It works.

Seattle’s Best will replace BK JOE’s coffee program in Burger Kings by September 2010.

I’m sure this is a good financial deal for Seattle’s Best (owned by Starbucks) and will help BK increase its perceived coffee quality, but in the long run I believe this will hurt Seattle’s Best perceived brand quality.  Why?  Because BK is unable to enforce quality standards in its stores.

Most people have an above average perception of Seattle’s Best Coffee, a somewhat premium coffee brand akin to Caribou Coffee or Gloria Jean’s.  On the other hand, Burger King quality image is quite poor, with people citing dirty stores, low quality meals and lazy employees.  Quality issues are due almost entirely to unmotivated employees and lack of leadership from the absentee franchisees.  It’s clear as soon as you step into a BK that there is little company pride or culture.  And when your employees don’t give a crap, your coffee standards (brewing methods, time in the pot, keeping coffee at ideal temperatures, etc.) will be ignored, to the eventual detriment to Seattle’s Best.

On a side note, Burger King is wisely taking a page from McDonald’s by dropping a slice of cheese from it’s $1 double cheeseburger.  The article mentions that BK is signaling removal of the $1 double cheeseburger from the dollar menu in the spring, and it’s testing higher prices for its $1 Whopper Jr.   Was the $1 double cheeseburger really worth all the fighting with franchisees?

The forums are temporarily down due to technical issues with the web hosting company.  I’ll get them back up shortly.  Thanks for your patience!

•  Update Feb 9, 2010: We’re back in business, all is fixed. 

Most franchisees will not have social media addressed specifically in their Franchise Agreements.  So, there is not much stopping franchisees from participating in social media web sites.  New franchisees are now starting to see company’s social media policies in their franchise agreements.What is the big deal with a franchisee setting up a Twitter or Facebook page?  Here are a few:

• A franchisee’s page is neglected and it reflects poorly on the brand.
• A franchisee posts a coupon on his Twitter page but isn’t clear that it is only valid at his store.
• A franchisee’s personality can become evident over time with social media – is this good for the brand, is it confusing?

In my opinion, from what I’ve seen with social media for 99.5% of restaurants – an proactive social media strategy is really on good for sending discount promotions to a ready pool of your customers.    You can sometimes get ‘buzz’ from online communities,  but the resulting increase in sales is almost always negligible.

I’m not suggesting you pick a concept with the lowest fees, but what you receive in exchange for your royalty is important – brand recognition, supply chain discounts, location assistance, quality control of brand, human support, menu development, marketing assistance.

One of my favorite fast casual restaurants is Nando’s who is famous for their marinated Peri Peri Chicken cooked over an open flame.  I ate at their London, England locations multiple times and it has quickly become my go-to restaurant when I’m there.   One Nando’s opened in the USA last year in Washington D.C., and I believe it is a corporate owned location. They do franchise in Canada, New Zealand, South Africa, Namibia, and Australia, but not the USA. Their mix of food is clever. While it is a sit down restaurant, ordering takes place at a central counter and the food is brought out to your table.

For appetizers that are served immediately, the offering is Peri Peri nuts, spicy mixed olives, and humus with Peri Peri drizzle…all healthy, all tasty detours from the typical high-fat fried appetizers.  See their menu below:Nandosusa Main Menu

Nando’s includes elements that would make it a strong franchise contender in my book (it doesn’t have brand recognition yet in the USA, however).
– Great Tasting Food
– Unique Customer Experience
– Improves on an already familiar taste – chicken
– Casual and fun environment
– Employees seem happy
– Branding is authentic….Portuguese presented in a fun way

On the down side,
– it doesn’t have brand recognition yet
– food preparation is based on human judgment rather than fool proof systems. For example, the chicken is pulled from the open flames based upon a human’s judgment that the chicken is sufficiently cooked.

Back in August 2007, I gave a NexCen Brands an “I wouldn’t buy it” rating after they grossly overpaid for the Pretzel Time and Pretzelmaker acquisition by paying 5x revenue.  At the time the stock price was around $7…fast forward 2 years and yesterday it closed at 36 cents and has been as low 5 cents in 2009.Your welcome!

Source: Dallas Morning News

Jim Schwartz, president and chief executive of NPC International Inc., said he was disappointed and “frankly frustrated” with the company’s 12.6 percent drop in same-store-sales from continuing operations for the quarter that ended June 30.

