Contents:
• Chapter 11: The Hotdog Café Story – Pg 78 -86
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MARKETING FEATURES:
BRANDING
COMMUNICATION
CONSUMER BEHAVIOUR
ENTREPRENEURSHIP
FRANCHISING
NICHE MARKETING
QUALITY
RESEARCH
The Hotdog Café Story
1
Hot Dog Café is a quintessentially South African success story. It is a fast-food
franchise that currently operates through about 130 outlets located in various
parts of South Africa. What makes this company so interesting is the fact that it
has successfully challenged a
series of widely held assumptions. That this was achieved
within less than a decade,
with limited start-up capital
and a very small head office
team, makes it even more
impressive.
Reinventing franchising
Past experiences caused most experts to conclude that:
• A hot dog concept is too simple to be sustainable as a franchise, especially if
presented as a street vending concept.
• For a franchisor to take responsibility for franchisee funding is akin to commercial suicide.
• BEE initiatives are laudable attempts to do the right thing, but it is almost
inevitable that their implementation will impact negatively on the franchisor’s
profitability.
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Hot Dog Café has succeeded in proving these assumptions wrong, and this is how
they did it.
Modest beginnings
While on a fact-finding mission to the USA, a young Pretoria businessman was
intrigued to discover that hotdog stands form an integral part of street life in most
major cities. He realised their business potential and, upon his return to South
Africa, set up one such stand in Pretoria.
It proved to be an instant hit with passers-by, so he added a few more. These,
too, were successful, prompting a large retailer to invite the young man to set up
a formal hotdog counter inside one of their stores. This led to the development of
an US-style diner concept and proved to be a roaring success.
Subsequently, six or seven outlets were added in quick succession, with mixed
results. Some units were profitable while others barely made the rent. It was at this
point that Derek Smith, now Managing Director of Hot Dog Café, was brought on
board, with instructions to turn the business around.
The year was 2001 and it did not take Smith long to identify the main problem areas; rectifying them was the hard part. Hotdogs are an impulse purchase
and highly price sensitive. Market realities make it difficult for a hotdog counter
to support the high rentals that shopping centres demand. In the absence of an
exclusivity agreement, which shopping centre managers are reluctant to grant,
most of such diners’ owners would effectively work for the landlord. To make
these businesses profitable, alternative locations had to be found.
Smith also realised that although this is a relatively simple business, proper
systems and procedures were needed to ensure profit maximisation. Furthermore,
increased attention would have to be paid to site selection procedures and the
recruitment, training and support of franchisees. Branding was another area that
required sustained attention.
With the support of a small team at head office level, Smith re-engineered
the concept from scratch. Although this was a mammoth undertaking, his task
was made easier by the fact that Hot Dog Café offered an excellent product that
needed no improvement. Market research confirmed this: 98% of new customers
absolutely loved the product and turned into regulars.
Interestingly, the market research company commented that the customer
experience rating was higher than that achieved by a major international
fast-food brand that served the same target market, namely, convenience-based
fast food. Another finding was that Hot Dog Café suffered from a lack of brand
recognition.
These research results confirmed what Smith instinctively knew. He first tried
to address it through traditional means by allocating a disproportionate amount
of money to brand-building efforts, but with little success.
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After reviewing the situation, Smith realised that customer satisfaction was Hot
Dog Café’s strongest point. It creates repeat purchases and encourages ‘word of
mouth’, convincing others to try the product, at negligible cost to the company.
Smith took the brave step of abandoning traditional advertising campaigns and
focused on customer care instead, with outstanding results.
It took more than a year to whip Hot Dog Café into the shape it is in today
but Smith believes to this day that this period of consolidation was necessary. The
results he continues to notch up confirm that he is on the right track. So what did
he and his team actually do? Perhaps more importantly, how did they do it?
Expansion through franchising
Not surprisingly, given that Smith is an accountant by profession, he started by
designing effective management and financial control systems. He also introduced some intelligent cost-cutting measures, careful to eliminate unnecessary
expenses without negative impact on service levels.
Smith also realised that the easiest way to establish a national presence would
be through a professionally designed and managed franchise programme. To
this end Hot Dog Café participated in a ‘Franchisor Development Program’ sponsored by NAMAC and implemented by a leading firm of franchise consultants.
Having improved the franchise model, Smith was ready to begin plotting national
expansion.
