A New Way to Reach Consumers

Modeling an insurance agency business after a sandwich shop might sound like an unusual goal, but that’s what John Rost, founder, president of CEO of Fiesta Auto Insurance aims to do. Following a strategy similar to the Subway franchise – ranked the nation’s No. 1 franchise in 2010 by Entrepreneur magazine – Rost has aggressive growth plans to make Fiesta Auto Insurance the nation’s only franchise system with more than 2,500 locations combining insurance and tax preparation under one roof.

Birth of a New Business Model

Back in 1999, Rost said he had four insurance agency locations in Southern California that were corporate stores.

“This was good for a number of years, but I started to recognize some of the challenges that exist in our industry across the board,” he said. “Independent agents across the country are faced with increasing rising costs: rent, utilities, labor and advertising. It just seemed that everywhere you turn, it’s more expensive to be in this type of business.”

Adding to the rising costs were challenges on earning revenue. “We’re not in charge of pricing our products. We don’t have an opportunity to determine how much we’re going to make on every hundred dollars of product that we sell. Insurance companies are increasing the margins for themselves by decreasing commissions,” he added.

Taking those challenges to heart, Rost began examining other industry business models, with the hopes of devising an operation where a business owner could have more individual ownership, but leverage opportunities to reduce expenses.

“I really wanted to develop something that was doing more like a Subway model of saying, ‘here’s where somebody can come in, have individual ownership, have a structured environment where certain things are provided for them, and systems and product are put in place,'” Rost said.

Thus, the Fiesta Auto Insurance franchise was born as a “one-stop shop” offering insurance and tax preparations services for budget-minded consumers. Like his initial four locations, Fiesta targets the blue collar, low- to middle-income, as well as Hispanic and Latin communities.

Targeting the Under-Served

Rost said he wanted to target those under-served niches with affordable, quality automobile insurance because they had fewer avenues for their insurance choices, as compared to more affluent consumers. Furthermore, because 50 percent of California’s population is either Hispanic or Latin, and that population is growing nationwide, it was a perfect opportunity for growth.

Combining the two industries – insurance and tax preparation – was a much more logical decision than it first sounds. “My focus has typically been on the blue collar, that hard-working, middle- to lower-income part of the population,” Rost explained. “That customer likes to come in and deal with people face-to-face. We have a high percentage of customers that come in and make their monthly payment in person because it feels better to them to walk in than put the payment in the mail and not know if it’s going to show up on time to the carrier, get posted properly and deal with it. When they walk out of the office, they have a receipt that proves the transaction was carried through, and that feels more comfortable to the Hispanic consumer, who was perhaps brought up in an environment outside of this country where the mail service doesn’t work very well.

“Now that same customer, that same blue collar, middle- to lower-income person is also somebody who is really not that confident when it comes to doing his own taxes,” he continued. “This is somebody who is coming in and asking for guidance when it comes to doing their insurance transaction. They know they have to have insurance because the state law requires it, but they’re not sure what the different coverages mean. At the same time, when it comes to doing their taxes, they understand that it’s complicated, and they’re not typically feeling confident to go buy a product off the shelf and do it themselves at home. Instead, they would be much more comfortable coming in, talking to that same person they see on a monthly basis throughout the year when they come in to make their insurance payments.”

The marriage of the two industries works perfectly from a business model for franchise owners as well, he said, because they’re using the same DSL connection, the same computer systems, the same printer, desk, utilities, etc.

“Everything is already there minus the software program. The staff just needs to be cross-trained in insurance and tax preparation,” Rost said. And the upside, he said, is that the franchise operation has the opportunity to earn significant additional income in the first quarter. Some franchise owners earn more than $300,000 in tax preparation fees alone.

Today, Fiesta has expanded beyond strictly auto insurance, offering insurance services for watercrafts, motorcycles, homeowners, rentals, condos, apartments, tenant occupied property, commercial auto, commercial property, commercial general liability, Mexico insurance and special event coverage. The majority of Fiesta’s business is nonstandard insurance, with standard business only about 20 percent of the company’s total volume.

