The trend has been for franchisors, especially for publicly traded ones, to sell more and more of their corporate owned stores. Why? The financial argument has been that earnings are stabilized by managing a franchise operation (simple income streams) rather than managing the nuances of local operating businesses. And, for the most part that makes sense both financial and practically.

One company who is bucking that trend is Swisher Hygiene, acquired in 2004 for less than $20 million by Steven Berrard and Wayne Huizenga…the team behind AutoNation, Blockbuster and Waste Management. While their business haven’t all been models of success except for AutoNation, they have grown business fast and made a lot of money. Berrard was also CEO of Jamba Juice.

You probably have never heard of Swisher Hygiene. The company sells low cost chemicals and cleaning services to business, especially foodservice and restaurants, such as the 3-compartment sink systems where EcoLab has traditionally dominated. In 2004, it was making an average of $17 per week per customer, with a base of about 30,000 clients. They feel the opportunity in this $9 billion market is in increasing sales to each existing customer and acquiring new ones. Swisher also was an amalgamation of 93 franchisees all working out of their trucks. Now, they acquired most of their franchisees, most recently their Chicago franchisee.

The stock has fluctated greatly in the past year when it went from $2 to $10 per share, now it’s back down to about $5 per share.

I don’t know if they will succeed, but it will make for an interesting case study one day. Hopefully the franchisees who took a buyout with stock will be better off than they were as franchisees.

Larger fitness clubs are seeing a drop in membership, and former fast growth clubs are turning flat to negative.

This is not just happening in the USA, but also in Australia where giant Fitness First is seeing a decline in membership. Fitness First has turned flat to negative, with increased competition from Anytime Fitness, personal trainers and low cost rivals.

It’s a tough industry where you have franchises like Planet Fitness offering a no-frills membership for $10/month.

The discussion forums are back up for people to ask questions and get responses from me and the community. I had to restore with a copy from earlier in the year, so I apologize if I lost your post. Thanks for your patience!

I apologize for the forum being down for so long. I will install a backup and get it functioning again. There is a lot of great content in there.

On a similar note, I had a new son born a few months ago which has absorbed most of my spare time. I will resume regular posting in mid-August. Thank you for your patience and loyalty.

WorldWide Papa’s is going public on the heels of opening up its 5th store in Russia. But, there are people who claim to have invested with WordWide Papa in Russia but were ignored by the company once they received the investment. The whole story isn’t here, but a company that fails to communicate with its investors in a respectful manner must be avoided.

I’ve seen a lot of investment fraud as an attorney, and I still am amazed at how often folks will steal from people they know.

When a franchisee fails, you don’t often see the franchisor swoop in and take over the lease and operate failed location, but Graeter’s is doing just that in Kentucky. Graeter’s corporate is acquiring several stores like it did for another franchisee back in late 2010.

Sales were reported in a broker’s sheet to be in excess of $3 million for the past three years. The asking price is $2.75 million plus a transfer fee.

Read more: Graeter’s Northern Kentucky franchisee puts stores on the block | Business Courier

For you non-Cincinnatians, Graeter’s ice cream is a local marquee brand in the Ohio Valley.

source: National Restaurant News

1. Washington, D.C.
2. San Francisco
3. New York City
4. Boston
5. San Diego
6. San Jose/South Bay
7. Baltimore
8. Philadelphia
9. Seattle
10. Pittsburgh

I would agree with Washington, D.C. being number 1. I’ve spoken to several small operators, that are expanding to Washington, D.C. One take and bake pizza concept expanded there and within a year it was their best performing store in the system of about 20.

As a rule, franchisees should try to keep their rent 5-9% of gross sales except indoor malls where you’ll be at about 15%. Recently I was evaluating lease rates in the Chicago downtown loop area, and for a nice spot between 1,200-2,000sf you’ll be paying around $50+sf NNN. Compare that to suburbs of Orlando where you’ll easily grab prime shopping center space for $20-25sf with lots of incentives.

