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Why Franchisors LOVE Multi-Unit Development Agreements

Franchisors love to sell multi-unit development agreements, but some of the reasons may not be so obvious. Multi-unit franchisee typically pre-pay a portion of the franchise fees for each potential location.  Similar to a non-refundable downpayment.  Lately, many franchisee haven’t opened their additional locations or have slowed the opening pace, but the franchisor still keeps their pre-paid franchise fees, which is typically $5,000 – $15,000 per location.  For example, if a franchisee signs an agreement to develop 10 units, then he may pre-pay a franchise fee of $10,000 per unit, or $100,000 for the rights to open 10 units.  He still would pay the remainder of the (oftern discounted) franchise fee as each location is opened.  The Development Agreements typically set a timeline for openings, and if you don’t keep to the schedule which is often opening at least one per year, then you lose your pre-paid franchise fee. The parties are negotiating one franchise and development agreement rather than a new agreement upon each new opening. Concentration of stores in one small area will help franchise sales in neighboring areas Generally multi-unit buyers have more reserve cash, so stores are less likely to fail from lack of short-term capital. A multi-unit franchisee is more likely to honor their penalty charges for closing a unit, compared to a single unit franchisee who has less assets.

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Bad Co-branding Franchise Example

My previous post highlight the not-so-obvious hurdles of co-branding.  The omnipotent FuwaFuwaUsagi sent in photos of Brown’s Chicken attempts at co-branding.  See his Brown’s Chicken photos below. Brown’s Chicken is trying to do the Chicago street food theme plus mexican.  It offers everything from pasta, ice cream, pizza, fried chicken, sausages, pasta, mexican, italian beef, and hot dogs.  The problem is not necessarily the menu, but the execution, presentation and customer experience.  It looks utterly silly to have so many brands in one cheap-looking tiny store.  Offering multiple unknown brands under one roof requires significant investment in the seating, presentation and overall customer experience. I’ve only seen one successful Chicago street food restaurant and it is Portillo’s / Barnelli’s combination.  When you enter one of the premium stores you feel as though you have entered an old-fashioned carnival era.  It is plain fun and food is quite good. The below photos provide a great illustration of what to do and what not to do – stuffing too many confusing brands under one roof. WRONG WAY TO CO-BRAND: RIGHT WAY TO CO-BRAND:  

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Walmart Trouble for Gaming Franchises like Play N’ Trade?

Walmart is now jumping into the used game trading industry with exchange kiosks.  How does this impact Play N’ Trade and Game Stop? I’m certain this is a smart venture for Walmart. A friend of mine interviewed at RedBox and told me the kiosk business model when scaled is tremendously profitable, and I’m sure Walmart has first hand knowledged of this model from having the RedBox DVD kiosks in their stores.  Additionally, attracting young teens into your brick-and-mortar stores undoubtedly is a strategic goal of Walmart. How greatly this impacts Play N’ Trade and Gamestop is questionable. It is hard to spin this as “helping the industry” as surely Walmart will take more from competitors than it increases the I contacted Larry Plotnick, CEO of Play N’ Trade for his reaction to the Walmart news.  In response, Larry noted: We have been aware of this test for some time, and have discussed the use of similar kiosks within our own stores; however it does not fit within our business model. The impact of Walmart is taken very seriously, considering the size and scope of their business and we will be watching and tracking their progress in detail. We believe there is positive implications to Walmart “legitimizing” used game and trading to a larger/broader demographic We strongly believe that our customer service, product offering and immediate customer gratification creates a better overall trading venue then does a kiosk type environment. Studies have shown that the significant majority of game trading is done by serious/hardcore gamers that prefer to trade in games for new gaming product (which is typically done in specialty retail not in big box stores) Larry’s points are fair.  Walmart will never be able to create the gamer atmosphere of Play N’ Trade, and gaming is all about experience.  Nevertheless, I …

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Increasing Royalties Because of Economy

I received this email the other day from Goin’ Postal.  Goin’ Postal is rather unique in that it charges franchisees a flat monthly royalty payment of $315 for 2009, regardless of gross sales, and that rate increases annually at 5% per year.   So in 2009, if you had gross annual sales of $250,000, your royalty converted to a percentage was effectively 1.5%.  In the email, it details plans to peg the royalty for new franchisees based upon a rate indexed to inflation even though it already increases the royalty 5% each year.   This will add a few thousand dollars of additional expenses when other expenses are also increasing, but given the overall lower royalty system it shouldn’t be a deal killer.   From a public relations perspective, I would have expected this email to include a plan to assist franchisees in harder economic times, rather only stating how we’re going to increase your costs when times are toughest. ———————————————————————  We would like to take this opportunity to let everyone know that sometime in the very near future our royalty system may be changing slightly for new franchisees.  As the country starts to pull back out of the recession and the government implements its stimulus packages, we are almost guaranteed to see some major inflation which will seriously devalue the flat rate royalties that we charge our franchisees. While we will keep our flat rate royalty system going forward, instead of increasing at a flat 5% per year, our royalties will increase at a rate indexed to inflation (or 5% if inflation is under control), then rounded to the nearest $5.  Franchise Agreements that are already in place are not subject to change, but we are currently working on the new FDD/Franchise Agreement that will be uploaded to the site …

