I thought Obika, a Fresh Mozzarella Bar concept from Europe, would do fine in the big cities and may ultimately make a good franchise, succeeding by shadowing the locations of Au bon Pain. I assumed their dozen overseas locations would have been prepared a powerful USA launch. But, the NYC location is not earning universal fondness from New Yorkers.
The look is modern and euro, and it has the right formula of escalating a familiar food to a higher level of passion. However, it fails in execution – service is too slow and the sandwiches are simply average. When people are paying a premium ($10 a sandwich), your niche is smaller and there is more pressure to earn repeat business from the local workers. I would imagine they have to do at least 350 transactions per day to break even. Eventually the number of potential new customers will dwindle to unsustainable levels and survival will depend on repeat business. I still think Obika will make it, but the chances of it being a 10+ unit chain in the USA are very slim.
Sbarro: -6% domestic, -13% internationally (taking into account increase in US dollar)
Sbarro’s attributes a drop in sales to a drop in mall traffic.
What is up? Frozen pizza sales.
Frozen pizza sales rocketed to $4.4 billion in America last year from $3.1 billion in 2000, the Minneapolis Star Tribune reported this week, citing market research by Datamonitor Inc. Sales of private-label brands (produced by chains such as Walmart, Jewel, Dominick’s and Target) have risen more than 20 percent in the past year. Clearly, cost and an acceptable level of quality is at play here.
In related news, Kraft Foods Inc., maker of DiGiorno, Tombstone and Jack’s, said it selling their brands to Nestle so it can fund an acquisition of Cadbury.
I’m a local Chicagoan so Potbelly’s Sandwich Works news is interesting to me. As you’ve probably heard, Potbelly is now franchising their potbelly stove themed restaurant. Their web site lists the total cost to open between $500k-$750k with a heavy $40k franchise fee.
A previous insider comment to a blog post on Potbelly has always stuck in my head which makes me pause about the opportunity. I’m pretty sure I know the person who wrote the comment:
Potbelly is another stab in the dark venture that suffers from ridiculous logistical design, high labor costs, exorbitant pricey locations, and excessive buildout costs. Is there any wonder thay GREw so much. did you expect them to just sit on the 100,000,000 raised by Starbuck’s Maveron Group. funny, potbelly has turned one quarterly profit in about 6 years and had three presidents in three years. The lines which everyone seems to think are the sign of success are a sign of basic incompetency and presume people will continue to buy into hype for a three day old bun baked by Turano (same as the other great success story Quizno’s ) and generic low quality meat that’s run through a conveyor oven which can’t be delivered or catered without serious degradation in quality. other than the expensive logo vanity packaging someone and the illusion of quality based on 500,000 of faux antiques, please explain what is original or significant quality. the sandwiches are the smallest, the most expensive per ounce, and the worst produced in terms of speed and efficiency than any I have ever seen and the lines aren’t looking too long these days. Nothing angers me more than a hot concept and has never managed to turn a profit. Think Cosi, Planet Hollywood, etc. that’s why the restaurant business gets a bad rap. Anyone with a brain could say hmmm lowest check average, slowest production line, highest rent, most labor and they don’t make money? Duh!
Panera Bread (I appreciate their free Wifi) reported company-owned same-store sales increase of 3.3% for its third quarter ended Sept. 29, 2009.
Franchise-operated same-store sales increased 2.5%, marking a systemwide increase of 2.8% compared to the same period last year. The company-owned comps increase showcased transaction growth of 1.8% for the quarter, and average check growth of 1.5%. Average check growth was comprised of retail price increases of approximately 2.25% and negative mix impact of approximately -0.75%.
Buffalo Wild Wings company-owned restaurant sales increased 26% for the quarter versus the same period in 2008.
The growth was driven by a company-owned same-store sales increase of 0.8% and 33 additional company-owned restaurants in operation at the end of the 2009 third quarter. Franchise-owned same-store sales increased 1.9% for the quarter and 52 additional franchised restaurants were in operation during that time.
