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).

Source

Chris Toman’s plan to go green could have put him in the red.

The owner of a local pizza franchise plans to apply for LEED certification for his 2,600-square-foot restaurant space on the back burner because it was going to cost too much.

Toman said he would have to pay between $30,000 and $40,000 to become certified by the U.S. Green Building Council under its Leadership in Energy and Environmental Design program, which awards points to structures that are energy efficient and otherwise good for the environment.

$40,000 for a small restaurant to get green certified is proportionally a huge expense., plus the cost of the alternative materials such as insulation made of old jeans and coke bottles for a countertop. Would that $40,000 be more profitably spent on advertising?

While going green can sometimes attract additional customers in certain markets, the increase in price compared to the market will divert others to your competitors.

Toman is opening a Pizza Fusion franchise, which requires all of its restaurants to be built to LEED standards, as part of its self-described mission to “Save the Earth one Pizza at a Time.”

Not only are the buildings green, the chain delivers pizzas in hybrid vehicles.

The cost of going green for Pizza Fusions in other markets is less than half of what Toman was told he’d have to pay here.

Much of the cost goes to consulting companies that develop energy-efficiency plans for buildings seeking certification. These firms also make sure the buildings ultimately perform the way they were designed and file reams of paperwork required on all projects regardless of their size.

“It seems like they’re overcharging,” he said. “I’m trying to do the right thing, but someone’s taking advantage of it and charging high rates.”

The American Association of Franchise Dealers (AAFD), who previously awarded Cuppy’s Coffee a Fair Franchising Seal, has suspended Cuppy’s accreditation pending a determination of the Association’s Board of Directors at a scheduled meeting on September 24, 2008. This comes after many obvious shameful contracts breeches by Cuppy’s old and new management over the past year.   Below the fold you can read the entire statement released by the AAFD.   Here’s a link to the email sent by Robert Purvin, AAFD’s chair, to Cuppy’s owner Dale Nabors informing him of the suspension. 

• For a full background of articles, see FranchisePick’s biography of this situation.  Also read Paul Steinberg’s recent post on bluemaumau.org
• Blogger Opinions and Reports: Sean Kelly, Michael Webster, Janet Sparks

(more…)

Source: Daily Courier (Pittsburgh)A law suit was filed on July 3, 2008 by a few dozen franchisees in Western Pennsylvania.  

The allegations are:

The lawsuit alleges that Quiznos engages in a “pattern of racketeering” and generates “grossly inflated profits” at the expense of franchises that usually fail. It also accuses the company of saturating geographic areas with more franchises that can be supported.

Quiznos is accused of allowing customers to redeem coupons for free or discounted sandwiches, a practice that allegedly benefits the company but not the franchise holders, who are not compensated for the loss of revenue, according to the lawsuit. Quiznos, according to the filing, requires its franchise owners to buy products they do not need and work only with suppliers connected to Quiznos who charge high prices.  

The financial strain on the franchisees causes the business to fail, the suit maintains. When the franchise fails, Quiznos threatens the owners with lawsuits to enforce the agreement, which requires them to pay royalties for 15 years even if the business has been forced to close, according to the lawsuit.    

Quiznos Response:

Richard Emmett, general counsel for Quiznos, said the allegations in the lawsuit are similar to those in an action filed two years ago in Illinois that was dismissed recently by a federal judge.”This is a copycat of that lawsuit,” Emmett said. “We’re confident the claims have no merit and this lawsuit, like the other one, will be dismissed.”  

He added that the allegations contained in the action arose several years ago.”

They have nothing to do with the way we’re operating now. It’s historical rather than present day,” Emmett added.

Julie Moran Aletrio from New York’s LowHud.com did a great job in her article on the meal prep trend in New York’s Lower Hudson Valley. Thanks for quoting me in the article. Here are a few highlights:

From a Let’s Dish franchisee:

“This concept is meant to help a busy person, but people found themselves so busy that they didn’t know how to incorporate this into their lives,” Hunerson said.

Closings nationwide:

By the end of last year, there were 1,353 meal-prep stores in the United States, according to the Easy Meal Prep Association.

Although the idea spread quickly, the failures followed with 264 meal-prep stores closing last year and another 200 expected to fail this year.

Industry consultant Bert Vermeulen, who founded the association in 2005, said the idea was too new to support the number of stores that opened.

“This is a concept where the stores got ahead of the market. The majority of the target market is not aware of this concept and why it works,” he said.

New concepts:

Rolling out a new concept requires a deep commitment in marketing from the franchiser, Vermeulen said, something that Let’s Dish and others didn’t provide.

“Many of the franchisers thought it was easier than it was. They sold franchises without thinking through the marketing program they were going to run,” he said.

Vermeulen pointed to Pappa Murphy’s Pizza, which has more than 1,000 stores, as a franchiser that did it right.

“If you remember 10 years ago, there was something militarily called the Powell Doctrine, which meant going in with overwhelming force. Pappa Murphy’s wouldn’t go into a particular metro area unless they went in big so they could establish awareness of their concept. Their concept is pizzas you pick up uncooked that you cook at home. It’s not that different from meal prep, but the rollout was very different,” he said.
….
And those outlets will be very different from the original stores that struggled to find customers. In 2004, 90 percent of meals were assembled by the customer. Vermeulen said more store owners are adopting a “grab-and-go” model where they assemble meals for time-pressed consumers reluctant to spend up to two hours crafting a pack of meals themselves.

