Bain Capital employs some of the smartest financial and strategic professionals in the USA.  Bain Capital originally funded Dominos Pizza back in the late 1990’s and reaped a hefty profit when it went public in 2004.  Now, Bain Capital is jumping back in with Dominos by acquiring the Japanese master franchisee, who delivers pizzas that often cost over $40 in Japan.  With Bain’s history in Dominos, I would bet that this is a smart investment.

I like Burger King’s new 20/20 design. It’s this kind of change in customer experience that can reinvent the brand. Concept stores that have been rebuilt with the new design have seen 30% increase in sales compared to the old style.

Burger King’s new broiler, Duke’s Flexible Batch Broiler, is a great piece of equipment too. It will allow more innovation and adaptability by franchisees. The price tag at $6,000 is reasonable.

Whether it be Angus beef or chicken, the Flexible Batch Broiler turns frozen products into char flavored, tender and juicy pieces of meat. A single cook in the kitchen can deliver eight Whoppers or 12 regular burgers in two minutes or less. This would give a production rate of 240 Whoppers and 360 regular burgers per hour. Also, the Flexible Batch Broiler can flame broil products that haven’t been thawed out. Ranging from $5,400-6,900, the Flexible Batch Broiler will save energy, time and money.

For more insight on Burger King’s strategy, see this presentation from an investor conference:

I’ve been noticing a new crop of high-end fast casual franchise concepts that are the size and atmosphere of a traditional sit down restaurant, but orders are taken at the walk-up counter.  Ingredient in Kansas City comes to mind.  They follow the recent trend of hearth oven baked pizza, homemade pastas, salads and sandwiches.

Vapiano is also an interesting urban-only concept started in Germany and now here in the USA.

It is a very modern, high-end Italian fast casual concept.  The chefs are stationed around the dining room, and customers walk up to the chefs who prepare their order right there.  A customer’s food and drink totals are tracked using a chip card similar to one you’d see on cruise boats.  As the customer leaves the card is scanned and the customer pays. It sounds a bit like a modern cafeteria but the architecture is sleek and hip.  The average check ranges from $14.50 to $22, depending on whether it’s lunch or dinner, claims the owner.

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.

Potbelly’s Sandwich Works with its core markets being Chicago, Washington D.C., and Texas, is walking away from some potential new locations, and renegotiating leases on existing locations to “reflect the new market conditions.”

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.

The very popular Potbelly’s in Chicago appears to be getting ready to franchise after opening 200+ company owned units.  Even though their web site still denies franchising is in the works, this job description has the following requirement:  

Must have franchisee expereince and knowledge of how to manage a mix company franchise system         

Photos and some random YouTube video of Potbelly’s are below the fold for you Chicago virgins. (more…)

Buffalo Wild Wing’s own restaurants in the second quarter rose 8.3%, and franchises rose 4.5%.  Again, the corporate owned restaurant see double the same-store gains as the franchise.Same-store sales alone can be deceiving because it doesn’t tell the whole picture. Were higher same-store sales a result of additional customers, expensive marketing blitz or promotions, new menu items or new pricing?

The modern atmosphere and different taste driving the growth of the tart frozen yogurt industry will almost certainly continue for several more years.  But a crash similar to the previous frozen yogurt industry is likely to occur.

Here are a few new entrants:

• Yagoot Yogurt (Cincinnati, OH)
• Tartini Frozen Yogurt Bar (Cupertino, CA)
  
• Ufood Grill is even serving them at their restaurant as a dessert
• Jubilee Frozen Yogurt (Chandler, AZ)
• Zoneberry serviced at Coffee & Tea Zones in Colorado Springs, CO.
• Sorbetto @ Starbucks
• Berrygood (Central Arizona)

I’ve always thought that the best way to grow a franchisor is not to have the best product or service offering, but to offer the best franchising arrangements with flexibility.  It look like some hotel franchisors are taking that exact route and it is working.

 A spokesman for Wyndham, Richard Roberts, said that all of the company’s brands require franchisees to sign up for a minimum of 15 years, except for Knights Inn, which offers three-year agreements. Asked about Ms. Sanders’s properties, Mr. Roberts said: “We consider details of our relationships with individual franchisees to be a private business matter. Anyone who wants to affiliate with Wyndham does so at their own initiative. The fact is there are 6,500 hotels in our system for a very good reason: We deliver value to our franchisees.” The brands also include Days Inn, Ramada and Howard Johnson.