At that time, the company operated two business models, namely carts (which
were company-owned), and diners (which were largely franchised). For the abovementioned reasons, Smith knew that while the cart model, if operated correctly,
had virtually unlimited potential for expansion, growth through the diner model
would be limited at best and no amount of effort would change that. This left a
gap in the market that was traditionally filled by informal competitors.
To secure a slice of this potentially attractive market, Smith designed the
e-diner – a semi-permanent self-contained structure that offers 12 square metres
of prime trading space. It turned out to be a stroke of genius because placing an
e-diner into a parking lot or other suitable area is a relatively simple undertaking.
Should the trading results achieved at a specific location be less than optimal, the
e-diner can easily be moved elsewhere.
Hot Dog Café now operated through three types of outlets:
• Carts designed to take up position near busy intersections.
• E-diners that are located outside commercial high-traffic locations, for example
branches of Makro or Builders’ Warehouse.
• As a result of an arrangement with BP Southern Africa, dedicated counters are
located inside some Wild Bean Café outlets and carts can be found on certain
BP forecourts.
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Ideal BEE concept
The Hot Dog Café’s potential for growth is limited only by a shortage of suitable
locations, but Smith has found a unique way of securing additional sites. He goes
all-out to convince large corporates that carts and e-diners operating under the
banner of Hot Dog Café are ideally suited to the implementation of their own
BEE initiatives.
These BEE initiatives are credible and sustainable. Best of all, they do not
require a large investment in time or money from the host company. The only
thing a sponsor of such an opportunity has to do, is to make a small area in an
existing retail store or within a head office building with high traffic count available, either rent-free or at a realistic rental. Hot Dog Café has the passion, knowhow and infrastructure to take care of the rest.
Every new site that is established under the Hot Dog Café banner enables an
individual, usually a previously unemployed person, to set up a viable entry-level
business venture. Depending on the potential of the location, these emerging
entrepreneurs may even be able to employ others to help them cope during rush
periods, for example over weekends.
Under official BEE guidelines, sponsors of such initiatives earn useful points
in two categories, namely enterprise development and job creation. And in most
instances, corporates who participate in this scheme achieve an additional objective at absolutely no cost to themselves.
By accommodating a Hot Dog Café on their premises, corporates are able to
offer customers, visitors and staff access to a convenience-based fast-food product
that is tasty, wholesome and affordable. This is achieved without the need for
management intervention because Hot Dog Café’s support team ensures smooth
operation.
Funding issues
For prospective franchisees to come up with the necessary finance poses almost
always a problem. The situation is even more pronounced in the BEE market
where start-up capital is scarce and surety requirements tend to pose an almost
insurmountable hurdle.
Traditionally, franchisors were reluctant to become directly involved in funding
franchisees but Smith realised that South Africa’s extraordinary past calls for extraordinary solutions. He reasoned that precisely because until relatively recently,
the largest segment of South Africa’s population was unable to participate fully in
the economic mainstream, or create equity through home ownership, Hot Dog
Café had to step in and make it possible.
On the strength of the success record of Hot Dog Café and the proven potential
of the concept, Smith managed to put several finance schemes in place that were
tailored to the needs of BEE candidates. Examples are:
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• A bulk loan facility granted by the Industrial Development Corporation (IDC) at
a favourable interest rate for on-lending to qualifying franchisees.
• A joint venture with Massmart and the Umsobomvu Youth Fund made it possible for formerly unemployed youths to enter the world of business with little
or no start-up capital.
Other funding schemes are under negotiation and in most instances, putting them
in place requires a massive leap of faith by shareholders. After all, the company
is expected to sign surety for at least part of the funds and/or enter into buy-back
agreements for e-diners and carts.
This exposes Hot Dog Café head office to a degree of risk most franchisors would
be reluctant to accept. However, Smith feels that it is the right thing to do. It also
drives the continued expansion of the Hot Dog Café network. Not surprisingly,
potential funders are impressed by the franchisor’s confidence in the soundness of
the programme. This makes it progressively easier to attract additional finance for
franchisees.
Risk is carefully managed
From the moment a new franchisee joins Hot Dog Café, he or she receives mentoring that exceeds generally accepted levels of franchisee support by as much as
1 000%. For example, after completion of an intensive training course, new franchisees receive hands-on start-up assistance and intensive ongoing support, which
includes weekly visits by an experienced franchise consultant. This consultant
helps franchisees to sort out any business problems they may encounter.
