• Burger King forecast still looking stale
• Triarc Cos., owner of the Arby’s restaurant chain, said Friday same-store sales were up 4%
• Fatburger system-wide same store sales for the first quarter increased .5% over 2005 results
• Cosi: Comparable restaurant sales, as measured for restaurants in operation for more than 15 months, increased 5.3 percent, Cosi’s 18th consecutive quarter of increases. Factors driving the continued growth included a 2.1 percent increase in transaction count and a 3.2 percent increase in average guest check. The higher average guest check was primarily due to a 1.6 percent favorable shift in sales mix and a 1.6 percent increase in pricing.
• Good article on the 5 Mistakes a small-business owner should never make…I agree with them all.
1. too little cash
2. thinking small
3. skimping on technology
4. underestimating the important of sales
5. losing focus
• T.G.I. Friday‘s same-store sales up 3.3%

Gap, Inc. uses the franchise distribution model in Southeast Asia and the Middle East to enter new markets and comply with local ownership laws:

Gap Inc. signed its first-ever franchise agreement in January with Singapore-based F J Benjamin. That opens the doors for up to 30 Gap and Banana Republic stores in Singapore and Malaysia by 2010. The first South East Asian stores will open around the same time as the first Middle Eastern stores.

Franchising is an effective way to skirt local laws against opening foreign-owned stores. The right franchise partner also helps a retailer tailor its merchandise to local tastes.

• Yum! Brands (KFC, Taco Bell, Pizza Hut) U.S. blended system-same-store sales increased 5%.
• Colony-based Pizza Inn pizza chain reported a 1.1% increase in same-store sales, or sales at stores open at least a year, during the first quarter 2006.
• For the 13 weeks ended March 28, 2006, sales for Panera‘s franchised and company-owned stores rose 9.1% and 8.9%, respectively. Systemwide bakery-café sales increased 9 percent for the 13 weeks ended March 28.
• Aaron Rents reports 13.7% increase in same store revenues.
• Brooke Franchise ( distributes insurance, financial and funeral services through a network of more than 560 franchise locations) saw same-store sales decrease about 2.5% for the year that ended Feb. 28, 2006 compared with the prior year.
• March retails sales growth for the Jean Coutu Group (PJC) Inc. rose 3.5% in Canada, 1.7% in the USA. PJC is the fourth largest drugstore chain in North America and the second largest in both the eastern United States and Canada. The Company and its combined network of 2,173 corporate and franchised drugstores (under the banners of Brooks and Eckerd Pharmacy, PJC Jean Coutu, PJC Clinique and PJC Sante Beaute) employ more than 60,000 people.
• Tim Hortons first quarter same-store sales increased 8.7% at restaurants in Canada and 9.8% in the United States.
• Wendy’s same-store sales decreased 4.8% at U.S. company stores and 5.2% at U.S. franchised restaurants.
• Baja Fresh Mexican Grill’s system same-store sales declined 3.6% to 3.8%.
• Sonic‘s 1st Q 2006 same-store sales growth of 4.7%, slightly above Sonic’s annual target long-term target range of 2% to 4% growth
• Sales are climbing at Mr. Jim’s Pizza following the launch of Mr. Jim’s new product, Nacho Stix, and the debut of a new branding and advertising campaign. Same-store sales increased for the first two periods of 2006, including a same-store sales increase of 8.1% in the second period. Nacho Stix is a thin crust pizza, loaded with chicken, onion, jalapenos, mozzarella and cheddar cheese and served with salsa or dipping sauce.
• Starbucks Corp. (SBUX) reported same-store sales during March were up 10%.
• GNC: Domestic same-store sales growth of 8.1% in company-owned stores and 1.5% in franchise locations. (notice the BIG difference between corporate and franchised locations)
• Regis (hair salon) same store sales -0.4%
• Papa John‘s: Domestic system-wide comparable sales for the quarter ended March 26, 2006 increased 4.2% (composed of a 6.1% increase at company-owned restaurants and a 3.7% increase at franchise restaurants).

