I thought Obika, a Fresh Mozzarella Bar concept from Europe, would do fine in the big cities and may ultimately make a good franchise, succeeding by shadowing the locations of Au bon Pain. I assumed their dozen overseas locations would have been prepared a powerful USA launch. But, the NYC location is not earning universal fondness from New Yorkers.
The look is modern and euro, and it has the right formula of escalating a familiar food to a higher level of passion. However, it fails in execution – service is too slow and the sandwiches are simply average. When people are paying a premium ($10 a sandwich), your niche is smaller and there is more pressure to earn repeat business from the local workers. I would imagine they have to do at least 350 transactions per day to break even. Eventually the number of potential new customers will dwindle to unsustainable levels and survival will depend on repeat business. I still think Obika will make it, but the chances of it being a 10+ unit chain in the USA are very slim.
As a whole, healthy, all-natural, and organic concepts have been having a hard time making their sales goals, except for notable exceptions like Chipotle. Everybody says they’ll go for healthy options, right?
You have to watch what people do and not what they say. I’m sure most people reading this post would say during a focus group, “Yes, I’ll pay a little premium for the organic meal”. But, in reality what do you do? Most of the time you purchase based on convenience, taste and price as long as you deem the quality above an acceptable level. I was reminded of this recently from a PepsiCo executive. Chipotle is the rare bird – it succeeds because it tastes good, is priced competitively, the line moves very fast, and most people don’t even realize the food is mostly organic.
Another “healthy” brand to watch is Naked Pizza because it has signed several area development agreements for hundreds of units but lacks experienced management. A reviewer on Yelp stated, the “cheese was rubbery and the pizza was cardboard” – ouch! Naked Pizza has gathered remarkable attention for only having a single location. The buzz is the result of winning an open venture funding call in a blog post from billionaire Mark Cuban. It’s also reknowned for embracing of twitter (a billboard simply lists it’s twitter address). A recent article summarizes the Naked Pizza idea:
NakedPizza’s solution is an all-natural, fortified pizza, made with simple, unprocessed ingredients, informed by science and made affordable and available through the proven carry-out and delivery model. It’s signature difference is a crust made with a diverse blend of “ancestral” whole grains, seeds and beans fortified with prebiotic fiber and probiotics (live, beneficial, cultures) for digestive health, balance and well being. The sauce, cheese, meats and vegetables toppings are all-natural with no added sugar, trans fats or high-fructose corn syrup. The company also offers a glutten-free crust and all-natural soy cheese. With less calories, lower glycemic index, and more protein than traditional pizzas and benefits including bone health and immunity, NakedPizza is the world’s first functional pizza.
Over at the BlueMauMau blog, there was a post about Huddle House discounting their upfront franchise fee from the magical $25,000 to $5,000 and waiving the royalty for the first five months. Some comments frowned upon franchisors who discount franchise fees. Here my opinion:
Count me as one who loves to see franchisors discount their fees as done by Huddle House. The goal of the franchisee should be to get the highest likely return on invested capital for their risk profile. My point is that franchisors should be more willing to base their fees on market demand like all other services.
Nearly all industries (and even financial instruments liked bonds) fluctuate their pricing based on many internal and external factors, particularly balancing prices with demand. Selling franchises should be no different.
Support suffers to the point of reduced sales for the franchisee if fee are discounted? Perhaps in some instances, but it is the exception rather than the rule. Per franchisee support expenses between can vary tremendously between franchisors, and the use of technology and other efficiencies can dramatically reduce support expenses. Maybe the franchisor’s fees were too high to begin with and now they are drifting in line?
A few commenters missed the point and disagreed, arguing that reduced fees makes it almost certain you’ll earn lower returns. My response:
Come on – I wasn’t suggesting investors focus on year one returns, nor was I suggesting you ignore non-financial issues. I am suggesting that a franchisor reducing upfront and ongoing fees often can, but not always, make the investment more attractive.
Projecting your return on invested capital is based on the entire expected life of the investment. After you review your expected return on invested capital, then you consider and adjust for intangible factors such as franchisor quality, location, levels of controllable and non-controllable expenses, desired income and investment return given the risk, alternative investments, and so forth.
