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Fall Into the Gap

Gap, Inc. uses the franchise distribution model in Southeast Asia and the Middle East to enter new markets and comply with local ownership laws: Gap Inc. signed its first-ever franchise agreement in January with Singapore-based F J Benjamin. That opens the doors for up to 30 Gap and Banana Republic stores in Singapore and Malaysia by 2010. The first South East Asian stores will open around the same time as the first Middle Eastern stores. Franchising is an effective way to skirt local laws against opening foreign-owned stores. The right franchise partner also helps a retailer tailor its merchandise to local tastes.

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2006 First Quarter – Yummy Same Store Sales Increase

Yum! Brands (KFC, Taco Bell, Pizza Hut) U.S. blended system-same-store sales increased 5%. Colony-based Pizza Inn pizza chain reported a 1.1% increase in same-store sales, or sales at stores open at least a year, during the first quarter 2006. For the 13 weeks ended March 28, 2006, sales for Panera‘s franchised and company-owned stores rose 9.1% and 8.9%, respectively. Systemwide bakery-café sales increased 9 percent for the 13 weeks ended March 28. Aaron Rents reports 13.7% increase in same store revenues. Brooke Franchise ( distributes insurance, financial and funeral services through a network of more than 560 franchise locations) saw same-store sales decrease about 2.5% for the year that ended Feb. 28, 2006 compared with the prior year. March retails sales growth for the Jean Coutu Group (PJC) Inc. rose 3.5% in Canada, 1.7% in the USA. PJC is the fourth largest drugstore chain in North America and the second largest in both the eastern United States and Canada. The Company and its combined network of 2,173 corporate and franchised drugstores (under the banners of Brooks and Eckerd Pharmacy, PJC Jean Coutu, PJC Clinique and PJC Sante Beaute) employ more than 60,000 people. Tim Hortons first quarter same-store sales increased 8.7% at restaurants in Canada and 9.8% in the United States. Wendy’s same-store sales decreased 4.8% at U.S. company stores and 5.2% at U.S. franchised restaurants. Baja Fresh Mexican Grill’s system same-store sales declined 3.6% to 3.8%. Sonic‘s 1st Q 2006 same-store sales growth of 4.7%, slightly above Sonic’s annual target long-term target range of 2% to 4% growth Sales are climbing at Mr. Jim’s Pizza following the launch of Mr. Jim’s new product, Nacho Stix, and the debut of a new branding and advertising campaign. Same-store sales increased for the first two periods of 2006, including a same-store …

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Tim Hortons is Going Public in Canada

Tim Horton’s, a 2,885 upscale coffee and donut outlet, is entering the public capital markets of Canada. The reporter characterized the IPO as “destined to go down as the most popular IPO this country has seen to date” and “The frenzy around this doughnut deal is putting Google to shame”. Is the author over embellishing? Tim Horton’s IPO buzz seems to be more in line with fellow Chipotle’s enthusiastic IPO, not the crazed delirium over Google’s IPO. Is going public good for franchisees? I haven’t explored arguments on both sides, but my initial impression is no. The pressure to increase margins, meet analyst expectations, and pay for the increasing regulatory costs is going to increase the pressure for franchisors to squeeze more money and profit from their relationships with franchisees.

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Celebrity Competition in Meal Prep & Assembly Franchises

In the forum, we batted around the new meal preparation and assembly kitchens concept such as Super Suppers and Dream Dinners. There are lot of non-franchised startups, and they already have their own trade association called the Easy Meal Preparation Association. The general sentiment from the forum is that this concept is a “maybe”, with the big questions being how much you can charge customers (and margins) before customers will just order restaurant takeout? is the change of behavior and lifestyle too much to create a solid base of loyal customers? how many competitors, if any, can enter the market and you still survive?  what if they have slightly lower prices and a nicer, larger facility and more creative menu? A surprising celebrity newcomer is jumping in this arena – Suzanne Somers. Inc. magazine did a feature article and mentioned this tidbit. And next? Suzanne’s Kitchen, an entry in the red-hot meal prep category, in which customers move from station to station inside retail stores, assembling family-size dishes from chopped meats, vegetables, and sauces. The first two outposts of Suzanne’s Kitchen, which Somers and her husband and business partner, Alan Hamel, expect to franchise, will open later this year. Why is she getting in this business? I think it has more to do with an attempt to leverage her brand name to command higher franchise fees rather than this being an inherently superior and profitable business model. Certainly Somers will draw media attention to the industry, which currently suffers badly from low recognition amongst its target audience.

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New Quiznos Lawsuits

Quiznos is facing more class-action lawsuits over delays in getting locations approved for its franchisees, and keeping their $25,000 franchise fee. More from the Denver Post article: The case alleges “deceptive business practices” in the company’s franchise sales method and demands that the company stop selling franchises in New Jersey until all existing franchisees get locations or are refunded their franchise fees. In a separate case filed in December in the Ontario Superior Court of Justice, the plaintiffs allege that the company is violating Canadian franchise law by not disclosing to potential franchisees full details and processes for securing locations. Quiznos, of course, denies violating any law. Hat tip: Paul Steinberg Franchisors usually carefully craft the franchise agreements to enable wiggle room in stalling or denying approval of locations. Warning flags include evidence of high franchisee turnover or higher proportion of revenue from non-royalty revenue which can sometimes be gathered and deduced from the UFOC Items 19-21. I know of a major dating franchise where one location in a big city has been sold 3 times over in the past few years, with the most recent franchisee begging the previous franchisee who sold it to him to take it back for FREE because it was draining money. If he closed the business, he would have breached the franchise agreement and would be obliged to pay tens of thousands in fees, charges and damages. Update: March 1, 2006 You can track the Ontario case on Goldman Sloan Nash & Haber’s web site, the Canadian law firm representing the plaintiff. The firm posted the detailed statement of claim (complaint) against Quiznos. Hat tip: Michael Webster