Ms. Sanders, though, has moved 17 of her 18 hotels to a new brand, Americas Best Value Inn. The company has broken ranks with its competitors by offering franchise agreements that are renewable each year.

Offering an alternative to the industry’s traditional 20-year contracts has helped make Americas Best Value one of the fastest-growing lodging chains. Nine years after it was founded, its name is on some 800 hotels — nearly all of which once waved other companies’ flags.

The company’s chief executive and president, Roger Bloss, sounds a populist message, calling Americas Best Value “a membership association” and allowing franchisees to vote on company policies, from what kind of shampoo to offer to how much they will pay in fees.

This article from the United Kingdom highlights some of the positive aspects of franchising.

He said: “Choosing the right franchise is a big decision – it’s your own money on the line and you need to be sure that you are investing in a sound business model. McDonald’s employs some of the most talented professionals around and it helps to be able to draw on that knowledge and expertise.”

There are significant advantages to running a franchised business, as a new idea has already been tested to ensure it is successful. What’s more, larger franchises will have a well-established trading name and are likely to offer marketing support and comprehensive training programmes in a wide range of business skills. Good franchisors can also help secure initial funding.

Mr Thomas said: “McDonald’s has some fantastic training opportunities for staff at all levels, which means that when I identify talent I have the tools to help my staff develop their skills.”

“At the same time, I can operate on a local level too and I’m involved in a number of community initiatives. I am deputy chair of the Trust for Sick Children in Wales, and regularly give talks on business and entrepreneurship at local schools and offer work experience placements through Careers Wales.”

He added: “For entrepreneurial people owning a franchise is a great opportunity to take a fantastic brand and make your own mark.”

The only portion I have issues with his last statement. For truly energetic entrepreneurs, owning a single franchise provides limited entrepreneurial satisfaction because of the lack of flexibility and adaptability limits built into the franchise operating structure.

Most of my friends order food online whenever possible, especially pizza like Domino’s and Papa John’s.  Online ordering is making up 20% this Papa John’s franchisee’s sales:

In fact, Chesley estimated, about 20 percent of her store’s sales arrive via the Internet.Customers can insert exactly what they want and it saves on labor costs since the staff doesn’t have to spend as much time on the telephone taking orders, Chesley said. “We do great with online ordering.”

Potential franchisees should make sure you are free to engage an online ordering network such as Order Network, CityWaiter, eHungry, Kudzu Interactive, or GrubHub.

This McAlister franchisee with 30+ years of restaurant experience from Oklahoma is doing well. The article has some good tidbits:

“Our business is actually up,” said Bothwell, attributing that to McAlister’s market positioning and lunch focus, which accounts for 65 percent of its revenue. “People seem to still be eating out for lunch.”Competing for the fast-casual market with such well-established companies as Panera Bread and Jason’s Deli, McAlister’s offers more than 100 menu items for lunch and supper, targeting health-conscious customers.

“We have to get more sales to cover our increased operating costs,” he said, noting his average per-person ticket runs $7.85.

His firm ended 2007 with revenue of $10 million, his stores averaging $1.5 million per year. With eateries to open this year in Shawnee; Lawrence, Kan., and Joplin, Mo., as well as at 21st and Yale in Tulsa, he projects 2007 revenue of $20 million.McAlister’s restaurants established in existing shopping centers, like his new midtown Tulsa deli, cost about $750,000 to open, said Bothwell. Stand-alone stores can run $1.5 million to get off the ground. Both employ an average staff of 50, now a greater challenge since Oklahoma’s new immigration law further drained the state’s tapped labor pool.

UPDATE: May 29, 2008 @ 5:34pm EST

UPDATE #2: June 4, 2008 @ 3:14pm EST

There was an interesting comment to this post about whether a stand alone location can realistically justify the $1.5 million build out costs, which is double the $750,000 cost for a strip mall location. The short answer is yes. You wouldn’t need twice the sales, but there would be an incremental increase in sales to have the free cash flow to service more debt.

Here’s the analysis: The monthly cost of borrowing an additional $750,000 @ 8% with 10-year repayment term is

To cover this $9,100 in additional monthly debt service not including the extra taxes and maintenance, the store would need to attract an extra 1,160 tickets monthly @ $7.85 average per ticket. A store with $1.5 million in sales is attracting 524 patrons per day. Can a standalone location attract at least 38.6 more people per day versus a strip mall front? Sure, it is possible with a significantly more prominent street exposure.