Tim Horton’s, a 2,885 upscale coffee and donut outlet, is entering the public capital markets of Canada.

The reporter characterized the IPO as “destined to go down as the most popular IPO this country has seen to date” and “The frenzy around this doughnut deal is putting Google to shame”. Is the author over embellishing? Tim Horton’s IPO buzz seems to be more in line with fellow Chipotle’s enthusiastic IPO, not the crazed delirium over Google’s IPO.

Is going public good for franchisees? I haven’t explored arguments on both sides, but my initial impression is no. The pressure to increase margins, meet analyst expectations, and pay for the increasing regulatory costs is going to increase the pressure for franchisors to squeeze more money and profit from their relationships with franchisees.

In the forum, we batted around the new meal preparation and assembly kitchens concept such as Super Suppers and Dream Dinners. There are lot of non-franchised startups, and they already have their own trade association called the Easy Meal Preparation Association. The general sentiment from the forum is that this concept is a “maybe”, with the big questions being

1. how much you can charge customers (and margins) before customers will just order restaurant takeout?
2. is the change of behavior and lifestyle too much to create a solid base of loyal customers?
3. how many competitors, if any, can enter the market and you still survive?  what if they have slightly lower prices and a nicer, larger facility and more creative menu?

A surprising celebrity newcomer is jumping in this arena – Suzanne Somers. Inc. magazine did a feature article and mentioned this tidbit.

And next? Suzanne’s Kitchen, an entry in the red-hot meal prep category, in which customers move from station to station inside retail stores, assembling family-size dishes from chopped meats, vegetables, and sauces. The first two outposts of Suzanne’s Kitchen, which Somers and her husband and business partner, Alan Hamel, expect to franchise, will open later this year.

Why is she getting in this business? I think it has more to do with an attempt to leverage her brand name to command higher franchise fees rather than this being an inherently superior and profitable business model. Certainly Somers will draw media attention to the industry, which currently suffers badly from low recognition amongst its target audience.

Quiznos is facing more class-action lawsuits over delays in getting locations approved for its franchisees, and keeping their $25,000 franchise fee.

More from the Denver Post article:

The case alleges “deceptive business practices” in the company’s franchise sales method and demands that the company stop selling franchises in New Jersey until all existing franchisees get locations or are refunded their franchise fees.

In a separate case filed in December in the Ontario Superior Court of Justice, the plaintiffs allege that the company is violating Canadian franchise law by not disclosing to potential franchisees full details and processes for securing locations.

Quiznos, of course, denies violating any law.

Hat tip: Paul Steinberg

Franchisors usually carefully craft the franchise agreements to enable wiggle room in stalling or denying approval of locations. Warning flags include evidence of high franchisee turnover or higher proportion of revenue from non-royalty revenue which can sometimes be gathered and deduced from the UFOC Items 19-21. I know of a major dating franchise where one location in a big city has been sold 3 times over in the past few years, with the most recent franchisee begging the previous franchisee who sold it to him to take it back for FREE because it was draining money. If he closed the business, he would have breached the franchise agreement and would be obliged to pay tens of thousands in fees, charges and damages.

Update: March 1, 2006
You can track the Ontario case on Goldman Sloan Nash & Haber’s web site, the Canadian law firm representing the plaintiff. The firm posted the detailed statement of claim (complaint) against Quiznos.

Hat tip: Michael Webster

Chipotle Mexican Grill Inc., a majority owned subsidiary of McDonald’s Corp., plans to offer 7.9 million shares for between $15.50 and $17.50 a share in an initial public offering, according to a regulatory filing on Friday.

http://www.chicagobusiness.com/cgi-bin/news.pl?id=18917

UPDATE: Jan 25, 2006

Chipotle may sell stock at $18 to $20 a share, up from an earlier estimate of $15.50 to $17.50 a share, the Denver-based company said in a regulatory filing

UPDATE: Jan 26, 2006

After the 7.9-million-share offering priced at $22 a share, Chipotle shares doubled to close at $44 Thursday, after reaching as high as $48.28. Chipotle sold 6.1 million shares in the deal, raising about $134 million, while its parent, McDonald’s, sold 1.8 million shares.