Dear Franchise Pundit readers,

Sorry for the sudden downtime for the past few weeks.  I had a problem with my web host and had to make a sudden switch, and I had a new baby boy born!  My head is back in the game and I’ll work to get things updated.   I had to use a backup of the web site to get things back up with my new web host, so I lost two months of blog and forum posts.  I’m sorry to all those who contributed and lost their content.

Thank you for you patience and I look forward to reading more of everyone’s contributions,

Ryan Knoll

I’ve seen several Crepe restaurant + cafes lately start up in the USA.   I don’t think they’ll be successful like their cousins in Canada and Europe.  It just doesn’t make that good of a sandwich wrap for the American palate and people aren’t used to eating the dessert crepes with Nutella and sprinkled sugar.  If anyone could pull it off it’d be Lettuce Entertain You, one of the country’s most successful restaurant development firms with over 75 concepts in their portfolio…but they closed their crepe start up in Chicago a few months ago.  Here’s a few that are still trying:

• Banna Strow’s
• Crazy Crepes
• Flip Crepes in Chicago
• The Magic Pan Crepe Stand in the Mall of America in MN run by the infamous Lettuce Entertain You (the one in Chicago closed)

I just finished negotiating a commercial lease for a restaurant and thought this would be a good opportunity to relay some real time advice on the topic.

1. Everything is negotiable in a lease agreement.  You simply have to ask for it in a sensible and compelling manner.  But just because everything is negotiable doesn’t mean you should try to negotiate everything.  Pick your battles, and accept some reasonable offers.
2. When you’ve been emailing red-lined lease drafts back and forth with the landlord and you’ve reached a stalemate on several key issues, schedule a face-to-face meeting to hammer out the rest.  It will usually help drive things to completion.
3. Be reasonable.  Don’t try to hammer the landlord on every aspect of the lease.  For example, if the price per square foot is reasonable compared to the market, then offer to pay the full rate and focus on other things like build out assistance, CAM, start of lease payments, hiatus of lease payments for remodeling, personal guarantees, etc.  Some landlords hold dear the price the receive per square foot but will heavily negotiate many other things.
4. List everything in an exhibit what you will take with you at the expiration or termination of the lease, or the landlord will claim it as a permanent fixture or improvement and not let you take it.
5. Most parties routinely start a lease negotiation with a Letter of Intent (“LOI”) to hammer out the big details like pricing, tenant improvements and the like.  A minority of other will recommend not starting off with a LOI, such as the self-proclaimed “Lease Coach” who touts his $1k-$7k services at the National Restaurant Association trade shows.  What’s my opinion?  In a perfect world I’d prefer starting out with the lease but I don’t think in the end it really matters whether you start negotiations with an LOI or lease.  Either way your negotiating the same details.  If the landlord insists on an LOI to start things off and you refuse, the landlord will view you as a pain-in-the-butt difficult tenant and he will be less likely to make concession on your lease demands.  Landlords will definitely make extra concessions for tenants they like and trust.
6. Support your reasonable requests with research.  For example, if you are attempting to lease a shell with a dirt floor and you are asking for a vanilla box plus $35/sf of tenant improvement (“TI”) money for a new build out, then have comparable offerings from neighboring landlords.  Often the landlord doesn’t know what the competition is offering to lure in tenants.
7. Economic Abandonment.  Include an out in your lease that gives you the option to accelerate the termination of your lease upon 60 days notice if the trailing twelve months sales are below a certain amount (i.e. $375,000).   This is a huge benefit and basically gives you a way to end the lease early if sales aren’t good.  I’ve seen several tenants do this like GNC and I think it’s a great idea.
8. Vanilla box is a generic term.  Always define it very specifically and list exactly what you want the landlord to provide in the vanilla box – ADA bathrooms, size of hot water tank, plumbing issues like size of water line and PSI, separately metered utilities, minimum 4-inch concrete depth with 4000psi strength and termite treatment, emergency lighting, electrical and HVAC details and capacity (i.e. 1 ton of A/C per 200sf), tap and meter fees, drop ceiling specifications, fire alarms up to code, electrical J box for outdoor sign, lighting, etc.
9. Have your architect inspect the premises before you finish the LOI.  Make sure the ingress/egress comply with the state code or you may need to install additional exits.  Make sure the square footage provided by the landlord is actually square footage that is usable by you and doesn’t include pillars, angled corners, etc.
10. Always try limit your personal guarantee as much as possible.  You never know what can go wrong, even things outside of your control like a war, natural disaster, or 10 new competitors within a few blocks.   If they landlord insists on a personal guarantee for the entire lease, try to ask for just the initial 5-year or 10-year term, or if you have the cash offer to pay an extra deposit that will be refunded in a year or two in exchange for a shorter personal guarantee.
11. Pay attention to insurance requirements.  There are some things that are cheaper for the landlord to insure as a rider to his insurance than you.
12. Possession Date.  This is the date you will have the right to start building in the space.   If the landlord is performing some build out on the space for you, make sure the landlord gives you sufficient notice such as at least 4 weeks so you have time to get your general contract organized and ready.
13. If parking is on site, make sure it is enough. Try to negotiate your own dedicated parking spaces.
14. Exclusivity is a big deal.  Can the landlord rent to your competitor?  If the landlord won’t grant you an exclusive (i.e. Deli sandwiches for Jimmy Johns), then ask for an option to terminate the lease or get an automatic reduction in rent if a direct competitor moves in.  Often it will be defined as someone generating more than 10% of sales from “ice cream” if it is an ice cream exclusive.   But, be careful and make sure terminations are not automatic but optional for the tenant or tenant can easily remove you by letting a competitor move in.
15. Landlords can be sneaky and unethical.  If they see a successful pizza shop in their shopping center, a leasing manager may want his lazy son to open up pizza shop there and thanks to you proving the concepts work in that spot, he’ll figure out how to get you out of your lease quickly.  What will automatically terminate the lease?  What are breaches and how are they cured?  A favorite method is using a failure to timely notify the landlord within the Notice Period of your intent to extend the lease for another term.

