Panaderia Taza is a coffeehouse targeted specifically at Hispanics with Spanish music, pastries, churritos and Mexican newspapers.  They’ve been getting good press lately and I thought I’d give our readers a heads up on this soon-to-be franchise.

NPR did a short profile on them.  Listen to the MP3. 

 Follow up to Franchisor as Exlusive Supplier (Krispy Kreme case)

More on the Krispy Kreme and Franchisee lawsuit:

Court documents filed in the case paint a cloudy financial picture for Sweet Traditions. In an affidavit, Sigurdson said a "continued catastrophic decline" in sales contributed to net losses of $1.2 million in 2003 and $3.2 million in 2004 and an operating loss of $2.2 million so far this year for Sweet Traditions.

He blamed Krispy Kreme for pressuring the franchise to expand too quickly, for overcharging it on supplies and equipment and for failing to promote the brand, even though Sweet Traditions has paid $2.5 million into a "brand fund."

As a follow up to the previous post Is caring for the elderly a profitable business?, I’ve been looking at a few other elderly care franchises.  My preliminary favorite is Comfort Keepers. All the non-medical elderly care franchises have roughly a $25K franchise fee and 5% royalties. But, Comfort Keepers sets itself apart with its strong brand recognition, blanket coverage of the United States and internationally, and smart online marketing. Why not buy into a system with the largest network of referrals and strongest brand recognition?  With social and demographic trending in a favorable direction, and heavy referrals from its web site, and barring any show stoppers from their franchise agreement, I’d lean towards buying it.

I was surprised to learn from this article that Quiznos pays commissions to its Florida outside real estate firm, Kotis Properties, to sign up franchisees. Possible conflict of interest?

In addition to helping find sites, Kotis Properties will also be helping Quiznos sign up new franchisees.

It seems this sales practice, along with high pressure seminars, is becoming more common in the franchise industry.

What can go wrong if your franchisor is also your supplier? A lot. Krispy Kreme, along with many franchisees such as Dippin’ Dots, are required to buy supplies direcly from the company. So what’s the big deal, right? Well, what do you do if they threaten to not ship supplies unless you agree to new terms, such as payment upfront instead of the normal 30-35 days? If you don’t comply you can’t operate your business. That was the unfortunate situation faced by a few Krispy Kreme franchisees. Krispy Kreme threatened to stop shipments unless it received $1 million that is in dispute (it didn’t say if those were late payments or due to new Agreement terms sought by Krispy Kream). In this case, the franchisees were lucky and the court agreed with their argument. The court ordered Krispy Kreme to resume shipment of supplies under the traditional terms of the agreement. The order includes assertions by the franchisee that Krispy Kreme –

"has refused to ship Plaintiff ingredients, supplies, and equipment, including doughnut mix – all of which are necessary to Plaintiff’s business operations – on terms previously agreed to by the parties."

Developing a high margin specialty niche in a stagnant industry is usually a formula for success (see Panera Bread’s twist on fast food, Sports Clips and Snip Its on hair cutting, Starbucks on coffee, Applebee’s on chain restaurants). Foot Solutions is a new shoe retailer looking to capitalize customers who require more comfortable foot wear, namely sufferers of diabetes, obesity and arthritis.

Concerns
Foot Solution’s web site details the anticipated $200,000 investment to open a store. The company expects the franchisee to sink $65,000 in shoe inventory before opening, yikes!

Foot Solutions requires you use only their vendors and approved products. And you must use their supply division to order opening orders, construction materials, fixtures and equipment. Of course, you should now be asking yourself, “How much more will I be paying if I was permitted to source the products myself?” Be sure to benchmark the average vendor and supply mark-up by asking the franchisor or franchisees for the actual price sheets.

Part of the reason to buy a franchise is the ability to buy into an already strong brand name. It is unlikely that customers are already familiar with the Foot Solutions brand (though it is a descriptive trademark, so intuitively people will generally understand the business’s purpose). There is also the dynamic of how many Foot Solutions can a local market support. Is it one, three, five? Niche franchises are much more susceptible to competition so the protected territory is an important issue.

There is a heightened liability risk. Franchisees receive training in foot pathology and physiology along with understanding the feet and related problems and symptoms. What if your sales person recommends a shoe that worsens a customers foot problem, or a customer relies on what they believe is your superior medical advice? Make sure you have high liability insurance coverage.

On the brights side…
From their FAQ:

Is this business profitable?

We cannot tell you how much you will make. Each store’s profit will depend on a number of factors such as total sales, monthly rent, labor cost, etc. We can tell you that most of the products you will be offering have an approximate cost of 40%, based upon our suggested selling prices.

The population trends favor this sort of business – obesity, diabetes and number of seniors are increasing. Local doctors can help generate a steady flow of referral customers. The customers are usually require special shoes and are willing to pay the hefty premium, with an average sale is expected to be about $200.

Conclusion
This is the sort of play that can work and be sustainable through referrals from customers and doctors. The margins are high and one or two trained staff can mind the store. I’d tentatively buy it!

Update 7-9-2005: Here is another article that includes pictures of their digital foot scanning machine.

Franchisee’s can sometimes successfully challenge and win in arbitration and court battles with their franchisors.

Subway’s founder Fred DeLuca lost his appeal to overturn an arbitration board’s decision that awarded Rottinghaus and Dowell, two midwestern Subway franchisees, $150,000 each. In 1997, DeLuca apparently didn’t want the two franchisees to be elected to the board of the Subway Franchise Advertising Fund, which distributes advertising money to Subway stores across the country. In 2001, the arbitration panel concluded that DeLuca violated Connecticut’s Unfair Trade Practices Act by pressuring the board to cancel the election and resolve new rules that prevented the two men from running.

It only took 8 years for this grievance to reach a final conclusion

New smoothie franchises seem to be opening as fast as Starbucks and now Chipotle’s. Unlike coffee, a “smoothie” is not a staple of the American palate and never will be. Nonetheless, the smoothie business has been hot lately with the likes of Jamba Juice (who reinvented the market), Smoothie King, Maui Wowi, and Planet Smoothie dominating the marketplace. They’ve been riding the omnipresent “health” wave by using tasty fruits and vegetables and vitamin powders in their potions. But how long will smoothies be perceived as healthy? You should be asking that question if you are thinking of buying a smoothie franchise.

Just as financial markets always returning to the equilibrium, so do businesses. Eventually the product will commoditize, the market will saturate, and prices will drop (See the sub sandwich market).
The process can be accelerated by negative news, just as the low carb movement (which I followed for a while) subsided.

For example, if the national spotlight continues to highlight the high calorie count of smoothies defeating the impression of a healthy alternative to fast food, same store sales will suffer leaving smoothie franchisees with a lot of silent blenders. It’s already happening in the United Kingdom.

Mississippi’s The Sun Herald reports:

Thinking of ordering a smoothie for a healthful light snack between meals? Although these sweet fruity treats can be low in fat and rich in vitamins and nutrients, such as calcium and vitamin C, they can have a lot of sugar and calories. For example, a medium-sized Citrus Squeeze from smoothie chain Jamba Juice packs about five times as much sugar (103 grams) as a regular-sized Hershey’s milk chocolate bar (22 grams). It has 470 calories – more than a McDonald’s double cheeseburger (460 calories). Instead, try a lower-calorie smoothie option like of one of Jamba’s “Enlightened” smoothies.