If you are a franchisee and need a pep talk, watch this video: 40 INSPIRATIONAL SPEECHES IN 2 MINUTES

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.

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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 sometime as soon as we see inflation start to increase.

?While our royalties will still be the lowest in the franchise industry, this will make a difference to future franchisees that sign up after the change, so we wanted to let everyone for those that are close to signing up. 

Below is a table to show the small difference with some estimated annual inflation numbers.

Thank you

Marcus Price

CEO.  Goin’ Postal Franchise Corporation

4941 4th Street

Zephyrhills, FL 33542

Ph: 813-782-1500 x103

Fx: 813-782-1599

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.

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. 

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!

The franchisor’s job of communicating with franchisees is not as easy as you might think.  Some franchisees simply shy away from anything technology, some barely speak english, and some franchisees expect regular courtesy phone calls.

Fast Casual has an insightful article on how some brands communicate.

To communicate news and information, brands like Qdoba, FOCUS and Salad Creations use newsletters, representative committees that will communicate back to the franchisees, and technology tools such as intranets, online videos, webinars (voice-over presentations viewed from the franchisees’ computer)

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 who need to lease.

Current CEO Rick Shaden in a Fox Business interview talks about his competition with Subway and the new torpedo sandwich.  A few notes:

• Blames slowdown on “economy and increased costs”
• Says customers want cheaper sandwiches
• Touts the $4 Torpedo sandwich, claims it is the “first portable sub”, “modern sandwich”
• Head to head to Subway, more innovative and edgy
• Frames Quiznos as a “challenger brand” to Subway

If I’m a franchisee, and my problem is low profit margins, I do NOT want to LOWER my prices…it just makes the problems worse.  However, from a franchisor’s perspective, earnings are based on TOTAL system sales.  So if forcing lower-priced sandwiches increases total system-wide sales but still lowers the franchisee’s profitability, some CEO’s may think that is necessary tradeoff.   Their short-term financial rewards often pave this path.  The interest between the franchise and franchisor are unfortunately are misaligned.If you haven’t seen the torpedo sandwich Shaden speaks of, here is a commercial for it:The Million Sub promotion left many customers upset when many stores refused to honor the “free sub” coupons, including a member of my family. The franchisees apparently are not reimbursed by corporate for the coupon – OUCH!Quiznos is in a tough spot. Their toasted sub concept is no longer unique, and the food and operational costs are still inflated due to franchisor imposed required purchasing.