On the tax side the company offers federal and state personal income tax filings, business tax returns, electronic filing and bank products.

Fiesta also provides motor vehicle registration services, travel services, wireless services and instant wire money transfers as well as accounting and bookkeeping services.

Poised for Growth

Fiesta has grown from its four offices in 1999 to the approximately 70 to 80 franchise units that are open, or in the process of opening, across 10 states. The company anticipates having 120 locations open by January 2011. Additionally the company has been approved as a franchisor in 46 states, and has a high goal of reaching 2,500 locations over the next six to 10 years.

That figure isn’t a pie in the sky figure, Rost said, noting the company recorded a 90 percent growth in revenue this year. The company averages growth of approximately 60 percent to 90 percent year after year, and wrote approximately $40 million in premium volume last year.

In the first quarter of 2010 alone, 20 new franchise locations opened, increasing the franchise’s footprint to more than 75 units operating throughout the nation. Recently, Fiesta was named to Inc. magazine’s list of the fastest-growing private companies in the United States.

“Getting to a certain size or number of franchises is not necessarily our goal,” Rost said. “It’s more about taking a look at the community we want to serve, and where opportunities exist. We’re mapped out throughout the country on where we have an opportunity to succeed in. There’s opportunity in new locations, and existing franchise owners can grow organically as well.”

Growing organically is not that difficult, Rost said. A new franchise costs just $10,000 in franchise fees, and requires capital ranging from between $30,000 to $50,000. A franchisee can be up and running in 30 days, thanks to the assistance of Fiesta’s agency management system and producer codes, and greater buying power. New franchisees have access to more than 50 personal lines insurance programs, plus commercial insurance programs and the ability to process every kind of tax return as well as offer refund anticipation loans.

Meanwhile, Fiesta has incentives for existing franchisees, to open multiple locations. The franchisor helps the agency owner lower expenses by handling errors and omissions insurance, printing and other services that it can get at a cheaper rate by handling in bulk. And the parent company earns a lower royalty rate (a percentage of each franchise’s total gross commission), as a franchise owner adds locations. In other words, there is an incentive for franchise owners to lower expenses by opening multiple locations – which also helps the overall company to grow the business.

“Our goal is to get up, get a footprint, get branding out there, to see that everybody is succeeding, given all the necessary training and systems we’ve put in place,” Rost said. “We really want to get franchise owners away from being the do-er of all things, not writing every policy, but being the CEO of the business and overseeing what’s in the business environment, working with salespeople and staff members. It’s a different business model than a mom and pop going into a location and being involved in every part of the transaction,” he said.

Brand Building

Like other franchises, Fiesta assists its franchisees to ensure owners are not located too close to each other. Agencies are typically located in retail strip centers, often anchored by a grocery store, Subway or check cashing business in a high-traffic area.

By locating at busy intersections, Rost said a franchisee’s business benefits from on-the-street marketing. The company mascot, Max, has become a familiar face in communities where a Fiesta store is located, as the big bird waves to passerbys from street corners.

“Max creates a lot of name recognition,” Rost said. “If you look at signage, you’re not really focused on a sign. But if you see Max waving to you and your kids, I guarantee you’ll notice that. And we want those cars going by, when they think of insurance, to say, ‘I’ll pop in where I see that bird for Fiesta Auto Insurance.'”

Ultimately, the Fiesta franchise model can be a great business for someone who is new to the industry, and says, “‘This is a great business model, I want to own one, two, three, four, five locations,’ and looks at this in the same way you might look at owning a Goodyear or Subway franchise model,” Rost said. “They don’t necessarily have the insurance experience, but we go in and provide that.”

The model also works for mom and pops who have already established insurance agency businesses, but “need additional training or want to start seeing a different side of the business” in which they can reduce costs and focus more on direct sales with customers,” he added.

“I believe we will add more than 100 locations this year, and we are excited,” Rost said.