Starbucks changed its iconic logo. The most noticeable change is removing the Starbucks name and making it a bit more simple.

It’s a bold move. I’m not sure how many people know that female image is actually the Starbuck’s logo. I’m sure it will work just fine and they have the research to back up this decision. What do you think?

I’ve noticed several franchised “Urban Flats Flatbread & Wine Co.” closing this year in the southeast, such as Orlando FL, Winter Park FL, Lawrenceville GA,  and Atlanta GA (pictured to the right).  Something clearly isn’t resonating with potential and repeat customers.   Many franchises suffer from this ‘surprise’ problem leaving execs scratching their heads about what is going wrong.    I’ll put on my pundit hat and give you my opinion and recommendations.

HOW RESTAURANTS ARE JUDGED BY CUSTOMERS:

People will instinctively judge a restaurant on three elements, and to draw repeat business you need to excel in at least two of these (and be at least average in the third) in the eyes of your local customer base:

1. FOOD:  Is the food memorable and superb all around?
2. PRICING: Is the pricing at or below the competition; does it provide value?
3. AMBIANCE/EXPERIENCE:  Is the customer experience superb with a unique and comfortable interior design?

A restaurant could succeed by satisfying only two of three criteria.  For example, you could provide an excellent customer experience and have great food, but prices are too high.   Cheesecake Factory and J. Alexanders are examples of this but both still generate excellent sales.