I believe that self-service ordering kiosks will be a fixture at many big-name restaurants and fast food outlets in the next decade, much as the self-checkout in grocery stores have become common place.  It makes sense for customers and it makes sense for the restaurant owners.  These self-service kiosks are aimed at increasing the average transaction and speedier service.  At this point I’d be satisfied with a “refill my drink” button at my table.

The extreme evolution of this concept is the Baggers restaurant in Germany where guests choose their meals from a touch screen at their table and food is delivered by a “mini-railway” from the kitchen located on the floor above.   The inventor’s gravity feed rail system is patented in Germany and he is seeking protection for the invention internationally so that he can license it to restaurants abroad.  You have got to watch this quick BBC video showing how the restaurant works.

Pinkberry Craze

Frozen yogurt is hot again? Well, sort of. Given the implosion of the last frozen yogurt phase, you are wise to be cautious. The last frozen yogurt craze in the 1980’s and early-1990’s was lead by TCBY. According to the International Council of Shopping Centers, TCBY’s same store sales fell 10%-15% annually between 1997 and 2004, particularly when the low-cal and low-fat versions were introduced. The International Dairy Foods Association reported frozen yogurt production in the U.S. went from 118 million gallons in 1990 to 65 million gallons in 2005, a 45 percent drop.This time Pinkberry sure seems to be all the buzz lately, even being features in a recent American Express ad and having their hip tart frozen yogurt dubbed “Crackberry” playfully implying an addiction is possible. Here are photos of a Pinkberry in Manhattan. Founded by Shelly Hwang (coming off several failed small restaurant ventures) and Young Lee (a solo designer), they effectively brought to Los Angeles the tart frozen yogurt now famous in South Korea.Pinkberry has apparently been stretching the healthiness of its yogurt, and in early April 2008 settled a law suit where it was accused of misrepresenting its product as “frozen yogurt” and making bogus health claims, including that the dessert was “all-natural.” Pinkberry admitted no wrongdoing but is paying $750,000 to a local food bank and $5,000 to the “victim”. The article implies that the recipe is not all natural and has higher calories than the founder claims.Nevertheless, sales of the tart frozen yogurt are impressive. Pinkberry has put forth in the media unit sales of $250,000/month and has generated a plethera of copycats across the country, including Berrie Good, Yogurberry, BerrySweet, Red Mango, and recently Berry Chill here in Chicago. Pinkberry has supposedly ceased selling franchises for now.

The Concept

The hip tart frozen yogurt concept is simple:

• a few basic flavors of tart all-natural frozen yogurt
• a variety of berry and exotic real fresh-cut fruit toppings in addition to cereal and cookies
• curvy counter and furniture; accented with colorful hip floors and wall coverings
• at least 4 plasma TVs showing something “cool” like music videos or Japanese game shows
• at least 4 plasma TVs above the counter with an animated menu
• charge about $4-$7 for a tart yogurt and 3 toppings of brand-name cereal, fresh fruit, candy, and pastries.

Should you buy a franchise or role your own?

You can easily roll your own. Here are some basic supplies you’ll need to get started:

• get your 2 ice cream machines from Taylor, ($36,000 each)
• tart frozen yogurt mix from YoCream or Cielo
• cups from Jas Wholesale (supplies price sheet ) (500 ct = $59)
• ultra modern flooring, counters, cabinets, and furniture from Ikea (~ $3,500)

I may be more biased to the “role your own” after seeing the success of a single-unit startup in Chicago called Berry Chill. It occupies a small storefront on State Street a few blocks of Michigan Avenue (the Magnificent Mile). The entrepreneurs got the location right, and executed the “feel” of the asian-inspired Pinkberry clones well enough. Berry Chill opened a few months ago during the middle of winter when the weather was below freezing.  However, while most of the frozen custard places close for the winter, there was almost always a line at Berry Chill.  I attribute most of their early success to copying a proven concept and selecting an excellent main street location with lots of tourists and local high-rise condo residents.   I’m sure the store will do well over $1 million in sales during the calendar year. Coincidentally, there is a Cold Stone Creamery (with Soup Man) 1.5 blocks away with a larger store but *probably less than a third of the street foot traffic and it rarely has a line except in the evenings of summer days…what a difference a few blocks and hip attitude make.Would I buy one of the aforementioned franchises? Probably not. I’m a strong believer in historic trends, and I would not want to be financially tied to a concept so easily copied or a category that tanked so quickly in the past few decades. I would be very hesitant to open a unit in a suburban outdoor strip mall, as heavy immediate foot traffic seems to be part of the successful formula.If I was to franchise, I would go with the brand with the high exposure and recognition, which at this time is Pinkberry, unless one of the franchise clones have extremely flexible terms in the Franchise Agreement, such as permitting me to essentially change my store brand if I choose not to renew, and permit me to transfer all assets to my new business without penalty or encumbrance, and if the Franchise Agreement did not require me to refrain from competing for any period of time after owning a franchise. If the concept doesn’t work, I want out of the franchise obligations but I want to still have the option to utilize the assets I paid for (either sell them or use them in a similar/renamed business).