The 13-year-old burrito and taco purveyor currently has about 480 stores and produced revenue of $471 million in 2004, up 49% from 2003.

At $44, shares of Chipotle are trading at roughly 80 times earnings. Meanwhile, Applebee’s and Ruby Tuesday are trading closer to 20 times earnings, making Chipotle’s valuation look laced with some irrational exuberance, even when its growth prospects are accounted for.

Part of the IPO proceeds will be used to pay down a $30 million line of credit with Chipotle’s parent.

Here is a list of companies that have voluntarily signed up with the SBA for streamlined franchisee loan application reviews.

Quiznos Sales and Profitability.pdf

“former owner”, a commenter on this site, left a tip on a document posted at the Toasted Subs Franchisee Association. The document purports to be a summary on Quiznos store profitability. Is it legitimate and accurate? I have no idea, but it’s probably in the ballpark. It’s apparently based on estimates gathered by franchisee sources reporting. Here’s snippet:

Quiznos Sales and Profitability – below is a list of sales statistics compiled year-to-date for Quiznos stores as of August 2005. In the Quinzos chain, an average new store (opened in the last 12 months) can break even around $7,000 to $8000, depending on fixed costs. This charts shows the number of stores breaking even or even losing money inthis chain. These sales figures are accurate. The profitabily estimates, are just that…estimates based on franchisee sources reporting.

Thanks “former owner”!

Sorry for the gap in posting…my time has been clipped by some legal and political endeavors.

Everyone reading this blog should already know this basic pros and cons of opening a franchise, but here is short article listing most of the basic points.

We mentioned DoodyCalls in a previous post and liked the witty franchise, and it looks like they are expanding easily across the US. It’s the type of service that may make a good acquisition candidate for one of the many cleaning or maid services.

Cold Stone has grown very quickly, though the franchisees I’ve spoken to say their store are barely churning a positive operating cash flow. Ice cream catering is becoming a popular side business for the franchisees, especially at kids parties and bar mitzvah where parents are willing to spend big bucks.

I’m surprised to see Panera Bread franchises selling for only about $1.3 million each which include repurchasing some area development rights in Indiana.

According to this press release, Educational Outfitters is opening 6 new stores. We reviewed this franchise before on FranchisePundit.com, and we concluded it was one of the better franchise ideas, focusing on an often ignored and segmented market. We gave it an “I’d buy it” positive rating.

I pulled together some numbers of required royalty and advertising fees for sandwich franchises:

An 8% difference in the fees for a franchise with $500,000 in sales is $40,000. Many would die to have that extra $40,000 to hire a qualified manager, enabling the franchisee be more of an absetnee owner.

Lower doesn’t necessarily mean better. I would want required pooling of local (maybe regional) funds for collective advertising and promotions.

Many people think of franchises as individually owned, mom-and-pop run businesses. On the contrary, many large corporate style operators with access to large quatities of capital have been in the business for a while. For example, I’ve heard a lot of about Lenny’s Sub Shop lately but haven’t been in one. The company started in 2001 and now has 63 franchises in the southeastern United States. This week a large investor group of former CEO’s living happily in Florida got together and signed a deal to open 125 Lenny’s Sub Shops in South Florida. The article says the deal is expected to contribute over $1 billion in revenue (that sounds way high, that is over $8 million in sales per store).

Looking at the photos on their web site, the Lenny’s ubs looks very similar to Jersey Mike’s, and somewhat similar to Jimmy John’s.

Lenny’s cost to open a store is claimed to be under $225,000, which includes all fees, build out costs and initial operating capital. The roaylty AND national marketing fees total 7%. Maybe worth a look.