HOW URBAN FLATS RATES:

According to most of the reviews I’ve read online, Urban Flats rates as follows:

1. FOOD: Average food, flats are minimalistic…not bad but not excellent either
2. PRICING: A bit high – $10 cheeseburger, $8.50 Loaded Potato appetizer, $10 “flats” pizza
3. AMBIANCE/EXPERIENCE: Average, some described it as trying too hard to be cool.   Music is too loud to talk.  If you have to describe your restaurant as hip in advertising, you probably are not.

Other repeat comments are that visitors expected a walk up ordering counter and self seating, but it’s a sit down wine bar.   The menu is surprisingly diverse for a “flats” restaurant.  It showcases very high end salads and entrées ranging from salmon and tandori chicken.  People understandably describe the “flats” as “pizza” even though there is no mention of pizza on the menu.

Also see: Urban Flats Menu

FIXING THE BUSINESS

I could see this concept get on the path to profitability by switching to a limited menu of “flats” priced at the fast casual norm of $6-$8.  And, only selling sides that support the “flats” sales such as  salads.  The service style should be fast (under 5 minutes to receive your order) and be located in storefronts where you’d find fast casual restaurants like Panera Bread, Go Roma, or Noodle & Company.

Ditch the waiters and table service, ditch trying to be a hip bar.  Ditch the menu items that do not support the “flats”, shrink your footprint to under 3,000 square feet. Make the seating comfortable to individuals and groups.  Try to infuse “authenticity” into your brand story, focus on the unique “flats”, don’t fight the pizza comparison.   Hire a new chef consultant (you need outside unbiased help right now) to restructure the menu, and rework foods to get the food costs well under 30%.   Hire an experienced research firm to test and improve the menu (email me if anyone wants research firm recommendations).  Let the chef consultant work closely with the research firm for best results.  Since stores already have bars and liquor licenses, have a couple of low-cost wines and decent draft beers with the pizza, but I’d drop the hard liquor permits if possible and just do beer and wine.  Flipper’s Pizzeria and Go Roma do this successfully while keeping it family friendly.  You may be tempted to go the sports bar route but I wouldn’t recommend it in this instance because you’ll get lost in the shuffle as most sit down pizza places already pseudo try that.

Currently, there is little unique about Urban Flats other than their “flats” pizza.  Luckily, there is a market void for quality under-5-minute pizza restaurants (Red Brick Pizza is currently trying to exploit this niche with high-temp stone hearth ovens that cooks pizza in 3-4 minutes…I’ll do a review of Red Brick Pizza soon because I think they’re screwing up too).   If I owned Urban Flats, I’d bet the farm on branding the restaurant entirely around the “flats”.   Try being more kid friendly with the menu and seating in your suburban locations and you’ll get many more of the coveted large family groups.   Gimme’ a combo that includes a flat, salad or side and drink for $10.

The foundation and sole goal for this turnaround is getting people in the door, returning every week, and encouraging their friends to check it out.  Once customers consistently fill the seats and gross sales are high enough to at least reduce prime costs under 60% and rent under 10%, then owners/managers can pontificate on increasing profitability by increasing average liquor sales, optimizing labor schedules, table turnover times, and getting their friends posh jobs at the bar.

As I write this I’m reminded of the reality show “Kitchen Nightmares” starring Chef Gordon Ramsey.  Ramsay doesn’t come out and say it but his formula for saving restaurants from bankruptcy hinges on fixing the three criteria above.  He (1) reduces the complexity and size of the menu, (2) reduces the prices to encourage repeat business and match competition, and (3) remodels the interior design and employee’s attitudes.

Hopefully the promotion of Michael Roeper to COO of Quiznos will help the franchisee’s profitability. Roeper owned several Quiznos units in Chicago from 2000-2006.

SOURCE

An Indianapolis, IN area Dominos pizza franchisee had sales of $6 million across three units but kept the 7% sales tax for himself. Eventually the state of Indiana found out about it and shut him down. I know it’s tempting to keep the sales tax, but how could you expect not to get caught?

