The No-Formula Franchise

Some franchisers experiment giving franchisees discretion over elements of their business. Great Harvest made the idea central to its model

by John Tozzi

Matt Salis arrives at his Great Harvest Bread Co. franchise in Denver at 4:30 a.m. to start baking, but some Great Harvest franchisees fire up their ovens at 10 p.m. to prepare for the morning rush. The time isn't specified in his franchise agreement. In fact, Salis' franchise agreement doesn't specify much. The 206 bakeries in the Dillon (Mont.)-based system must pay royalties and use wheat supplied by the company. But all the minutiae that most food-service franchisers rigidly control—decor, hours, pricing, menus—are left up to Great Harvest franchisees.

This flexibility contradicts the core idea of franchising: to build a brand by copying a carefully controlled system. CEO Mike Ferretti says Great Harvest, founded in 1976 by a couple in Great Falls, Mont., straddles the line between franchising and entrepreneurship and appeals to people who don't feel comfortable starting a business from scratch but find a conventional franchise system too restrictive. While some brands have experimented with giving franchisees more discretion over elements of their business, Great Harvest has made the idea central to its model.

Protecting the Brand

"Great Harvest is a fairly unique, out-of-the-box, doesn't-fit-the-mold franchise," says Robert L. Purvin Jr., head of the trade group American Association of Franchisees & Dealers. Purvin praises Great Harvest but says he doubts the model would be successful for most systems. "The conventional wisdom and the conventional truth is if you're going to brand something, you've got to be hard and true to the brand," he says. Purvin cites Howard Johnson as a brand that lost its value because it let standards slip.

Still, for the franchiser, the model appears to be profitable. Great Harvest is privately held and declined to provide financial information. But according to audited financial statements printed in its offering circular, the company had operating income of $1.16 million on revenues of $5 million for the year ended Oct. 31, 2006.

Salis and his wife, Sheri, purchased an existing Great Harvest in Denver four years ago. Sheri has a culinary degree and had worked at a Great Harvest bakery in St. Paul, Minn. Matt was ready to leave the corporate world after a decade spent in sales and marketing in the steel industry. "We wanted to do something on our own, but we had no experience with business startups," he says. "I'd worked for big companies all my life, so I felt pretty good about the finance side and the marketing side. But I didn't know who to call when I needed 20 pounds of smoked gouda cheese."

The Trade-offs

Ferretti says most of his system's franchisees are like the Salises: first-time business owners leaving corporate careers. In company surveys, most prospective franchisees say they aren't considering other franchise businesses.

But the Salises trade some of the advantages of franchising for their flexibility. Most franchise systems benefit from economies of scale, but Great Harvest prides itself on buying from diverse local suppliers. And while Matt Salis says he looks for very little from the franchiser, he says some owners get frustrated that the company isn't "spending a lot of time on that particular owner's pet project." The diversity of stores means Great Harvest franchisees don't inherit "best practices" the same way more uniform chains do.

The company is selective about to whom it offers franchises—fewer than 1% who inquire are approved—because franchisees take on more responsibility than in other systems. Great Harvest has opened just over 200 stores in three decades. "We trade some growth for the novelty of being an anti-brand," Ferretti says. By comparison, publicly traded Panera Bread (PNRA) has opened more than 1,100 locations since its founding in 1981, more than half of them franchised. Panera Bread won't sell single franchises; the company looks for owners to develop regional multi-unit chains.

Freedom Franchising

"We've never wanted to be a consistent, cookie-cutter type of concept," Ferretti says. "The consistency of high-quality whole grain products is what we're looking for. How people get there, we're O.K. with." He calls the approach "freedom franchising," a term Great Harvest recently trademarked.

For the Salises, at least, the system has yielded good results. Since buying the franchise, their annual sales have gone from $325,000 to $645,000, partly because of a sandwich line they introduced. They opened a satellite store in 2006 and plan to open another this summer.

And the odd balance between being entrepreneurs and franchisees has yielded rewards beyond their profits. "My wife and I didn't get into this to make money," Salis says. Instead, by getting to work at 4:30 a.m., he can put in a full day of work and still pick up his children after school. Says Salis: "The nonmonetary rewards have been just tremendous."

Tozzi covers small business for BusinessWeek Online.