Discounting hasn’t worked so far for Chili’s and Applebee’s who began offering 2 for $20 meal deals. The problem is total customer traffic is off and these discounts tend to amplify the problem because profit margins are reduced on the customers that do come in. Even P.F. Changs, and Benihana are seeing 10%+ slowdowns in sales just from a quarter ago.
A former franchisee of Pizza Pizza in Ontario lost his franchise for allegedly falling behind on payments to the franchisor. This whole relationships seems to have gone mismanaged by both sides. The franchisee wasn’t keeping good sales records and delivery drivers were impatient with customers, and the franchisor let bad practices continue for too long.
A recent study lumps tanning in tanning beds in the same caustic category as arsenic and mustard gas. The tanning industry is simply a rental business, and the rental business can be very lucrative. Just ask my hero Wayne Huizenga who made billions from starting integrated rental businesses Waste Management, Blockbuster Video, and partly Autonation.
The franchise tanning industry has been positioning itself for a reduction in the ultraviolet tanning beds with the spray tan alternative. Most have purchase Mystic tanning beds (see video below) that can be rented in the same manner as bulb beds, plus some locations are offering spray-on artists to spray on manually that perfect tan with a high-end spraying device.
Spray tanning has been booming most evidently in the celebrity ranks, with many celebrities even hiring their own full time spra-on tan artists. Lindsey Lohan is even being sued for allegedly stealing the formula for her new spray tan retail line. All this points to tan growing trend (remember, the trend is your friend) of spray tanning consumers.
Can traditional tanning franchises offering spray tans grab a sustainable piece of this emerging spray tan market?
In the short term, probably yes. But it will take five-figures of investment and marketing for each location. Customers previously visited tanning salons to rent 20-minute increments on tanning beds because tanning beds were too expensive to purchase for the home. But, consumers can now buy spray tan bottles at Walgreens for $5. The key for the tanning salons is offering customers 1) the “spray on artists” and 2) machines that spray the perfect tan. Self application of tanning lotions can leave a person looking laughably orange if applied to heavily or unevenly, or left on too long. So the edge for tanning salons is to have machines and people that can give the tan glow with the spray. Until the self tan sprayers improve it application devices, such as offering inexpensive sprayers and improved formulas that tolerate lazy applicators, the tanning salons that make the investment in spray-on tanning should be able sustain themselves.
A key to growth is attracting woman over 30 years old who have all abandoned traditional tanning salons from their justified fears of UV-light skin damage. These women are currently spending $35 per bottle at department stores for spray tans. Below are a few videos on spray tanning.
Franchisors love to sell multi-unit development agreements, but some of the reasons may not be so obvious.
Multi-unit franchisee typically pre-pay a portion of the franchise fees for each potential location. Similar to a non-refundable downpayment. Lately, many franchisee haven’t opened their additional locations or have slowed the opening pace, but the franchisor still keeps their pre-paid franchise fees, which is typically $5,000 – $15,000 per location. For example, if a franchisee signs an agreement to develop 10 units, then he may pre-pay a franchise fee of $10,000 per unit, or $100,000 for the rights to open 10 units. He still would pay the remainder of the (oftern discounted) franchise fee as each location is opened. The Development Agreements typically set a timeline for openings, and if you don’t keep to the schedule which is often opening at least one per year, then you lose your pre-paid franchise fee.
The parties are negotiating one franchise and development agreement rather than a new agreement upon each new opening.
Concentration of stores in one small area will help franchise sales in neighboring areas
Generally multi-unit buyers have more reserve cash, so stores are less likely to fail from lack of short-term capital.
A multi-unit franchisee is more likely to honor their penalty charges for closing a unit, compared to a single unit franchisee who has less assets.
My previous post highlight the not-so-obvious hurdles of co-branding. The omnipotent FuwaFuwaUsagi sent in photos of Brown’s Chicken attempts at co-branding. See his Brown’s Chicken photos below.