It was the third consecutive negative quarter for the Overland Park, Kan.-based company, due in part to difficult comparisons to last year’s sales tally. That’s when Addison-based Pizza Hut launched its line of Tuscani pastas. Schwartz noted that cash-strapped consumers have been looking for less expensive meals, even among the pizza players.

BlueMauMau recently had an article about the increase in “better burger” franchises.  I too have seen in the past two years an increase in the high-end burger space from both independent stores like The Daily Grind in Port Orange, FL (great store-baked buns) and franchises like Cheeburger Cheeburger and Five Guys.  I recently performed a valuation on a group of high-end burger franchises for a client and I walked away with mixed feelings.  The key driver of profitability was the lease costs, and the key driver for sales was location.  The basic formula for a decent ROIC (return on invested capital) was convenient, high traffic location with a rent at or below 6% of gross sales.  This ends up being the simple formula for most restaurants.   Your restaurant’s cost targets should be:

• Prime Costs (Food and Labor) a combined 60% (about 30% each depending on type of restaurant),
• rent below 6% of gross sales,
• interest costs below 1.2%,
• owner’s net profit at least 10%,
• which leaves about 22% of your gross sales left for overhead, maintenance, royalty payments, advertising, and other costs.

As you can see, an 8% royalty and advertising costs for a franchise cost takes a big chuck out your remaining 22% budget.The HARDEST part of predicting a restaurant franchise’s success is forecasting sales.   Forecasting sales requires an analysis and comparison of other local restaurants, proximities (closeness to road, attractions, anchor stores, etc.), parking/drive thru, local demographics, competition, signage, brand awareness, and many other details.  If your sales projections cannot confidently support sales at least 20% more than your break-even point, don’t do they deal.

Thermostat controls help Arby’s cut costs

But someone always forgot to shut off the air or would poke a straw or toothpick through the lockbox on the programmable controls to lower the temperature.

If employees are so desperate for cool air conditioning that they will stick toothpicks through a locked thermostat, then you probably are keeping the temperature too high.  Yeah, you can cut costs by reducing the climate controls, but grumpy hot employees are not worth the savings, in my opinion.

The restaurants now use Web-based controls accessible only to top managers, ensuring the air is on only during business hours and never gets cranked too high. Those moves saved $800 in a month at one location.

I agree with automating a reduction in heat and cool air during non-operating hours.  But I am very skeptical of over-managing the temperature during operating hours for morale reasons.

Image by RACINGMIX via Flickr

I’ve always been very interested in co-branding. It seems to just make sense to combine operations and leverage resources. An early co-branding franchisee of KFC and A&W speaks about his co-branding experience.

“I think the real lesson is, you’ve got to spend the money and do it first class,” he says. “If you try to go in and nickel and dime it, not buy all the equipment, not buy all the seating, not buy all the signage, not train all your people, not have a great manager—it’s just all the same things that we know will work in any restaurant. If we want to be successful, we’ve got to do it right.”

White’s results are exactly the same as what Tricon franchisees discovered when co-branding KFCs and Taco Bells. “When we started introducing Taco Bells into KFC in the multi-brand program,” says Gary Masterson, senior director of franchise development for KFC, “we referred to the early program as ‘lick and stick,’ where we just took a KFC and put a Taco Bell sign over the drive thru, changed the pylons from KFC to Taco Bell, and maybe a couple of minor changes to the decor elements, but nothing major. It was just an investment of maybe less than $50,000.

“The impact on sales was nowhere near as great as the current program,” says Masterson. “Today, if you want to build a Taco Bell in a KFC, you have to reskin it. You have to tear off the outside of the building and introduce the Series 6000 multibrand look, which is an equal mixture of Taco Bell and KFC. Those restaurants are performing at much higher levels of sales performance than the early ones.”

It would be nice if the story could end here, but co-branding isn’t just about real estate. There’s also the human angle. Combining two brands under one roof is more than simply putting up some appealing signage and attracting a lot more customers to your restaurant. Once those customers arrive, the folks behind the counter have to be able to service the increased demand.

The article then goes on to discuss the labor issues.