At least for the duration of the loan period, the franchisor handles all financial
aspects of the business and even writes up franchisees’ books of account. This close
involvement with franchisees’ business affairs makes it easier for new franchisees
to succeed. It also helps the franchisor to control the degree of risk the company
is exposed to.
Franchisee support
• Standard franchisee support includes the usual palette of services, including
initial training, help with site selection and the setting-up of the business, daily
product deliveries, ongoing quality control and periodic training sessions.
• Head office keeps a small pool of franchisee-hopefuls on standby. These individuals have undergone the necessary training and are keen to operate their own carts.
They are held back by a shortage of suitable sites and must wait their turn.
• Should an established cart operator be unable to attend to his or her cart on any
given day, these individuals are ready, willing and able to step in at a moment’s
notice. This ensures that neither the brand nor the franchisee’s business suffers
any losses.
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• To keep established Hot Dog Café franchisees motivated, those who excel are
given a chance to move to better sites as these become available, and/or to
acquire additional units.
Quality control
Product quality, customer service levels and the maintenance of the highest standards of hygiene determine the success of any food operation, and Hot Dog Café is
no different. Smith knows that but he also understood that this type of operation
cannot support the cost of sending teams of experts into the field to inspect the
various facets of operations.
To maintain desirable standards throughout the network while keeping costs in
check, Smith trained the drivers of the network’s delivery vehicles in basic franchisee support and quality control. As part of their daily delivery routine, they
complete a tick sheet for every unit they visit.
The tick sheets are returned to head office and carefully analysed. Should deviations from acceptable norms become apparent, a senior franchisee support person
is dispatched to take care of the problem.
Motivation flowing from ownership
In the beginning, the Hot Dog Café carts were staffed by employees and managing
them proved to be an absolute nightmare. Ever since the operation of the carts
was turned over to franchisees, however, sales have increased in leaps and bounds
while operational problems have almost become a thing of the past. This proves
once more that ownership motivates individuals to excel, and Smith wants to
expand on this theme.
A project that is currently underway aims to turn the drivers of the delivery
vehicles into entrepreneurs in their own right. Details are still sketchy but the
programme will see drivers taking full responsibility for their routes and vehicles.
They will no longer be remunerated for hours worked, but rather on the basis of
sales levels and the number of units visited.
In addition to offering entry-level access to entrepreneurship to yet another
pool of individuals, this programme is expected to improve service quality and
enhance productivity.
Product development
To the casual observer, it may appear as if Smith focuses exclusively on the development and implementation of the franchise strategy. But this is not the case. In
response to customer demand, head office experimented with an addition to the
menu in the form of boerewors rolls. This proved successful and the item is now
available at selected units throughout the network, primarily on weekends.
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Hot Dog Café’s medium-term plans also involve the establishment of an inhouse BEE butchery, no doubt another step in the right direction.
Financial rationale
Smith is convinced that unless a business generates reasonable profits, it is not
sustainable. He describes his approach to doing well from doing good as ‘philanthropic entrepreneurship’ and asks: ‘How can I expect entry-level entrepreneurs to
take me seriously as a mentor if my own business does not produce fair profits?’
Fortunately, the business model adopted by Hot Dog Café makes perfect economic sense and the shareholders are smiling all the way to the bank. Ongoing
franchise fees are based on a 7% management services fee and a 4% advertising
fee.
In suitable circumstances, for example in the case of the cart model, these fees,
as well as an allowance for the ongoing maintenance of the unit, are built into the
cost price of product supplies. This simplifies administration and fee collection.
It also protects the brand because the money needed to maintain the corporate
image is under the control of the franchisor.
The status quo
Hot Dog Café has all the makings of a winner. Relatively low start-up costs, low
stockholdings, a simple operating system and a solid franchisee support infrastructure combine to make this an attractive entry-level franchise opportunity
with virtually unlimited target market potential. Consider this:
• Entry-level entrepreneurs are given a realistic opportunity to move from the
ranks of the unemployed to become self-employed. Sooner rather than later,
the more industrious ones among them even become employers.
• Individuals who prove their mettle have access to opportunities for further
advancement at several levels:
– They can move from a cart to an e-diner, in some cases to a classic diner; or
they can expand by investing in additional units.