Brown’s Chicken is trying to do the Chicago street food theme plus mexican. It offers everything from pasta, ice cream, pizza, fried chicken, sausages, pasta, mexican, italian beef, and hot dogs. The problem is not necessarily the menu, but the execution, presentation and customer experience. It looks utterly silly to have so many brands in one cheap-looking tiny store.
Offering multiple unknown brands under one roof requires significant investment in the seating, presentation and overall customer experience. I’ve only seen one successful Chicago street food restaurant and it is Portillo’s / Barnelli’s combination. When you enter one of the premium stores you feel as though you have entered an old-fashioned carnival era. It is plain fun and food is quite good.
The below photos provide a great illustration of what to do and what not to do – stuffing too many confusing brands under one roof.
Walmart is now jumping into the used game trading industry with exchange kiosks. How does this impact Play N’ Trade and Game Stop? I’m certain this is a smart venture for Walmart. A friend of mine interviewed at RedBox and told me the kiosk business model when scaled is tremendously profitable, and I’m sure Walmart has first hand knowledged of this model from having the RedBox DVD kiosks in their stores. Additionally, attracting young teens into your brick-and-mortar stores undoubtedly is a strategic goal of Walmart.
How greatly this impacts Play N’ Trade and Gamestop is questionable. It is hard to spin this as “helping the industry” as surely Walmart will take more from competitors than it increases the
I contacted Larry Plotnick, CEO of Play N’ Trade for his reaction to the Walmart news. In response, Larry noted:
We have been aware of this test for some time, and have discussed the use of similar kiosks within our own stores; however it does not fit within our business model.
The impact of Walmart is taken very seriously, considering the size and scope of their business and we will be watching and tracking their progress in detail.
We believe there is positive implications to Walmart “legitimizing” used game and trading to a larger/broader demographic
We strongly believe that our customer service, product offering and immediate customer gratification creates a better overall trading venue then does a kiosk type environment.
Studies have shown that the significant majority of game trading is done by serious/hardcore gamers that prefer to trade in games for new gaming product (which is typically done in specialty retail not in big box stores)
Larry’s points are fair. Walmart will never be able to create the gamer atmosphere of Play N’ Trade, and gaming is all about experience. Nevertheless, I predict that Walmart will expand the market for used games and trading, but eventually will siphon sales from the established players Play N’ Trade and Game Stop…in any industry there will always be some customers that will chase the best price.
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.
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!
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.
Quiznos is helping franchisees renegotiate leases at no cost to the franchisee. Good move.
Since the teams have been in operation, Quiznos has negotiated more than 40 leases thus far, with an average reduction of 15-20 percent in lease payments
Here is one franchisee’s experience in the press release
Thomas Mihailovich, a franchise owner in Rochester Hills, MI, participated in the lease renegotiation program in late February. Quiznos and a third-party team worked with Mihailovich and his lessor to arrange a reduction in rent of more than 20 percent, a cost savings of $50,000 over the term of the lease.
“I began the process and within one week I was saving nearly $500 per month on my rent,” said Mihailovich.
How do you renegotiate a lease?
If you are currently leasing a space for your franchise and want to renegotiate the lease, you do have a few leverage points. First, the landlord doesn’t want to lose a tenant because it will usually mean unrecoverable expenses and vacant space for a period of time. Second, along the same lines, a long-term stable lease makes landlords smile, so offering to extend or renew a lease for a longer number of years is very attractive, even at a reduce price per square foot.
Here is a sample approach. Find another space nearby that fits your needs equally well and is less expensive. Then approach your landlord and ask him to match the rent or you intend to move. See what the response is. From that point, ask permission to sublet. Depending on how long you have on your lease, ask also offer to sign a longer lease in exchange for reduced lease payments.
Getting the assistance of a real estate broker or better yet an attorney is usually well worth the money in renegotiating a lease.
In recent months the sandwich chain has walked away from at least two prospective deals in the suburbs, in Hillside and Romeoville, and local real estate sources say company executives have told them Potbelly is pulling back its growth plans here.