I’ve written a few articles on eBay drop offs. I was neutral on the franchise…

Pros:

• it’s a service people will use
• eBay buzz and hype is still strong
• all franchisors are charging the same 35% fee (for now)

Cons:

• the business is too simple to start, has no barriers to entry, new competitors will literally springing up overnight

existing used and consignment stores will soon add eBay sales

• the service will have to compete based on fees (who wants a constant lowering on margins?)

I’m sure I’ll be negative on the business within the next 5 years, but for now I’m staying neutral because the next 2-3 years will be strong.

Want proof the eBay drop off store is easy to start and run without a franchise? Campus Easy Sales recently set up shop on the Washington University in St. Louis campus. A couple of fulltime students thought it’d be a good idea and just started it. They do nothing different than any other franchise out there (the hold the item, take pictures of it, post an ad on ebay, ships the item after the auction ends, and send the seller their cut). However, the total fees add up to ONLY 24% COMMISSION off the first $500. Compare to other eBay drop offs who charge 35%. You can bet your dog’s favorite toy this puppy will see their commissions slashed to 25% or less in a few years.

I pulled some numbers together on the average 1 year same store sales growth in 2004 of quick service restaurants (and a few non-QSRs):

Is your QSR doing better or worse? Rumor has it the big sub franchises (Subway, Blimpies, Quiznos) aren’t doing nearly as well. Apparently the franchisors are squeezing the profitable stores by putting in new stores nearby to maximize their franchise fees and royalties. What a great reward for beating the average!

Update April 16, 2005:

Aggregate data:

Same-store sales from 53 quick-service and family-dining chain restaurant companies, representing more than 40,000 units, were up for the 86th consecutive week as of Feb. 21, 2005 and rose 4.6 percent for that week, according to the NPD Group, the foodservice market research firm based here.

NPD, which tracks weekly sales trends at chains and independents, said the average same-store sales increase during the 86-week period was 4.4 percent. The upswing since July 2003 followed two years of flat or negative growth, NPD reported.

Chain restaurants captured an additional 3 percent of the foodservice market between 2001 and 2004, at the expense of independent restaurants, NPD added. It said consumer demand was driven by quick-service restaurants’ new menu offerings that focused on higher quality and innovation. link to source

Update April 17, 2004 (Hat Tip: Brad. Thanks for sending the link!)

And more…

Between 2003 and December 2004:

• 64% of restaurant operators reported a same-store sales gain
• 20% of operators reported a same-store sales decline

(source: National Performance Index authored by the National Restaurant Association, 2005)

Those looking to buy a franchise should read this article at the Denver Post. It tells the story of a semi-famous author who wanted to get into the smoothie business by buying a Juice Stop franchise (now defunct).

The moral of the story?
When deciding whether to buy a franchise, your diligent independent research is essential. While some franchises have help people achieve their own version of success, too often people are destroyed emotionally and financial. The prospective franchisee should ignore the saleman’s pitch, and make the decision to buy based on one’s own research and facts.

Those with moderate financial success are accustomed to investing many thousands in stock or real estate without a lot of indepent research. If it looks good and seems like a fair price, we buy it.

An investment in a franchise, however, shifts much of the burden of earning a return on you and the integrity of your franchisor. The upfront independent research must include background checks on the franchisor’s management and interviews with existing franchisees. Hell, pay some franchisees to see and photocopy their financial results. That will give you a model of some realistic financials. It’s that important.

The article ends by describing how the franchisors of Juice Stop filed bankruptcy, and several years later the same people started another juice bar franchise called Squeeze. I know it most people improve after making mistakes, but I don’t trust those guys. It’s one thing to fail, but your true character is exposed when you lie and ignore your franchisees on the way down.

This story should keep you on your skeptical toes when investigating franchise opportunities.

It’s amazing how similar some franchises look. Here are two lady-only fitness franchises – Liberty Fitness (left) and Curves (right) :

It looks like the identical building, identical machines, and identical recovery boards. I’m sure the corporate offices can tell you the difference between these franchises, but, more importantly, can potential customers tell the difference?

