Dream Dinners Hammered by Forbes

Dream Dinners is an example of good idea but profit challenged business model.   It’s just too expensive to attract and retain customers.

A Forbes article looked through the Dream Dinners FDD from the state of Washington, and focused on the required audited financial statements.

As of Dec. 31, the company boasted $2.9 million in assets, against which it carried $3.4 million in liabilities. (Such negative book value implies that if Dream Dinners were unwound today, shareholders wouldn’t get much.) That’s a snapshot, but here’s a trend: Last year, the company lost $628,000 on $7.5 million in sales; compare that to 2005, when it earned $928,000 on sales of $4.5 million.

….

Typically, new business concepts need up to five years to season before they can be franchised successfully. Dream Dinners–along with its next largest competitor Super Suppers, now with 165 stores–both began franchising in less than two years.

Franchisees accused the franchisor of false promises and unsubstantiated financial projections.

A major point of contention has to do with rosy promises Dream Dinners seemed to have made to its franchisees. Under the Federal Trade Commission’s franchise law, franchisers are not permitted to make “predictions” about franchisees’ financial success–unless they do it in the Uniform Franchise Offering Document, which typically contains a host of disclaimers.

Dream Dinners “totally disregarded these regulations,” says Garner. It not only posted financial projections on its company Web site, he says, it also put them in a Power Point presentation given to potential franchisees.

Jennifer Hemann, a former Dream Dinners franchisee in Maryland and one of the plaintiffs in the suit, alleges that she was shown that Power Point presentation–which included estimated profit margins for a given volume of customers–when interviewing with the founders. “They told us, ‘Our lawyers said not to show this to you, but if you write fast, you can get it all down,’” she says…

The slides, provided by Garner, present some tantalizing figures: Allen and Kuna projected that, at 187 customers per month, a franchisee could expect to earn $75,400 in profit annually, or 18.9% of total revenue. On the high end, at a quoted 328 customers per month, net profits jumped to $163,300, or 23.3% of sales. The estimated distance customers would be expected to drive: two to five miles. Allen and Kuna insist that “the figures were realistic and based on the actual performance of stores.”

The owners look innocent and reliable enough, eh?  On face value and blind trust, I would be tempted to believe Allen and Kuna.

Meal Assembly Watch has an insightful 5 Ways to Save Dream Dinners.

I have acted as general counsel to franchisors in my law practice.  From what I have observed, most smaller franchisors do not have experienced managers.  This inevitably turns growth sloppy by allocating too many resources and cash to new franchise sales.  Marketing programs for their franchisees and brand/product development suffer.  Inevitably, the franchise sales process is much longer and more expensive than projected, and ends up monopolizing the franchisor’s time and money.  Sometimes this get worked out (McDonald’s), and sometimes it doesn’t (Quiznos).

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