– The introduction of an area development franchise concept is in the pipeline.
• Hot Dog Café is ideally suited to the implementation of meaningful and realistic BBBEE initiatives. At this point, we need to mention that under the guidelines given in the BBBEE Codes of Good Practice, Hot Dog Café has a Level 1
(or AAA+) rating.
The network’s track record proves beyond doubt that the model works. In the
nine years since its inception, not one cart or e-diner franchisee failure has been
recorded. It is not surprising, then, that a long list of franchise-hopefuls exists,
thus ensuring ongoing momentum.
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What does the future hold?
No matter how you look at it, Hot Dog Café’s successes to date are impressive.
Not only does the company create healthy returns for its shareholders, it is also
the proud recipient of several coveted industry sector awards. These include
FASA Newcomer Franchisor of the Year 2003, Franchisor of the Year 2005 by
the Professional Catering Association and FASA Leading Developer of Emerging
Franchisees of the Year 2007.
Never one to be content to rest on his laurels, however, Smith is working on a
new concept that will be piloted during the second half of 2007. It will be known
as The Coffee Stop and is an extension of an existing programme known as the
Cadet Scheme, which was sponsored by NAMAC Trust, now part of SEDA. Under
this scheme, which was found to be highly successful, unemployed matriculants
were hired at a basic salary and trained in all aspects of operations. Those who
made the grade were given opportunities to start their own Hot Dog Café or find
employment.
The Coffee Stop will be serving good coffee and light meals. Stores are expected
to operate seven days a week from 7 am to 6 pm and will be owned by formerly
disadvantaged individuals who will be handpicked and carefully trained to ensure
that they have the wherewithal to succeed.
The project is supported by Massmart, who will make space for the first 10
stores available at subsidised rentals. The pilot outlet, which will initially be
owned outright by Hot Dog Café, is located at a Builders Warehouse in Nelspruit.
It is expected to open its doors for business in October 2007.
A group of 20 cadets is currently undergoing preparatory training in all aspects
of operating a food service establishment, including management theory and
practice, working in a store and, most importantly, the art of coffee making. In
keeping with The Coffee Stop’s name – trainees will undergo training at Ciro to
qualify as Baristas. This qualification originates from Italy and identifies a master
coffee maker.
The initial team operating The Coffee Stop will be drawn from the first group
of cadets. The store will initially be managed by a senior member of the Hot Dog
Café management team who will act as a mentor to promising team members
and is expected to work himself out of a job within six months. At that point,
the team’s top performer will be offered the opportunity to acquire a 51% stake
in the company, with funding provided by Massmart in the form of an interestfree loan.
Once this loan has been repaid, the franchisee has the right to acquire the balance of the shareholding. Using the asset in the form of a 51% share in a viable
business as surety, he or she should be able to attract a loan from a commercial
bank.
But although commercial criteria will be applied during the evaluation process,
those members of the team who show dedication but do not qualify for owner-
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ship of a store will not leave empty-handed. Not only do they have a permanent
job, but the skills they have acquired during training will help them to advance
their careers. Not too bad for someone who wasn’t just unemployed but virtually
unemployable less than a year earlier.
Conclusion
The success of Hot Dog Café demonstrates two things. Firstly, franchising can be
successfully adapted to almost any type of business. Secondly, BEE does not mean
handouts, or giving away part of your business for free.
Given the growing popularity of convenience-based fast-food concepts, including coffee shops, this company is unlikely to ever run out of customers and its
future looks bright. All that’s needed now to keep the momentum going is participation by corporates prepared to make suitable sites available at realistic rentals.
Discussion questions
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Do you think it is possible for consumers to be loyal to more than one brand of fast food?
Discuss the distribution channels used by Hot Dog Café. Why do you think these channels have
been so successful?
What is your understanding of niche marketing? What are the advantages and disadvantages of
using a niche marketing strategy?
What are the different types of franchising options available to business owners? Which option do
you think was used by Derek Smith when franchising the Hot Dog Café concept?
Do you think Hot Dog Café is trying to cater for different market segments with their three different outlets? If so what do you think are the characteristics of each of these segments?
References
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2
This is an updated version of an article that first appeared in the book Franchising in South
Africa – the Real Story by Eric Parker & Kurt Illetschko, published by Frontrunner Publishing,
Johannesburg.
This article was procured by Michael Cant.