As a follow up to our previous article regarding Quiznos and the importance of legal representation, the QuiznosSucks.com owner posted his (claimed) financial results from owning a Quiznos franchise:

Topic: How much a Quiznos earns
Posted by: XXXXXXX
Date/Time: in 2005

I am a Quiznos franchisee. Here is a breakdown of how much a franchisee can potentially earn — or not earn.

The figures are not necessarily BAD, I guess I just wish someone gave me these hard figured BEFORE I bought one.

If a store earns $40,000 / month:
7% Royalty	$ 2,800
1% Local Advertising	$ 400
3% national advertising	$ 1,200
20% Labor	$ 8,000
29% Food	$ 11,600
3% Paper	$ 1,200
.3% Accounting/Payroll	$ 300
10% Rent/CAM	$ 4,000
2.75% Insurance / Misc.	$ 1,100
5% repay SBA loan	$ 2,000
4.5% misc bills (utilities, etc)	$ 1,800
.5% Spoilage	$ 200
1% Supplies	$ 400
1% Promo Food	$ 400
1% Comp Food	$ 400
2.9% Credit Card Fee	$ 1,160
.4% Coupons	$ 160
.5% Food Waste	$ 200

No one has any control over %. They are fixed and that is that. So if a store is lucky enough to earn $480,000 annual, the owner can expect to walk away with a profit of 9.4% = $45,120 [edit by Ryan Knoll: I believe this should be 7.15% = $34,320 based on the numbers provided]. No one is going get rich off of that. Of course if an owner can get cheaper rent, and increase sales, it will be of great benefit.

The average store seems to be about 1,500 – 1800 sq ft. and the going rate is $17.50 – $30.00 sq ft + $5.50 – $8.00 CAM.

That looks reasonable to me and should be considered by anyone buying an existing or new franchise. People often forget the expense of promos and coupons, credit card fees, insurance, and payroll expenses. The pretty picture the franchise sales rep paints for you often is the “best case” scenario.

Well, you might think, “That’s a 18% return on my investment of $250,000! I’ll take it!”. That’s not an accurate reflection of your actual return. Those results assume you are working at the franchise full-time and do not include your or your manager’s salary. So, if you think your year’s effort is fairly compensated at $45,000, then your real return on your investment is ZERO (actually it’s negative because you could be making 4-5% in bonds).

General Nutrition Centers ("GNC") forged the path for franchised health supplement stores. It was a nice run but I believe it is near the end of the road for GNC. The industry is saturated with newer, flashier and larger stores like the Vitamin Shoppe and Vitamin World.

For example, in Chicago in the Lincoln Park area at the corner of Diversey Pkwy and Clark Ave, a beautiful large Vitamin Shoppe opened up across the street from the tiny, more expensive GNC. Also, Sherwyn’s, a large health food store, opened up within a block of the GNC. The every evolving competition is slowly finding the formula that will eventually beat out GNC’s small competitive advantages.

This article (from 2003) explains how GNC sales dropped 10% in 2003, which led Royal Numico, a leading Dutch baby food maker, to sell GNC to private equity firm Apollo Advisors. It looks like the sale didn’t help, 4th quarter sales droped 12% from the same quarter last year.

Will GNC’s new smoothies help stop the bleeding? I doubt it.

I enjoyed reading how Blimpie has tinkered with its look in a tough market. I think this quote from the article sums it up best:

“It’s hard to communicate a quality product in a store environment that doesn’t reflect that,” he said. “The quick-casual segment has upped the ante on what consumers can expect.”

You wonder why Blimpie would choose the “look” of cheap yellow booths and floors in the first place. Panera Bread has done a wonderful job of creating a high-quality fast food (or fast casusal as some call it) experience.

The basic strategy which I think many franchisees can learn from is “the logo and interior change will draw customers in, while the food (or product) that hooks them”.

By the way, which logo do you like better? I like their new logo.
New logo –>
Old logo –>