication open to prevent problems. He encourages franchisees to talk openly. “Potential franchisees call up existing franchisees and ask them for the truth about the company,” he says. “Nothing I say sells them. They find out about our business for themselves.”

Consistency Counts
Since Taco Del Mar is growing so rapidly, the company must keep an eye on quality and consistency, according to Schmidt.

Jensen notes that some master developers are better than others at keeping up with the physical quality of units. “It’s sometimes difficult to get the franchisees to keep the bathrooms or the parking lots clean, for instance, but we work on that,” he says.

However, Jensen says that the food is consistently good.

Taco Del Mar plans to expand in the Western United States first, then the Southeast, Midwest and Northeast.

Automated facilities manufacture the food to corporate specs. “Our beef and chicken is cooked in a sauce and then delivered to us. We reheat it. We don’t need chefs. We don’t need grills,” says Schmidt.

Staffers prepare fresh items such as salsa, guacamole and spicy rice on site. To reduce the margin for error, recipe books, complete with pictures, offer employees the step-by-step processes.

“This environment assures safety, efficiency and good product price,” says Schmidt. Product costs including paper are 29 percent at a well-run store. Labor, on the other hand, is “all over the board,” ranging from 22 percent to much higher, depending on what the manager pays him or herself.

Of course, Hamburger points out that the success of any type of franchising depends on the overall economics of the franchise. Master franchises can have just as much success—or failure—as other forms of franchising.

“It is the underlying concept that determines success or failure of the business, not the form,” he says.

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