What a sad story. Giordano’s is a leader and well-known institution in Chicago’s stuffed crust pizza game. It owns 10 corporate  stores and manages 35 franchised locations in Illinois and Florida.  Somehow this chain, where people (often tourists) stand in long line for an overrated $20 deep dish pizza, owed $45 million to a lender and had to file bankruptcy in February when it stopped paying back a note. Bidders for the company include the parent companies of Gino’s East and Connies Pizza.

It sounds like they over-leveraged their real estate acquisitions and didn’t have enough income for debt coverage.

Giordano’s was acquired by VPC Capital Partners in Chicago for $52 million.  It’s chairman, Richard Levy, hopes to elegantly apply his legal, bio-pharmaceutical, and energy background into the pizza industry, an obviously natural next step for him and sure to reassure franchisees.  Luckily, the Giordano’s family is going to stick around and collect big salaries to help out.   Don’t the new owners look happy in this picture (pic courtesy of Chicago Tribune) to the right?   They have BIG plans for the brand, hoping to clone the success of Paul Newman’s $200 million grocery business including developing a line of products for grocery stores “similar to what Paul Newman has done for salad dressing” and expanding the restaurant footprint beyond its Chicago and Florida markets.

I didn’t see this one coming. Planet Smoothie is solid brand with a loyal customer base. I hope Planet Smoothie received a significant premium in this acquisition by Tasti D-Lite, and the existing franchisees have some protections. Tasti D-Lite was acquired by a private equity firm in 2007 majority owned by Jim Amos, who promptly appointed himself CEO after the acquisition. Amos was formerly CEO of Mail Boxes Etc before selling to UPS, former CEO of Sona MedSpa and I Can’t Believe It’s Yogurt. I don’t know Amos personally, but from what I have heard he is a classic promoter. He’s likable and has the right persona for a CEO. But, from what I hear he runs his mouth too much and gets into trouble confidently over-promising results and being extremely difficult with existing franchisees. He’s good as selling franchises and controlling the franchisor’s cash flow. He’s had to settle out of court in a dishonesty-related law suits in his previous CEO roles. The hybride ice cream/yogurt pumped by Tasti D-Lite is smooth and creamy thanks to multiple gums and thickeners, but most people only care about the relatively low calories versus full fat ice cream.

I understand the strategic benefit for Tasti D-Lite: they can distribute their frozen yogurt through the 100+ existing Planet Smoothie locations, the customer base has a lot of crossover, smoothie recipes can incorporate frozen yogurt, and hopefully per-unit increase sales will increase more than 25%.

It looks like the preferred transition option for franchisees is to allow units to co-brand the concept. I’m sure the Planet Smoothie franchise agreement was favorable for Amos. My guess is there is a clause whereby existing franchisees have to at least transition to selling the yogurt menu quite soon, but conversions to dual-branded units probably can’t be forced until the franchise agreement is up for renewal.

I hate to say this but I think the acquisition, all things considered, is probably good for Tasti D-Lite. I haven’t seen a concept work where frozen yogurt was a secondary offering, so Planet Smoothie franchisees may be the ones losing some return on their investment following the conversion.

I’m very interested to see how this situation progresses over the next year.

From press releases:

Earlier this year, the first drive-thru Tasti D-Lite location opened in Columbia, Mo., and the first on-campus store was opened at Duke University. In addition, Tasti D-Lite introduced its first self-serve model to the brand’s long-time full-serve model, and also introduced its first “store-within-a-store” location on Las Vegas Boulevard.

“This acquisition presents an opportunity to combine two iconic brands to create a winning combination for both the customer and the franchisee,” Amos said. “The consumer profiles of Tasti D-Lite and Planet Smoothie are very similar, so combining the two complementary brands will provide both brands an opportunity to increase the scale of the combined store network as well as sales at the store level.”

Following this transaction, Tasti D-Lite plans to offer new franchisees the option to own and operate in a co-branded store concept, which fully integrates both brands into a unique customer experience.