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Krispy Kreme’s New Strategy

From Krispy Kreme’s 10-K…, focusing on smaller stores with lower overhead. I guess it took them a while to learn from Dunkin’ Donuts that selling only $.50 donuts and coffee doesnt add up to enough revenue for a large store. The Company is working to refine its domestic store operating model to focus on small retail concept shops, including both satellite shops and shops that manufacture doughnuts but which are smaller and have lower capacity than traditional factory stores. Satellite stores in a market are provided doughnuts from a single traditional factory store or commissary at which all doughnut production for the market takes place. The objectives of the small retail concept model are to, among other things: reduce the investment required to produce a given level of sales and reduce operating costs by operating smaller satellite stores instead of larger, more expensive factory stores; achieve greater production efficiencies by centralizing doughnut production to minimize the burden of fixed costs; achieve greater consistency of product quality through a reduction in the number of doughnut-making locations; enable store employees to focus on achieving excellence in customer satisfaction and in-shop consumer experience; and stimulate an increase in on-premises sales of doughnuts and complementary products by increasing the number of retail distribution points to provide customers more convenient access to the Company’s products.

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Cost of Wings Up

If you own a wing restaurant, like Wing Stop, and your in the middle of the $540k average store sales (see Item 19 of their FDD) for Wing Stop, then your costs went up $44,226 in December.  Why?  The price of wings has increased 39% since December 2008. 

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Hold Off on Restraunt Franchises

Most restaurants are experiencing a decline in sales and customer traffic.  Unless you can obtain a 40% off lease deal, I would recommend holding off on restraurant related franchises until your targeted customer group spending escalates.  The cost of the franchise will likely be the same now as it would be in upcoming years when hopefully the economy is better, so I would wait on investing in a restaurant franchise until the consumer spending trends are more positive.  Remember, the trend is your friend!

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Church’s Chicken Lowers Building Costs

You’ve probably heard about the cost savings of prefabricated modular building.  Church’s Chicken is going with a new prefab building to reduce startup costs, hopefully attracting new franchisees. …Church’s Chicken estimates that the pre-fabricated buildings will cost 25 percent less than its traditional stand-alone structure, Brown said. The low-end of pricing for a traditional structure is about $660,000. The modular store has a slightly smaller footprint than the store’s traditional prototype. The 1,750 square-foot building has 23 seats in the dining room, down 10 from the traditional standard. Brown said he doesn’t see the smaller seating capacity affecting operations in most locations. The company is considering a 1,200-square-foot model to replace its small walk-up neighborhood units. It also may look into developing a larger store for regions where in-store dining is more popular. While Church’s Chicken used modular buildings about 30 years ago, the new structures have advanced well beyond their forebears. Advances in metal extrusion and other technology have allowed for a building of equal quality to traditional construction, he said. The modular store is designed to fit local building requirements, with each unit built according to pre-approved state building codes depending on the location. Financing… One program is an internally funded equipment leasing program in which the company would directly lease full equipment packages to franchisees. The leasing program, valued at $200,000-$220,000, would cover all necessary equipment, from smallwares to fryers, Brown said. Church’s Chicken is offering an 11 percent annual rate on the seven-year leasing package — a rate equal to the corporation’s cost, Brown said. Franchisees can purchase the equipment at the end of the lease for $20,000-$30,000. Brown said franchisees with great credit may be able to getter a better deal by purchasing the equipment with financing. But it’s a good deal for those …

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Free Lease Renegotiations From Quiznos Corporate

Quiznos is helping franchisees renegotiate leases at no cost to the franchisee. Good move. Since the teams have been in operation, Quiznos has negotiated more than 40 leases thus far, with an average reduction of 15-20 percent in lease payments Here is one franchisee’s experience in the press release Thomas Mihailovich, a franchise owner in Rochester Hills, MI, participated in the lease renegotiation program in late February. Quiznos and a third-party team worked with Mihailovich and his lessor to arrange a reduction in rent of more than 20 percent, a cost savings of $50,000 over the term of the lease. “I began the process and within one week I was saving nearly $500 per month on my rent,” said Mihailovich. How do you renegotiate a lease? If you are currently leasing a space for your franchise and want to renegotiate the lease, you do have a few leverage points. First, the landlord doesn’t want to lose a tenant because it will usually mean unrecoverable expenses and vacant space for a period of time. Second, along the same lines, a long-term stable lease makes landlords smile, so offering to extend or renew a lease for a longer number of years is very attractive, even at a reduce price per square foot. Here is a sample approach. Find another space nearby that fits your needs equally well and is less expensive. Then approach your landlord and ask him to match the rent or you intend to move. See what the response is. From that point, ask permission to sublet. Depending on how long you have on your lease, ask also offer to sign a longer lease in exchange for reduced lease payments. Getting the assistance of a real estate broker or better yet an attorney is usually well worth the money …

