Seawest Sub Shops Inc. -- Seawest Franchise Takes Sub Sales To Cutting Edge

The Washington State Penitentiary isn't known as a breeding ground for successful restaurant operators. Neither is the Ohio State Patrol.

But that's where Bernie Kane and Jim Iseman, the top executives at Seawest Sub Shops Inc., became interested in the restaurant business.

Kane and Iseman today run one of the fastest-growing franchise fast-food operations in the country, selling submarine sandwiches at 73 outlets in Washington, Oregon and 10 other states.

The two have unconventional backgrounds for the food industry.

Kane, chairman and founder of the Bellevue-based company, is a one-time counselor at the Washington State Penitentiary in Walla Walla. Iseman, president, spent six years as a state trooper in Ohio hunting down speeders and other lawbreakers.

But if their backgrounds are unusual for the fast-food industry, their business practices are downright bizarre in the franchise world. Rather than employ centralized management controls, as do most successful franchise businesses, Kane and Iseman have loosened the financial and operational ties between franchise headquarters and franchisees.

Differing from most companies in the franchise industry, Seawest doesn't siphon off a set percentage of each restaurant's gross sales. Rather, its strategy is to charge franchisees an annual fee that remains the same regardless of the size of an outlet's sales.

That practice gives new owners a financial break, allowing them to start operations without daunting up-front cash drains.

``It doesn't seem right that someone give me 10 percent of his gross,'' says Kane, an affable 53-year-old who started the business 10 years ago. ``We're very franchise-oriented. We want our franchises to succeed.''

Seawest outlets sell 25 varieties of submarine sandwiches, costing $3.50 to $5.25. The average bill is $4.75. Customers tend to be middle-income people in their mid-30s, most with families, Iseman says.

``Listen, this isn't brain surgery,'' Kane admits. ``It's a real simple operation designed by me, for me.''

So far, that strategy has worked. Seawest has grown from 49 franchise outlets two years ago, most in Washington and Oregon, to 73 in 10 states today. Six more are under construction, and the company has deposits for 50 more. Sales at all the franchises last year hit $15 million, a 25 percent increase over 1988, according to figures the company provided to Chain Store Guide Information Services.

The parent company's gross income from selling new franchises and from annual fees was $367,000 through the first nine months of 1990, up from $299,00 for all of 1988.

Seawest has attracted at least one semi-celebrity investor. John Johnson, who helped lead the Seattle SuperSonics to the 1979 National Basketball Association championship, last spring bought an existing Sub Shop in Kirkland.

Only one franchise has failed, Kane notes.

Seawest started in 1980 in Walla Walla when Kane bought an existing deli-sandwich shop for $8,000. ``After about three days, I realized I wasn't wearing a suit and no one swore at me,'' Kane says. ``People just came in, smiled, paid $3 for a sandwich and left. I never went back to my old job.''

Kane branched out, opening shops in the Tri-Cities in Central Washington and in Pendleton, Ore., and later throughout the two states. By 1985, he owned 39 outlets in Washington and Oregon.

In 1986, Kane linked up with Iseman, who had spent eight years as an executive with the Rax Restaurant chain after leaving the Ohio State Patrol.

``He came into a store I owned in Redmond, bought a sandwich and liked it,'' Kane recalls. ``We got to talking.''

Two months later, the two were partners.

After concluding that managing such a large operation would become increasingly difficult, they turned Seawest into a franchise operation and sold the original 39 stores. Those stores, many of which exist today, are similar to Seawest's outlets, but they are independent operations with no connection to the parent. No company-owned stores exist today.

Seawest's strategy is deceptively simple: Keep start-up costs, monthly rents and annual franchise fees low. That brings the operations within reach of a large number of investors and makes their potential financial return more attractive than many alternative investments.

``This thing is set up cheap,'' says Iseman. ``It's set up to let franchisees make money at the lowest cost possible.''

Most franchisees can buy into the business for $45,000 to $65,000, Kane says. That covers Seawest's $15,000 one-time charge to buy a franchise and pays for equipment and opening inventory and all other costs.

A typical outlet does about $200,000 in business a year, Iseman estimates. Seawest charges franchisees a $2,000 fee the first year, $3,000 the second and $4,000 in the third through 10th years.

Seawest's largest competitor, Subway Sandwiches & Salads, charges its 3,000 outlets across the country a fee equal to 10.5 percent of gross sales.

``It's a inexpensive franchise,'' says Carol Dungan who owns the Bellevue Sub Shop. ``There's no fee based on a percentage of my gross. I feel that I reap the benefits from my own high income.''

Seawest's flat annual fees and low franchise costs are a departure from normal franchise economics, notes Brian Quinton, assistant editor of Restaurants & Institutions, a trade publication. The tactic may be particularly suited for a recession, he suggests:

``It's a way to get a franchise started in tough economic times. While it's not unique, it's cutting edge, particularly in the food-franchise business.''

Seawest places its 1,000-square-foot outlets in high-traffic strip malls, where rent is typically $1,000 a month or less. It likes to be in locations where 15,000 to 25,000 customers live within three miles. ``The hardest part is finding real estate,'' Kane says. ``You want rent to be low and the landlord to make improvements. We look for rent to be 5 percent of sales.''

``The secret to this business is keeping debt service low,'' Iseman says.

Restaurants and other food outlets are the largest segment of the franchise industry. According to the International Franchise Association, franchise-restaurant sales likely will hit $76.5 billion worldwide in 1990, equal to 11 percent of total projected franchise sales of $716 billion.

SEAWEST SUB SHOPS INC.

-- Employees: 4

-- Headquarters: Bellevue

-- Business: Fast-food franchiser

-- Number of outlets: 73

-- Chairman: Bernie Kane

-- Estimated 1989 sales: $15 million

-- Major competitor: Subway Sandwiches & Salads

-- Strategy: Charge franchisees set annual fees rather than a percent of sales

Strategy appears weekly in the Business Monday section of The Seattle Times.