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.

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’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.

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.

I spoke with a former franchisee of Nrgize, a smoothie bar by Kahala Corp of Stone Cold Creamery fame.  Nrgize has very good tasting healthy smoothies and complementary healthy foods.

The franchisee was open for about a year before closing its doors.  The location was in a popular suburban fitness center.  At first, the thought of exposure to all the healthy clientèle sounded like a sure win.  However, sales were lower than expected from gym members and public walkins from non-members to buy smoothies was extremely rare.

It’s a good lesson on understanding visit rates from a given population and repeat visits.  I’ve heard this rule of thumb and it seems to makes sense —– If you have a great food product and are the only provider, you will likely get close to 20% of the population to visit you twice a month.  With competition and a less than unique food offering, you should figure less than 12% will visit you twice a month.  You will quickly see that a 5k regular visiting member gym would yield at best 66 transactions per day.  If your average ticket is $5 at a 12% capture rate, your sales will be $118,800/year which is probably nowhere near profitable territory.

[updated so moved back to the top]

Founded in 1999, Spicy Pickle is not have a good run.  In 2008 the company’s income was $4.4 million but their expenses were $10 million, for a loss $5.6 million.  In 2009 income was $4.1 million, and they slashed expenses and payroll to $6.1 million, for a loss of $2 million.  They now have $800,000 left in the bank.   They are desperately working on a new round of financing.   I’d have to see unit performance and lease rates, but it could be an attractive acquisition for veteran QSR investor.

It also franchises a brand called Bread Garden Urban Cafe…a Canadian sandwich and bakery QSR I never heard of.   The franchisor employs 28 people.

Update: March 18, 2010, 10:00PM CST

I updated the above financials stats with more details.  I was still curious about Spicy Pickle’s financial predicament so I did more research.

Back in 2007, Spicy Pickle needed to raise more money.  So it sold preferred equity that gave the holders superior rights to its assets and priority to dividend payments, and I’m sure other special treatments were in the agreement like rights of refusal for issuing more preferred equity.  Fast forward to 2009, and Spicy Pickle needs money again.  What’s left to give away?  Not much, so it had to buy back the preferred equity.  In 2009 with around $2 million in cash left, Spicy Pickle paid $1 million of its common stock and $800,000 cash to buyout the preferred equity holders.  Clearly they wanted those preferreds out!

What’s could be worse for Play N Trade and Gamestop than Walmart competing against you in the resale market? Game platform manufactures switching to download-only platforms, so there are no discs or cartridges to buy or re-sell.

This article details the legal disputes and subsequent law suit between franchisor Quaker Steak & Lube and a franchisee in Pennsylvania.  The franchisee claimed:

• [franchisor] lied to him about the restaurant’s prospects for profitability;
• approved too large a restaurant for the State College market;
• forced him to use a select list of food vendors and menu choices that hurt his chances for profitability; and
• did not provide adequate training, startup marketing or operational support.

The franchisee claims a projected $100,000 weekly gross sales ($5.2 million annually) was given to him by the franchisor, when actual revenues were $80,000 a week in 2006, $61,000 a week in 2007 and $45,000 a week in 2008.  The judge agreed with the franchisor that the projections were simply that – projections and not historical fact or earnings claims.All other claims were also denied by the judge.  That’s how these law suits usually end unless there is real “smoking gun” evidence of a breach of the franchise agreement or fraud.

Amazon.com introduced used game trading in March 2009, and now Best Buy is testing video game trade ins.  Competition isn’t always a bad thing, but in this instance Game Stop and Play N’ Trade’s sales are going to be heavily diluted. Below was Game Stop’s response in the Best Buy article:

GameStop spokesman Chris Olivera declined to comment specifically on Best Buy’s test, but he indicated GameStop’s more than 6,000 stores have advantages over self-service ventures.”Trading in used games and consoles is a highly-assisted activity,” Olivera said in an emailed statement. “We are very confident in our model that allows for our expert associates to help consumers trade in product, a fact not addressed with a self-serve process.”"Likewise, GameStop has over 12 years of skin in the game and understands the highly-regulated business of pawn and resale laws that vary not only from state-to-state, but municipality to municipality,” he added.