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:
Discounting hasn’t worked so far for Chili’s and Applebee’s who began offering 2 for $20 meal deals. The problem is total customer traffic is off and these discounts tend to amplify the problem because profit margins are reduced on the customers that do come in. Even P.F. Changs, and Benihana are seeing 10%+ slowdowns in sales just from a quarter ago.
I was browsing a few blogs and surprised at how many “we just make simple great burgers, fries and shakes” restaurant and franchises were popping up. Some are going all-organic, most aren’t. McDonald’s new higher-priced Angus beef burger is considered a response to the better burger trend.
Most everyone likes a good burger and are willing to pay up to $5 regularly for good one. I think the new wave of better burger joints will have some staying power compared to other pure trends like tart frozen yogurt, salad or pita/wrap specialty franchises.
From what I’ve seen already from clients, these aren’t wildly profitable until you reach $1 million or more in sales per location assuming your rent is under 7% of gross sales, and that’s very difficult to do.Let’s look at one city.
Franchise IT tech guy Todd Michaud wrote an very thoughtful piece on the overlooked issue of data collection and usage by the franchisor. He address the problems of the overt burden on franchisees to subsidize this data collection, and he exposes the fuzzy usage policies of the data. His recommended solution involves compromises in the data collection costs and also urges franchisors share the data and analysis back with the franchisee.
Franchisors love to sell multi-unit development agreements, but some of the reasons may not be so obvious.
Multi-unit franchisee typically pre-pay a portion of the franchise fees for each potential location. Similar to a non-refundable downpayment. Lately, many franchisee haven’t opened their additional locations or have slowed the opening pace, but the franchisor still keeps their pre-paid franchise fees, which is typically $5,000 – $15,000 per location. For example, if a franchisee signs an agreement to develop 10 units, then he may pre-pay a franchise fee of $10,000 per unit, or $100,000 for the rights to open 10 units. He still would pay the remainder of the (oftern discounted) franchise fee as each location is opened. The Development Agreements typically set a timeline for openings, and if you don’t keep to the schedule which is often opening at least one per year, then you lose your pre-paid franchise fee.
The parties are negotiating one franchise and development agreement rather than a new agreement upon each new opening.
Concentration of stores in one small area will help franchise sales in neighboring areas
Generally multi-unit buyers have more reserve cash, so stores are less likely to fail from lack of short-term capital.
A multi-unit franchisee is more likely to honor their penalty charges for closing a unit, compared to a single unit franchisee who has less assets.
BlueMauMau recently had an article about the increase in “better burger” franchises. I too have seen in the past two years an increase in the high-end burger space from both independent stores like The Daily Grind in Port Orange, FL (great store-baked buns) and franchises like Cheeburger Cheeburger and Five Guys. I recently performed a valuation on a group of high-end burger franchises for a client and I walked away with mixed feelings. The key driver of profitability was the lease costs, and the key driver for sales was location. The basic formula for a decent ROIC (return on invested capital) was convenient, high traffic location with a rent at or below 6% of gross sales. This ends up being the simple formula for most restaurants. Your restaurant’s cost targets should be:
Prime Costs (Food and Labor) a combined 60% (about 30% each depending on type of restaurant),
rent below 6% of gross sales,
interest costs below 1.2%,
owner’s net profit at least 10%,
which leaves about 22% of your gross sales left for overhead, maintenance, royalty payments, advertising, and other costs.
As you can see, an 8% royalty and advertising costs for a franchise cost takes a big chuck out your remaining 22% budget.The HARDEST part of predicting a restaurant franchise’s success is forecasting sales. Forecasting sales requires an analysis and comparison of other local restaurants, proximities (closeness to road, attractions, anchor stores, etc.), parking/drive thru, local demographics, competition, signage, brand awareness, and many other details. If your sales projections cannot confidently support sales at least 20% more than your break-even point, don’t do they deal.