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Quiznos Sales & Profitablity – Summary Report

Quiznos Sales and Profitability.pdf “former owner”, a commenter on this site, left a tip on a document posted at the Toasted Subs Franchisee Association. The document purports to be a summary on Quiznos store profitability. Is it legitimate and accurate? I have no idea, but it’s probably in the ballpark. It’s apparently based on estimates gathered by franchisee sources reporting. Here’s snippet: Quiznos Sales and Profitability – below is a list of sales statistics compiled year-to-date for Quiznos stores as of August 2005. In the Quinzos chain, an average new store (opened in the last 12 months) can break even around $7,000 to $8000, depending on fixed costs. This charts shows the number of stores breaking even or even losing money inthis chain. These sales figures are accurate. The profitabily estimates, are just that…estimates based on franchisee sources reporting. Thanks “former owner”!

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News and Gossip Briefs

Sorry for the gap in posting…my time has been clipped by some legal and political endeavors. Everyone reading this blog should already know this basic pros and cons of opening a franchise, but here is short article listing most of the basic points. We mentioned DoodyCalls in a previous post and liked the witty franchise, and it looks like they are expanding easily across the US. It’s the type of service that may make a good acquisition candidate for one of the many cleaning or maid services. Cold Stone has grown very quickly, though the franchisees I’ve spoken to say their store are barely churning a positive operating cash flow. Ice cream catering is becoming a popular side business for the franchisees, especially at kids parties and bar mitzvah where parents are willing to spend big bucks. I’m surprised to see Panera Bread franchises selling for only about $1.3 million each which include repurchasing some area development rights in Indiana.

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Educational Outfitters expanding with 6 new stores

According to this press release, Educational Outfitters is opening 6 new stores. We reviewed this franchise before on FranchisePundit.com, and we concluded it was one of the better franchise ideas, focusing on an often ignored and segmented market. We gave it an “I’d buy it” positive rating.

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Royalty and Advertising fees of sandwich franchises

I pulled together some numbers of required royalty and advertising fees for sandwich franchises: Required Royalty and Advertising Fees for Sub & Sandwich Franchises Subway 12.5 % Quiznos 11 % Mr. Hero 10.5% Blimpies 10% Jersey Mike’s 10% Philly Connection 10% Togo’s Eatery 10% Zero’s Subs 10% Firehouse Subs 9% Jerry’s Subs and Pizza 9% Burger King 8.5% Charley’s Grilled Subs 8.25% Capt. Subs 8% Cousin Subs 8% Hungry Howie’s Pizza and SUbs 8% Subs Plus 8% Great Outdoors Subs 7% Lenny’s Sub Shops 7% Moe’s Italian Sandwiches 7% Nathan’s Famous 7% Pickerman’s Soup & Sandwiches 7% Port of Subs 6.5% Sub Station II 6% Baldinos Giant Jersey Subs 5% An 8% difference in the fees for a franchise with $500,000 in sales is $40,000. Many would die to have that extra $40,000 to hire a qualified manager, enabling the franchisee be more of an absetnee owner. Lower doesn’t necessarily mean better. I would want required pooling of local (maybe regional) funds for collective advertising and promotions.

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The Lenny’s Sub Shops hype

Many people think of franchises as individually owned, mom-and-pop run businesses. On the contrary, many large corporate style operators with access to large quatities of capital have been in the business for a while. For example, I’ve heard a lot of about Lenny’s Sub Shop lately but haven’t been in one. The company started in 2001 and now has 63 franchises in the southeastern United States.

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If students can do it without a franchise…

I’ve written a few articles on eBay drop offs. I was neutral on the franchise… Pros: it’s a service people will use eBay buzz and hype is still strong all franchisors are charging the same 35% fee (for now) Cons: the business is too simple to start, has no barriers to entry, new competitors will literally springing up overnight existing used and consignment stores will soon add eBay sales the service will have to compete based on fees (who wants a constant lowering on margins?) I’m sure I’ll be negative on the business within the next 5 years, but for now I’m staying neutral because the next 2-3 years will be strong. Want proof the eBay drop off store is easy to start and run without a franchise? Campus Easy Sales recently set up shop on the Washington University in St. Louis campus. A couple of fulltime students thought it’d be a good idea and just started it. They do nothing different than any other franchise out there (the hold the item, take pictures of it, post an ad on ebay, ships the item after the auction ends, and send the seller their cut). However, the total fees add up to ONLY 24% COMMISSION off the first $500. Compare to other eBay drop offs who charge 35%. You can bet your dog’s favorite toy this puppy will see their commissions slashed to 25% or less in a few years.

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Copycat franchises

It is stunning how similar franchises look. When copycats come around, the industry begins to commoditize and pricing pressure hurts everybody.

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