Young kids have been self-trained to research and buy online for the best price. I wouldn’t bet on kids paying a premium for simple trade-in transaction. Sorry Play N’ Trade and Game Stop.  One angle these speciality stores could still exploit is providing its customers with in-store use of expensive assets, particularly renting by the hour very high-end immersion and 3-d gaming equipment.

NexCen Brands is the franchisor for Great American Cookies, MaggieMoo’s, Marble Slab Creamery, Pretzelmaker and Pretzel Time.  The recently opened up a research and development facility for their restaurant concepts.  At first glance, this looks great, despite it being a tiny 1,200 square feet.   My nitpicking then creeped in.  Here are a few issues I see:

1. The manager of the R&D center is the VP of Plant Operations.  I would much rather see someone with an innovation, marketing or chef background, not someone who coordinates a warehouse or manufacturing facility.
2. The article states that the R&D facility is “supported” by NexCen’s top vendors – bread, chocolate and dairy vendors.  Ummmmm…..bias?  It’s a great deal for franchisor NexCen who gets their vendors to sponsor the facility and research, but do you think this will produce the best innovations for the franchisees?  Will the vendors spend their time “innovating” their particular product offerings more into the menu?

I’m being hard on NexGen, I know.  Hopefully the R&D facility will produce some winners, but the issues noted above make me believe NexGen chose the absolute cheapest way to create the image of R&D.

What’s the best way to create better and cheaper offerings, faster?

After professional research with customers and franchisees, you can identify promising ideas, develop them with your chefs, professionally test the ideas with customers, and repeat the process until you get a winner.  Let your marketing, finance and purchasing teams have input.  Then roll it out to franchisees.

The franchise Liquid Capital provides businesses with short-term financing that is secured by receivables.  Think payday loans for businesses, cash now secured by reliable future income.  A fictitious example of this works would be my law firm – clients typically pay their legal bills as late as possible, so if I needed a reliable inflow of cash each month, I could pay a fee to Liquid Capital to give me cash on a predictable timetable.  My responsibility would be to pay back Liquid Capital when the client pays their legal bill.

In theory, the business model works can work great.  Theoretically there are high margins on lent cash, long term working relationships, many customers that need this service, professional atmosphere, and you are providing a needed service to the business community.

BUT…..In real life, the business model struggles.  As this article states, one franchisee said it took him a year to land his first client!  In the past 4 years, 19 Liquid Capital franchisees have closed their doors.  The franchisor also requires a minimum volume of lending of each franchisee, and failure to achieve volume goals can be termination “for cause” according to the franchise agreement.  If you are desperate for clients, inevitably you will lend to riskier borrowers than you would like.  And, collections are a real pain nowadays in the United States with all the laws protecting borrowers and limiting communication and other means to collect debts.  If you are extremely plugged into the community, then potentially this franchise will pay off.

I wouldn’t buy it.

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!

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.

Back in 2006, I listed MRI (Management Recruiters International) on a list of franchises I wouldn’t buy.  Today, a commenter named Bob Stewart in the forum reiterated from his own experience which included false representations about who actually was a valid franchisee.Here is Bob’s web site listing his alleged misrepresentations, with emails from MRI and MRI’s parent company CEO.  It certainly is an interesting case study.

Rick Romell from the Sentinel Journal in Milwaukee called me to discuss the Meal Prep industry a few weeks ago.  He produced an informative article which can be read here.

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.