For both Tricon and Yorkshire, operational simplification will not only make a difference from a management perspective, but also at the bottom line. “Intuitively, you would think that if your sales go up 50 percent, your labor percentage ought to really drop dramatically,” says Feltenstein. “But it doesn’t. That is a challenge for us and many others with whom I’ve spoken, to get the labor percentage to drop so you can flow through even more. The fact is you’re flowing through a lot of incremental profits because the sales are so much higher—but it could be even better if we find more efficient ways to manage it so as to take more labor dollars out of the store.”

Looks like Houlihan’s still can’t find the right balance of seating capacity, location, and affordable rent.  Their Stamford franchisee was open 6 months and then closed after not paying for those 6 months.

"There’s a lot of competition, and 250 seats is a lot to fill and a lot of rent to pay," he said. "Sometimes, smaller is better."

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

There has been a lot of talk lately, from Joel Libava’s Franchise King blog to recent MSNBC article, looking at whether 401(k) retirements savings should be used to fund a new franchise.  Many franchisors for obvious reasons like this idea, such as Westshore Pizza & Cheesesteaks who focuses their sales pitch as a great 401(k) investment.Use 401(k) money to buy a franchise?  My legal and financial opinion is almost always a NO!  It is too risky to gamble your needed retirement funds in a franchise.  If you need to tap your 401(k) to buy a franchise, you cannot afford to buy a franchise.  If your entire retirement life is already FULLY funded and you have plenty of cash, then use your excess cash for the franchise opportunity.

Professional investors always take a little cash off the table, and your 401(k) is what you took off the table.   Keep it there, don’t risk it away.  You could easily lose ALL your money in a franchise, but you couldn’t lose all your money in a 401(k) even if you tried.  Additionally, a single unit franchise will almost certainly not make enough money to payout and match a six-figure retirement account in less than a decade.

Tax and Match Advantages – Big DifferenceIs 401(k) a good investment in the first place?  YES!  Since your 401(k) investments are done with pre-tax income, you are saving about 30% more than you would have with after-tax income.  Plus, an employer match will nearly double the money that goies into your 401(k) than if you just invested the income from your final paycheck.  Upon retirement, you can control the 401(k) withdrawals to minize income taxes.  Even if the employer is not matching, the certainty of pre-tax investing is powerful because it is taken out automatically, but once the paycheck hits your bank it is much more likely to be spent rather than invested.

Day’s Inn paid $600,000 for a shooting that occurred in a franchisees parking. Details and arguments below:

The national chain argued that it was a separate entity and that it did not maintain sufficient control over the local franchisee such as to establish an agency relationship.

….

The one area not specifically dealt with in the manual was guest safety. The victim’s lawyer argued that the chain’s failure to address security did not relieve it of liability for the negligence of the franchisee. The Trial Court agreed.

Both the local motel and the franchisee were liable to the victim because the area of Exit 97 off Interstate 95 where the Selma Days Inn was located had a long history of criminal activity including a pair of armed robberies at a hotel next door just two weeks before the victim was shot. Evidence would have been that the motel franchisee and the chain failed to take adequate precautions to protect their guest, including the victim.

After the Judge refused to release the national chain, the defendants agreed to $600,000 to settle the case.

The actual photo of the Selma Day’s Inn is to the right.

Imagine if you were a franchisee and a mystery shopper from the franchisor anonymously visited your store and ordered a sandwich.  The meat in the sandwich you served happened to be 1/2 an ounce smaller that the standard 4.5 ounces.  Would it be fair to lose your franchise because of default?  You did break the rules, eh?  But what if was really a charade to encourage compliance?This was the situation a Denver court had to deal with.    The final judgment was that Quiznos had in fact breached the contract by wrongfully terminating the defendants, and awarded them $349,797.http://blogs.westword.com/cafesociety/2009/01/quiznos_gets_grilled_in_a_new.php

I would hate to be a franchisor in the meal assembly business right now.  They have been getting hammered in the press almost weekly across the United States. 

Here are articles JUST IN THE PAST WEEK!

• Losing Their Appetite, The Columbus Dispatch (I am quoted in the article)
• Investor Sues Failed Suzanne Somers’ Meal Prep Business, Lexington Hearld Leader

The only bright spot is that pre-assembled carry-out meals seems to be working, which ironically is opposite of the initial premise of the business.   Can this pre-assembled model save the industry?  Probably not, because most people know that business model simply as a “carry-out restaurant”.