Industry Developments

Forbes has a good article on the current status of the Frozen Yogurt industry. Reformulations of the frozen yogurt to a low-fat with fruit mix seem to be working:

MaggieMoo’s International also reformulated its smoothie line, changing it from non-fat to a low-fat, lactose-free ice cream or fruit smoothie called Zoomers. The company made the change after conducting blind taste tests with consumers, 67% of whom preferred a tasty, low-fat smoothie to a non-fat smoothie, says Debbie Benedek, senior vice president of brand marketing. Flavors include a Triple Berry Pomegranate that’s packed with antioxidants. 

After changing its frozen yogurt production process, within six months Dreyer’s/Edy’s Slow Churned watched a double-digit decline in frozen yogurt business turn into double-digit growth, says Suzanne Ginestro, senior brand manager for Dreyer’s and Edy’s Slow Churned ice cream. (Dreyer’s is known as Edy’s east of the Rockies.) By using the slow churn method, fat is better dispersed throughout the product, making it feel richer and creamier. A similar change also boosted the brand’s light ice cream sales.

USA Today, world reknowned for their franchise evaluation skills (note the sarcasm) as evidence by naming Quinoz #2 in 2006, has named 7-Eleven as their #1 franchise for 2008.

7-Eleven management is very systematic and generally organized.  With so many world-wide stores, it has invested heavily in automation and technology.   Marketing partnerships are big with 7-Eleven to get people in the stores, see the Simpsons movie promos and Citibank ATMs as examples.

7-Eleven does not allow absentee-ownership, and each location generally must be  a minimum of 1,400 square feet and must be at least 1/2 mile from another 7-Eleven franchise.  Franchise fees are at least $70,000 plus typical build out costs.

The article mentions a unique system that builds “equity” in their store, so if the franchisee wants to sell, the seller can ask for a premium “goodwill” payment representing built-up equity.

Single store ownership is a way to make a living, but not make a six-figure income.

McDonald’s franchisees are being asked to invest at lease $100,000 per store to accommodate the new upscale variety in coffee drinks, creating the ability to sell caramel lattes and cappuccinos. While the franchisees generally do not doubt this new offering will increase sales, it’s still a big price to pay and dents the immediate cash flow.

The equipment alone will cost franchisees about $25,000 per restaurant. Plus, they are being asked to invest considerably more to retool their stores to better handle the specialty coffee and other new beverages, from sweet tea to smoothies to energy drinks.

Lesson

Can a franchisor require franchisees to investment capital to implement a new offering?  It all depends on the terms of the franchise agreement, but almost all franchise agreement require a franchise timely adaptation to reasonable requests to implement new services and products.  Worst case, you will be required to make the investment at time of renewal of your franchise agreement.  The renovation costs required for franchisees is often a reason for walking away from a franchise at renewal time.

As a franchisee, if you are able to pay yourself about $60,000/year, and your franchisor is requiring you to invest $50,000 at renewal for renovations that you forecast will take 5 years to recover, what do you do?  Do you have the equity or cash to borrow the funds?   A wise businessman will run the numbers, a foolish businessman will automatically pay up without figuring the impact.

Restaurants seem to have had a good year.

The largest Pizza Hut Franchisee in the U.S., NPC International, Inc., owned 874 Pizza Hut locations during the 3rd quarter of 2007. With $173.3 million in total 3rd quarter sales, the annualized sales per store was about $793k, which translates to a monthly revenue of just over $66k, and daily sales for a 30 day month of about $2,200.

Comparable sales, or sales in stores that have been open at least a year, increased 4.9 percent in the third quarter. That makes five consecutive quarters of comparable sales growth, pushing NPC’s positive comparable sales record to 35 of the last 37 quarters, Schwartz said in the release.

CKE Restaurants reported Wednesday that Hardee’s same-store sales rose 3.6 percent for the four-week period ended Nov. 5, and increased 2.7 percent for the third quarter ended on the same date.

