Web Exclusive: Daphne's Launches Franchising Program

The fast-casual Greek restaurant chain has set the stage for franchised expansion.

By Maya Norris, Managing Editor -- Chain Leader, 4/21/2008 9:01:00 AM

Founder and CEO George Katakalidis has just launched Daphne's Greek Cafe's franchising program.

Daphne's Greek Cafe has made a name for itself over the last 17 years with a healthy approach to Greek food. With an average unit volume of $900,000, the fast-casual concept has expanded steadily to 80 units in California, Arizona, Colorado and Oregon. Now the San Diego-based company is taking the next step: It launched a franchising program in February. Founder and CEO George Katakalidis spoke to Chain Leader about how he has prepared the concept for franchised expansion.

You opened Daphne's in 1991. And now you have about 80 units. Why did you wait until now to start franchising?

I waited this long because I wanted to make sure that we had everything down to a science. Our box is very buttoned up. We can very easily replicate it, and we can very easily operate it. And we wanted to make sure that we got it to that consistency because my biggest fear is if you bring on any kind of partner, a franchisee for example, you want to make sure that when you give it to them that that box is well-ribboned. I want to make sure that when I hand something off it's complete. And right now I want to make sure that it is complete. And it is.

What changes did you make to the concept to make it more amenable to franchising?

It's all the back-house and internal systems that you put in place. We've put in some great systems that will give us incredible control, visibility, a transparency as to what happens in that box. And that's very important for a multiunit operator.

Can you give me an example?

Our POS system in the back-of-the-house system-that stuff is very, very tight. I would probably say that it's one of the best in the industry that we've put together. The way that we market in our restaurants. The way we open a store. How we design our restaurants. The vendors. We've simplified the process of how we bring products into the restaurants. We have national contracts with broadliners and with beverage companies. So that stuff is very important.

How do you gauge success of your operating economics?

Well, you take a look at your prime costs: your food costs and your labor costs. You've got to be able to be within a certain range to say, "Hey, I'm doing a good job." And for us, we are in essence south of 55 percent, which is very good in our industry....It's about 28 percent for food costs, and it's roughly 25-26 percent for labor.

So how many points did you drive that down?

We drove about 2 to 2.5 points down [combined for food and labor], which is significant when you're doing a lot of volume.

It costs about $450,000 to open a Daphne's unit.

How much does it cost to open a unit?

It's obviously a bit of a variable because it depends on the specific location. When we opened up in the Bay Area in San Francisco, the average cost up there was about $100,000 more than it was down here. It's relative. And I know Portland is a little bit more expensive because...it's out of market. But in market [in California], typically it's going to cost us approximately $450,000 in hard costs. And then the soft costs associated with it. Soft costs are preopening costs for training and travel.

What types of sites do you usually target?

We usually target lifestyle centers; high-traffic, high-visibility centers; endcaps; inlines. But we don't want to go in shopping malls per se unless we're on the outside pads.

Who's your main customer base?

Our customer is somebody between the ages of 18 to 55, educated, well-traveled and healthy lifestyles.

What do you see as the advantages of franchising?

For us we're spreading the gospel. We're spreading the good word, if you will. We've got a good product, a great company. We are in essence, and California has been for some time ahead of the curve in terms of concepts and lifestyles from the rest of the country. And now that we have perfected the box, we want to spread that word around. And I think franchising will allow us to work with some top-notch operators in their local markets and will allow us to grow faster.

Who's the ideal franchisee?

For us the ideal franchisee is someone who's been in the business for some time, currently has the ability to open five to 10 restaurants in a given market and maybe already has an existing concept.

So, for example, is he a Panera franchisee? Is he a Jack in the Box franchisee? So he currently has a system within that city, but he can't grow. So he's looking for another concept, one that is right on with all trends and it plays to his community and clientele.

Do you have any concerns about franchising?

I think in the beginning I did. I don't any more. The key thing for us is to make sure that when you sell something that it's a profit center. It's a business plan, and we're selling something that we think is very profitable and really plays to where the future of a lot of communities are going to go to. And that is fresh, great-tasting food. And that's exactly what we do with a Greek influence.

Daphne's differentiates itself by taking a healthy approach to Greek fare.

Since Chain Leader last covered Daphne's in May of 2003, a few fast-casual Greek concepts have popped up like the Louis Pappas Market Café, Opa or Mr. Greek. In addition, Mediterranean cuisine is much more popular especially because a lot of doctors consider it healthy as well as very flavorful. How does Daphne's continue to set itself apart from these other Greek and Mediterranean concepts?

Other than the fact that we are geographically in quite different markets than they are, I think if you've been in any of our stores, you'll realize how contemporary and how clean and how operationally sound we are. Now I can't say that I've been in all of these other concepts. I do know of them. They do a good job themselves. But I think we are positioned to grow and grow much faster than any of them.

How so?

I just think the unit economics from what we've done--the systems that we've put in place. I don't want to get into specifics, but we could open a chain of 10 of these or 20 of these in Florida tomorrow if we had the right partner. We could do the same in Atlanta. We could do the same in wherever because we have that wherewithal now because of the systems that we put in place.

Have you signed any franchisees yet?

No, we are not going very fast on that. We wanted to make sure that we find the right people first. So we're diligently talking to about two or three people right now.

Are you going to continue to build company stores?

Daphne's is growing, and the thought process is we as a company are going to grow and build between 12 to 15 restaurants ourselves this coming year. And that is not only the outside markets but the internal markets, meaning California itself.

And what we intend to do is, even if we build outside of California, basically we will be seeding these markets, and that means we'll have an opportunity to either keep them or franchise them even though there are [company] restaurants there.

What are your expansion goals five or 10 years from now?

We know that we could become a major player in the fast-casual segment. We've done a great job like I said of building the infrastructure first. And now that we have this infrastructure, it's now a springboard to allow us to grow. If we play our cards right, we could easily grow at a 30-plus clip for the next couple of years.