The meal assembly business concept sounds enticing – a fun business with an obvious benefit where professional women socialize as they prepare healthy meals for their households, leaving the mess behind.  If you were thinking of getting into this business and asked your friends their opinion, most would say “Yeah, that sounds like a cool business.  I’d use it!”  But, your friends would be leading you estray.  Unfortunately, “good ideas” alone won’t make you money or ensure a sustainable business. 

The primary problem with this industry is getting customers in the door and keeping customers coming regularly (like most businesses).  Franchisees had everything going against them and stood little chance of succeeding -

• higher rents in high-trafficed streets,
• no initial brand recognition,
• requires change in customer habits,
• requires times and hours on the customers part,
• most need to be educated on the concept and its benefits
• easy concept for franchisors to develop and launch, so competitors came fast
• customers’ brand loyalty is negligible
• most ingredients more expensive “all natural” and “organic”;  higher rate of perishables

I hope this industry can work things out, primarily because it does offer a convenient service that can help families be healthy.  And healthy, less stressed families are generally happy families. 

If I was CEO of one of these companies, I would scale back and only roll out cities with a minimal number of units to leverage advertising.   I would hire great PR and advertising firms to get attention and help develop partnerships.  I would focus on margins and only offer lower-cost meals that met a certain profit margin.

Entrepreneur.com’s Janean Chun posted an article entitled,  Can You Buy a Big Franchise?  The topic seemed interesting so I read it.  The article essentially says you too can own popular franchise brands, if you meet the net worth requirements.  She supports her proposition by interviewing a Subway agent in California as a credible source, where he implies that Subway is a strict selector of franchisees who only work with entrepreurs, not investors.  What a hoot.  Disgruntled franchisees would disagree.

In the forum, a visitor proposed a question whether a buyer of an existing franchise can renegotiate the lease.  Paul Steinberg as always provides great guidance:

As previously noted, most landlords will not agree to a novation but most leases contain provisions relating to assumption.

Viz the personal guaranty, I have had leases which provide that upon assumption, the incoming tenant signs a personal guaranty whereupon the outgoing personal guarantor is released. Of course, this works only if the outgoing (selling) entity will be a shell after the sale, but if that is not the case then you can tweak the language to achieve the desired result.

If you are the seller and are unable to get a release from the guaranty, you should make sure to have appropriate language in your contract (or addenda thereto) to enable you to go after the purchaser and the natural person/guarantor which stands behind the purchaser. This will avoid the purchaser defaulting and leaving the original guarantor stuck. Of course, this will only work if the defaulter’s guarantor has assets…but judgments are good for many years (depends on state law). At very least, the new (purchaser) tenant will think twice about defaulting.

Inc. magazine tackled this question.

….If the landlord is reasonable,

Go to the landlord and say, ‘We really want to stay here, but we just can’t make it at the rent we’re paying. Here’s what we can afford as a base rent right now.’ And explain how you came up with the figure. Take him through the numbers, and show him why you’ll be able to survive with the lower base rent but you’ll go out of business if the rent remains at the current level. “At the same time, I would make it very clear that you have no problem paying more as your sales come back. One way to do that is by offering to give the landlord a percentage of your gross sales over a base amount that you agree upon.

….If the landlord is NOT reasonable,

Basically, you need to do a hardball negotiation. I’d go to him and say, ‘We can’t make it at the rent you’re charging us, and we’re going to be forced to close the store unless you give us some help.’ Then see what he says. It’s important to understand that you have a fair amount of leverage in this situation. Even if the landlord weren’t facing tenant problems already, it costs him money whenever somebody leaves, in terms of lost rent, broker’s fees to find another tenant, probably some demolition, and so on. My advice would be to hold out for a rent abatement of some sort. I think you have a good chance of getting one. For example, you can probably get the landlord to let you have a rent vacation, which would be preferable to rewriting — and extending — the lease. If you have problems with the landlord, you don’t want to lock yourself into a lease agreement for a period that’s any longer than necessary. You’re better off keeping your options open.

What metrics should you use to determine whether your rent is too high? Some experts recommend targeting any store with negative cash flow, or with occupancy costs higher than 10 percent of sales.

This article provides a very good overview of important provisions and potential traps in franchise legal documents.  (article is from a Canadian newspaper)