In the U.S., McDonald’s same-store sales rose 5.4 percent in October, boosted by the ongoing popularity of the Monopoly game promotion, the company said.

RETAIL UP:

• Target +4.1%
• Wal-Mart +0.4%
• TJX (TJ Maxx, Marshall’s) +3%

RETAIL DOWN:

• Anne Taylor – 4.2%
• Chico’s -10.6%,
• Bon Ton, Cato -8%,
• Fred’s -0.6%,
• J.C. Penny -1.8%,
• DSW – 3%,
• Cache -3%,
• Pacific Sunwear -.08%
• Sharper Image -8%,
• Gap -8%,
• Nordstrom -2.4%,
• Macy’s -1.5%,
• Kohl’s -1.5%,
• Talbot’s -7.9%
• Shoe Carnival -5%,

Since Tamarac-based Puroclean began franchising in 2001 it has sold more than 180 franchises, making it one of the 50 fastest-growing concepts in the nation. The company provides mitigation, restoration and reconstruction services for damage caused by fire, water or vandalism.

Part of the company’s success is that it’s a business-to-business model — working largely with insurance agents and adjusters. That draws franchisees who might shy away from traditional sales, said Puroclean President and COO Keith Gerson.

‘’We are one of those under-the-radar opportunities that most people don’t think about,’’ he said. “But when you align all the stars in terms of what makes a good business — growth opportunity, great margins and low cost of entry — it’s just one of those rare models that is firing on all cylinders.’’

Gerson, of Puroclean, said there’s a simple formula to keep fueling the growth of a franchise: Keep the franchisees happy. In fact, some of the company’s best marketers are owners who are eager to sell the concept — which is different than selling the business, said Gerson.

If you talk to a franchisee about buying in and they say, ‘ `Gee, you want to buy a business? I’ll sell you mine,’ ‘’ be leery, he said.

Cross Posted at: Let’s Talk Franchising

Fantastic Sams, a full service hair salon brand with nearly 1,400 salons in the US and Canada, was recently ranked as one of the “50 Top Franchises for Minorities” and the “Top 25 Franchises for Hispanics” by the National Minority Franchising Initiative and Hispanic Enterprise Magazine. Fantastic Sams was the only hair salon franchise system selected by both surveys.

As published in the September 28 edition of the USA Today newspaper, The “50 Top Franchises for Minorities” award recognizes Fantastic Sams as one of the exceptional systems that has demonstrated a focus on recruiting and supporting minority franchisees into its system. Selection was based on many factors, including historical performance, brand identification, market dynamics, franchisee satisfaction the level of initial training, on-going support and financial stability.

The “Top 25 Franchises for Hispanics” was featured in the June/July issue of Hispanic Enterprise Magazine. Fantastic Sams was recognized as a franchise that has made a corporate commitment to recruit prospective franchisees from the Hispanic community over the past several years. According to Hispanic Enterprise Magazine, “This commitment is not based on altruism; it is based on sound economics. The companies noted here represent exceptional opportunities for prospective franchisees and have demonstrated a commitment to properly training and supporting you once you become a franchisee.”

Fantastic Sams is also a charter member of Minority Fran, a program that was recently launched by the International Franchise Association’s Diversity institute. Minority Fran was created to build awareness of franchising within minority communities and to increase the number of minority franchise owners.

“We are thrilled about our recent recognition by the minority business community,” said Scott Colabuono, CEO of Fantastic Sams. “We want to recruit franchisees who are interested in running a business and who also understand the culture of the clients they serve.”

Fantastic Sams is currently concentrating its efforts on attracting quality franchise partners who want to invest in a leading hair salon brand with a solid operating system and a strong corporate support structure. The average initial investment to open a Fantastic Sams Hair Salon (ranging between $100,000 to $225,000) and the company’s fixed fee royalties make it one of the most competitive opportunities in the industry. “With Fantastic Sams’ attractive economic model, experienced franchise partners find our brand a worthwhile investment,” added Colabuono.

“Prospective franchise owners for Fantastic Sams should have well developed people skills to be successful. Our best salon owners set a standard for guest service that translates into highly trained and motivated hair stylists. Our guests recognize the difference when they step into our salons,” according to Jeff Sturgis, VP Franchise Development. “We have become the leading full service hair salon brand by offering the best in salon services and products, and by creating a customer loyalty that sets us apart from our competition, “he added.

Cross Posted at: Let’s Talk Franchising