Quiznos seems to be in perpetual defeat.  Here is another money-losing franchisee from Quiznos:  

“We can’t make money,” said Quiznos franchisee Marty Tate, who said his Erie, Pa., store leads the region in sales. Mr. Tate, who is not part of the lawsuit, said 40% of his sales go directly into advertising, royalties and food for the next week. He added that three of seven locations in his county have closed in the past year. Mr. Tate said that when his contract expires next spring, he will open his own independent store.

Advertising funds are always somewhat of a mystery. Typically, the franchisee will pay about 5-8% into an advertising pool that is supposed to be leveraged across all applicable markets. Unfortunately, there is often not as much bang for the buck as the franchisor would like you to believe, particularly in the creative production and media buys. Quiznos example:

Then there’s the issue of advertising. Quiznos’ agency is Cliff Freeman & Partners. According to TNS Media Intelligence, the chain spent $83 million in measured media in 2007 and $55 million in the first half of 2008. Despite the increase, many franchisees said that they rarely see their own ads, and most say the work isn’t memorable. (By comparison, Subway spent $361 million in during 2007, according to TNS.

“The last good Quiznos commercial was Baby Bob, and that was 2004,” said Mr. Tate, who said he’s complained to executives about the creative. “I would challenge anyone to remember the last Quiznos ad they saw.”

Dream Dinners is an example of good idea but profit challenged business model.   It’s just too expensive to attract and retain customers.

A Forbes article looked through the Dream Dinners FDD from the state of Washington, and focused on the required audited financial statements.

As of Dec. 31, the company boasted $2.9 million in assets, against which it carried $3.4 million in liabilities. (Such negative book value implies that if Dream Dinners were unwound today, shareholders wouldn’t get much.) That’s a snapshot, but here’s a trend: Last year, the company lost $628,000 on $7.5 million in sales; compare that to 2005, when it earned $928,000 on sales of $4.5 million.

….

Typically, new business concepts need up to five years to season before they can be franchised successfully. Dream Dinners–along with its next largest competitor Super Suppers, now with 165 stores–both began franchising in less than two years.

Franchisees accused the franchisor of false promises and unsubstantiated financial projections.

A major point of contention has to do with rosy promises Dream Dinners seemed to have made to its franchisees. Under the Federal Trade Commission’s franchise law, franchisers are not permitted to make “predictions” about franchisees’ financial success–unless they do it in the Uniform Franchise Offering Document, which typically contains a host of disclaimers.

Dream Dinners “totally disregarded these regulations,” says Garner. It not only posted financial projections on its company Web site, he says, it also put them in a Power Point presentation given to potential franchisees.

Jennifer Hemann, a former Dream Dinners franchisee in Maryland and one of the plaintiffs in the suit, alleges that she was shown that Power Point presentation–which included estimated profit margins for a given volume of customers–when interviewing with the founders. “They told us, ‘Our lawyers said not to show this to you, but if you write fast, you can get it all down,’” she says…

The slides, provided by Garner, present some tantalizing figures: Allen and Kuna projected that, at 187 customers per month, a franchisee could expect to earn $75,400 in profit annually, or 18.9% of total revenue. On the high end, at a quoted 328 customers per month, net profits jumped to $163,300, or 23.3% of sales. The estimated distance customers would be expected to drive: two to five miles. Allen and Kuna insist that “the figures were realistic and based on the actual performance of stores.”

The owners look innocent and reliable enough, eh?  On face value and blind trust, I would be tempted to believe Allen and Kuna.

Meal Assembly Watch has an insightful 5 Ways to Save Dream Dinners.

I have acted as general counsel to franchisors in my law practice.  From what I have observed, most smaller franchisors do not have experienced managers.  This inevitably turns growth sloppy by allocating too many resources and cash to new franchise sales.  Marketing programs for their franchisees and brand/product development suffer.  Inevitably, the franchise sales process is much longer and more expensive than projected, and ends up monopolizing the franchisor’s time and money.  Sometimes this get worked out (McDonald’s), and sometimes it doesn’t (Quiznos).