Leveraging people and assets across multiple operating businesses is what enables most companies to make money, including franchisees.    The leveraging action turns what would otherwise be an individual, high-overhead and high-risk investment into a portfolio of lower-overhead and risk-managed investments.

In a previous job I worked for a commercial real estate investment and management company.   The company made money because they were able to use the same employees to manage dozens of leased properties, and leveraging one employee across dozens of properties increased the profit margins.

In franchising, a multi-unit operator can leverage skilled managers across multiple units.  And, the $25,000 saved across 50 restaurants adds up quickly to a nice income.

A great example of leverage in franchising is Frank Heath and David Paradise of Mississippi-based Mid River Restaurants.   Between them they own:

• 12 Applebee’s in Louisiana,
• 26 Hardee’s in West Virginia, North Carolina and Kentucky,
• 10 Taco Bell restaurants in Louisiana and Mississippi, and
• 12 IHOP restaurants in Ohio, Indiana, and Kentucky.

And, they are in the process of acquiring 33 St. Louis area Applebee’s for the rock-bottom price of $25 million ($757k each, below build out cost).  The seller is DineEquity Inc., the parent company of Applebee’s Neighborhood Bar & Grill and IHOP restaurants.

Mid River Restaurants has several advantages over other small and individual franchisees:

• profit per restaurant is higher than most because of their controllable costs are lower with centralized management, accounting and service teams
• cash flow is large enough to finance large, well priced acquisitions
• the greater cash flow also enables them to hire and retain smarter employees who are likely to further enhance the profitability
• the whole enterprise learns from four very well developed franchise systems, exposing employees to “best of breed” methods

Individual franchisees as a group tend to be lower skilled, lower financed, micro-managers, unleveraged and over worked, which is why franchisors prefer experience multi-unit operators.

DineEquity, owner of Applebees and IHOP brands, is trying smartly trying to avoid discounting their menu like the rest of industry. Their strategy to get customers in the door focus on appealing healthy “skillets” price at $9+ which currently make up about 10% of sales.

The “2 for $20″ deal of an appetizer and two entrees now makes up 18% of Applebee’s sales mix, down from around 20% in previous quarters, Stewart said. Applebee’s promoted that offer through most of last year but has since made it a mainstay on the menu that’s not supported prominently by ads.Applebee’s margins rose slightly last quarter, to 14.1% to 14%, helped by lower food costs, although that was offset partly by more marketing to try to bring in guests.

Same-store sales were down 1.6% at Applebee’s systemwide, an improvement from prior quarters, while guest counts continued to decline on year.

You’re a franchisee and your financial and operational problems are snowballing out of control.  The result is you’re not operating in compliance and you’re late on payments to the franchisor, and the franchisor decides that you need to stop operating.   How does the franchisor shut down your store using the courts?

See Krispy Kreme v Satellite Donuts (franchisee)

Nick Lanni, the founder of Great Steak & Potato Co. (founded in 1982, sold in 2004 with 260 locations), is starting a new sandwich concept at my alma mater, Miami University in Oxford, OH. The concept is called “SoHi Grilled Sandwiches” and is supposed to be a fresh grilled build-your-own cheese steak and burger place.

Coincidentally, his sons started the 25 locations Currito: Burritos Without Borders.

Average unit sales were $1.4 million per company-owned Jack in the Box location and $900,000 per Qdoba system location in fiscal 2009.

source: Morningstar

This relates to the previous blog post as it illustrates another great company selling its corporate owned stores. Donatos, who happens to make my favorite pizza, announced it sold 39 locations to a franchisee, Titan.  Titan now owns all 23 Donatos stores in Indianapolis and 16 of the 22 in Cincinnati. The other Cincinnati locations are owned by other franchisees.

The focus on franchising was originally announced in 2007 by the Columbus-based pizza chain. At that time, about three-quarters of Donatos’ locations were owned by the company. That has changed. Including the Titan deal, Donatos has 179 restaurants in six states, and 63percent are owned by franchisees.