Potbelly founder Bryant Keil said last year that the chain could double its Chicago-area stores to more than 150, and hired former Sears CEO Aylwin Lewis to spearhead growth nationwide. Mr. Lewis said he wanted to accelerate expansion and at the very least maintain Potbelly’s growth rate of about 40 new restaurants a year.
But the dramatic drop in the economy over the last six months has hit even the private Chicago-based company known for its kitschy décor, toasted subs and fresh-baked cookies. Potbelly’s costs to build its stores are higher than its rivals’, sources say, so the company can’t afford too many mistakes in a climate where sales are likely to be slow.
He said Panera has long provided catering, but “it’s always been an afterthought” to its restaurant business. He wouldn’t disclose financial numbers except to say that catering accounts for a very small percent of sales. The chain has more than 1,200 U.S. locations.Mr. Tristano said any new packaging that keeps the food fresh is a key to successful catering as well as competitive prices and timely service.Panera’s catering costs about $5 per person for breakfast; lunch ranges from about $8 to $12 per person. Mr. Rand said the chain will analyze the success of the new catering efforts in the next year and decide weather to expand the ideas nationally.
The pizza industry is in a larger downturn than I would have predicted. Papa John’s is even delaying scheduled increases in their royalty:
Papa John’s, meanwhile, is extending sweeping financial assistance to its franchisees. The company is delaying for at least six months an increase in its royalty rate on sales to 4.5% from 4%. It also is rolling back the royalty it collects on Internet-generated sales, a fast-growing part of its business, to 2% from 3%, and markedly cutting the price of cheese it sells to franchisees. Finally, those franchisees suffering the most will get special marketing support.
While hamburger chain McDonald’s Corp. has posted consistent gains in its domestic same-store sales, with 4% growth in 2008, U.S. franchised same-store sales at Domino’s fell 1.7% in 2007 and 5.6% in the first nine months of 2008. Papa John’s is predicting its same-store sales will be flat to down 2% this year, and Pizza Hut, whose same-store sales slipped 1% in the fourth quarter of 2008, is off to a slower start than expected this year, according to Yum, which has called the division its biggest challenge.Pizza’s woes started before the current recession gripped the nation. Figures compiled by Chicago-based restaurant-consulting firm Technomic Inc. show that while the overall U.S. fast-food category experienced compounded annual growth of 6.4% from 2002 to 2007, pizza sales rose only 2.5% during that period.
You seem to be assuming there are profit margins. Why is that? Please be aware that you need to go back in time and recalculate old numbers for current lease obligations. FuwaFuwaUsagi […]
Is this the same Paul W. Steinberg who failed to pay the taxes on his franchise operations to the extent of over $33,000 with the result that NY State had to go to the expenses of issuing a series of Tax Warrants against him. Go to: http://appsext8.d... […]
Quote from: FuwaFuwaUsagi on February 16, 2010, 05:03:15 PMThe Pundit writes:I was browsing through old posts and came across this one. It's a great one for all to read.My reply:Thanks for the kind words Ryan, but did you up... […]
The Pundit writes:I was browsing through old posts and came across this one. It's a great one for all to read.My reply:Thanks for the kind words Ryan, but did you up my karma points - NOOOO!!!!!! Cheap &(*%$&^ - LOL!!!Once a year, whether ... […]
I thought Obika, a Fresh Mozzarella Bar concept from Europe, would do fine in the big cities and may ultimately make a good franchise, succeeding by shadowing the locations of Au bon Pain. I assumed their dozen overseas locations would have been prepared a powerful USA launch. But, the NYC location is not earning universal fondness from New Yorkers. 
I’m a local Chicagoan so Potbelly’s Sandwich Works news is interesting to me. As you’ve probably heard, 
Franchisors love to sell multi-unit development agreements, but some of the reasons may not be so obvious.
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.
Quiznos is helping franchisees renegotiate leases at no cost to the franchisee. Good move.
U.S. News & World Reports takes a stab at listing the healthiest fast food restaurants.
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