He predicts that by 2010, 80 percent of the meal-prep industry’s revenue will come from grab-and-go meals.

Source: http://www.stuff.co.nz/4599872a13.html

Keely Clements also says her repeated pleas for support from Subway management were ignored, despite telling them her Northlands Mall store was losing money.

That franchise was closed on Monday, after mall management terminated the lease, because it was owed $164,000 in unpaid rent.

Clements also stands to lose her second store, in Kaiapoi, after Subway served her with papers to terminate her lease on July 1, meaning there was no way for her to on-sell the store and recoup capital.

Clements has been protesting outside Subway stores in Christchurch this week to highlight her situation. Christchurch has 23 stores, one for every 16,000 residents.

Clements worked at Subway before buying a franchise in Kaiapoi in 2005 for $480,000. After the success of that store, a year later she bought a second franchise at Northlands Mall for $410,000.

Dream Dinners is an example of good idea but unprofitable 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.

Many of my law firm’s clients are small franchisors, and frankly most do not have experienced managers or have enough invested capital. The new managers often spend way too much time on franchise sales and not enough resources on marketing programs for their franchisees and brand/product development. The franchise sales process is always longer and more expensive than anticipated, and that focus ends up monopolizing the franchisor’s time and money. These franchise programs have an extremely high management risk, meaning that not only is the franchisor’s management unproven in this specific strategy, but they are underfunded which keeps the focus on franchise unit sales.

I used to be extremely skeptical of consultants, and still am to large extent, but I have come to greatly appreciate the need and effectiveness of professional research and design teams to innovate and set the program up for success. The distinction is night and day between franchisors who utilize professional researchers and designers (McDonald’s is the most obvious example), and those who don’t. I have additional perspective on this in the financial industry because my wife is global director of user centered design for one of the world’s largest banks, and I see how many projects get screwed up when the bank’s business units try to short-cut improvements without leveraging the expert teams.

Meal Assembly Watch has an insightful post on how to fix Dream Dinners – 5 Ways to Save Dream Dinners. Executives of the franchisor with poor strategy and execution beyond selling franchise units seem to be the main problem.

Back to the Forbes article…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 in the picture, eh? I would be tempted to believe Allen and Kuna. But, how could you have seen past their persuasive projections?

1. Looking at the audited financial statements would have revealed a tightening financial situation.
2. If the profits were as high as the owners said, they would be raising money to open company-owned stores.
3. The inexperienced co-founders are still playing a leading role in the company…are they really the best people to be managing a fast-growing organization?
4. …post your ideas on the waring signs in the comments below

Scott Pooler, a former official eBay Trading Assistant, and a master franchise representative for an eBay drop store franchise chain weighs in on the subject of franchising and stand alone eBay drop stores in Trading Assistant Journal, a weblog that provides news and commentary for eBay consignment specialists.

Scott’s experience on both sides of the fence reveals certain truths, and since he was at one time a proponent of the franchise model, his views are helpful to anyone considering the purchase of a new franchise eBay drop store or opening one on their own. These views are Scott’s opinion and do not reflect upon eBay any eBay franchise drop store chain in particular or upon eBay consignment as an addition to any other type of business.

His views regarding the stand alone drop store franchise model and why it has failed are worth reading.

Read the whole story

Cross Posted at Let’s Talk Franchising

It was announced in Convenience Store News that Dinner by Design, a meal assembly chain based in Grayslake, Ill., has unveiled a new package of convenience services that the company expects will change the easy meal prep industry.

Specifically, Dinner by Design’s new services include:

• Delivery services that allow people to preorder entrees and side dishes and have them delivered to their company, daycare, school or other organization. Based on a test marketing effort, the company already has more than 300 group delivery clients nationwide. Home delivery will be unveiled and tested in one location in mid-March.
• Pick Up meals for busy people who don’t have delivery service. Take & Bake entrees, desserts and side dishes are premade and can be picked up anytime during expanded business hours. Orders can be placed online, e-mailed, faxed or phoned in.
• Dinner Tonight selections geared for people who need something for dinner without defrosting time. This service helps meet the needs of nearly 37 percent of people who don’t think about dinner until just before preparing it, the company stated.
• Group delivery, Pick Up service and Take & Bake selections are already available and operating successfully at most locations nationwide. Dinner by Design has nearly 60 kitchens open, and agreements for another 40 locations in the U.S. and Canada.

“This is the wave of the future,” president and CEO John Matthews said in a company statement. “This new business model has been very attractive to existing and potential franchise owners alike. We anticipate that the new meal assembly model will mean added growth for Dinner by Design owners and operators.”

It may be a move in the right direction, though I am always concerned when a franchisor introduces a whole new program before the program has received proper testing. I think the move is indicative of the fact that the industry is failing to provide an ROI to franchisees, and is scrambling to come up with a new business model that can deliver profits.

The challenge with this approach is that it may require additional investments by the franchisees to implement. You wonder if that is just like putting more “good money, after bad money”.

Cross Posted at: Let’s Talk Franchising