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Potbelly’s Growth Slows…For Now

Potbelly’s Sandwich Works with its core markets being Chicago, Washington D.C., and Texas, is walking away from some potential new locations, and renegotiating leases on existing locations to “reflect the new market conditions.” In recent months the sandwich chain has walked away from at least two prospective deals in the suburbs, in Hillside and Romeoville, and local real estate sources say company executives have told them Potbelly is pulling back its growth plans here. Potbelly founder Bryant Keil said last year that the chain could double its Chicago-area stores to more than 150, and hired former Sears CEO Aylwin Lewis to spearhead growth nationwide. Mr. Lewis said he wanted to accelerate expansion and at the very least maintain Potbelly’s growth rate of about 40 new restaurants a year. But the dramatic drop in the economy over the last six months has hit even the private Chicago-based company known for its kitschy décor, toasted subs and fresh-baked cookies. Potbelly’s costs to build its stores are higher than its rivals’, sources say, so the company can’t afford too many mistakes in a climate where sales are likely to be slow.

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Healthiest Fast Food Restaurants

U.S. News & World Reports takes a stab at listing the healthiest fast food restaurants.  Panera Bread Jason’s Deli Au Bon Pain Noodles & Company Corner Bakery Chipotle Atlanta Bread Company McDonald’s Einstein Bagel Bros. Taco Del Mar  Implyign that everything on the menu is “healthy” is decieving.  For example, a single burrito at Chipotle is likely to have 1,500 calories. 

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Panera Push in Catering

Panera to experiment in Chicago with a greatly expanded catering strategy. He said Panera has long provided catering, but “it’s always been an afterthought” to its restaurant business. He wouldn’t disclose financial numbers except to say that catering accounts for a very small percent of sales. The chain has more than 1,200 U.S. locations.Mr. Tristano said any new packaging that keeps the food fresh is a key to successful catering as well as competitive prices and timely service.Panera’s catering costs about $5 per person for breakfast; lunch ranges from about $8 to $12 per person. Mr. Rand said the chain will analyze the success of the new catering efforts in the next year and decide weather to expand the ideas nationally.

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Status of Pizza Industry

The pizza industry is in a larger downturn than I would have predicted.  Papa John’s is even delaying scheduled increases in their royalty:  Papa John’s, meanwhile, is extending sweeping financial assistance to its franchisees. The company is delaying for at least six months an increase in its royalty rate on sales to 4.5% from 4%. It also is rolling back the royalty it collects on Internet-generated sales, a fast-growing part of its business, to 2% from 3%, and markedly cutting the price of cheese it sells to franchisees. Finally, those franchisees suffering the most will get special marketing support.   While hamburger chain McDonald’s Corp. has posted consistent gains in its domestic same-store sales, with 4% growth in 2008, U.S. franchised same-store sales at Domino’s fell 1.7% in 2007 and 5.6% in the first nine months of 2008. Papa John’s is predicting its same-store sales will be flat to down 2% this year, and Pizza Hut, whose same-store sales slipped 1% in the fourth quarter of 2008, is off to a slower start than expected this year, according to Yum, which has called the division its biggest challenge.Pizza’s woes started before the current recession gripped the nation. Figures compiled by Chicago-based restaurant-consulting firm Technomic Inc. show that while the overall U.S. fast-food category experienced compounded annual growth of 6.4% from 2002 to 2007, pizza sales rose only 2.5% during that period.

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26-year-old Franchisee

A 26-year-old woman became the youngest franchisee in the Schlotzky’s system. Is she too young? You may think, until you read this: Jessica Johnson worked at the Schlotzky’s in Teays Valley for nine years – working her way from cashier to manager.Then in October, even though some people thought it was a little crazy, Johnson got a Small Business loan and bought her very own store.That made her the youngest franchisee in the Schlotzky’s chain.”I was not scared to do this because I believed 100 percent” Johnson said. “I knew it was something I wanted to do and if for whatever reason it didn’t work out I knew there was someone looking out for me and it wasn’t meant to be.”Johnson says she has been focusing on catering, delivery and customer service to keep profits up despite the economy. She is probably more experienced and ready than 90% of Schlotzky’s independent franchisees.

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We Don’t Serve Kids

Too funny…. The Sizzler restaurant in Antioch will stop serving students during school hours. It’s a way to stop them from cutting class. Call me crazy, but I would rather kids hang out at Sizzler than hang out totally unsupervised somewhere else!

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Meal Prep Tanking in Milwaukee Too

Rick Romell from the Sentinel Journal in Milwaukee called me to discuss the Meal Prep industry a few weeks ago.  He produced an informative article which can be read here.

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