My previous post highlight the not-so-obvious hurdles of co-branding. The omnipotent FuwaFuwaUsagi sent in photos of Brown’s Chicken attempts at co-branding. See his Brown’s Chicken photos below.
Brown’s Chicken is trying to do the Chicago street food theme plus mexican. It offers everything from pasta, ice cream, pizza, fried chicken, sausages, pasta, mexican, italian beef, and hot dogs. The problem is not necessarily the menu, but the execution, presentation and customer experience. It looks utterly silly to have so many brands in one cheap-looking tiny store.
Offering multiple unknown brands under one roof requires significant investment in the seating, presentation and overall customer experience. I’ve only seen one successful Chicago street food restaurant and it is Portillo’s / Barnelli’s combination. When you enter one of the premium stores you feel as though you have entered an old-fashioned carnival era. It is plain fun and food is quite good.
The below photos provide a great illustration of what to do and what not to do – stuffing too many confusing brands under one roof.
The franchisor’s job of communicating with franchisees is not as easy as you might think. Some franchisees simply shy away from anything technology, some barely speak english, and some franchisees expect regular courtesy phone calls.
To communicate news and information, brands like Qdoba, FOCUS and Salad Creations use newsletters, representative committees that will communicate back to the franchisees, and technology tools such as intranets, online videos, webinars (voice-over presentations viewed from the franchisees’ computer)
There has been a lot of talk lately, from Joel Libava’s Franchise King blog to recent MSNBC article, looking at whether 401(k) retirements savings should be used to fund a new franchise. Many franchisors for obvious reasons like this idea, such as Westshore Pizza & Cheesesteaks who focuses their sales pitch as a great 401(k) investment.Use 401(k) money to buy a franchise? My legal and financial opinion is almost always a NO! It is too risky to gamble your needed retirement funds in a franchise. If you need to tap your 401(k) to buy a franchise, you cannot afford to buy a franchise. If your entire retirement life is already FULLY funded and you have plenty of cash, then use your excess cash for the franchise opportunity.
Professional investors always take a little cash off the table, and your 401(k) is what you took off the table. Keep it there, don’t risk it away. You could easily lose ALL your money in a franchise, but you couldn’t lose all your money in a 401(k) even if you tried. Additionally, a single unit franchise will almost certainly not make enough money to payout and match a six-figure retirement account in less than a decade.
Tax and Match Advantages – Big DifferenceIs 401(k) a good investment in the first place? YES! Since your 401(k) investments are done with pre-tax income, you are saving about 30% more than you would have with after-tax income. Plus, an employer match will nearly double the money that goies into your 401(k) than if you just invested the income from your final paycheck. Upon retirement, you can control the 401(k) withdrawals to minize income taxes. Even if the employer is not matching, the certainty of pre-tax investing is powerful because it is taken out automatically, but once the paycheck hits your bank it is much more likely to be spent rather than invested.
A 26-year-old woman became the youngest franchisee in the Schlotzky’s system. Is she too young? You may think, until you read this:
Jessica Johnson worked at the Schlotzky’s in Teays Valley for nine years – working her way from cashier to manager.Then in October, even though some people thought it was a little crazy, Johnson got a Small Business loan and bought her very own store.That made her the youngest franchisee in the Schlotzky’s chain.”I was not scared to do this because I believed 100 percent” Johnson said. “I knew it was something I wanted to do and if for whatever reason it didn’t work out I knew there was someone looking out for me and it wasn’t meant to be.”Johnson says she has been focusing on catering, delivery and customer service to keep profits up despite the economy.
She is probably more experienced and ready than 90% of Schlotzky’s independent franchisees.
You would think that if a retail business closes, those lost sales would be reallocated to other stores in the area. Brownsville, Texas is finding that not to be the case when stores such as Mervyns, Hooters, Taco Cabana, Circuit City, Starbucks, Petco, Kay-Bee Toys and Linens-N-Things closed.
During less tumultuous circumstances when one store or restaurant closes its sales shift to another business. But these are extraordinary times. As stores have closed it appears they are taking a portion of their sales receipts.According to Pete Gonzalez, deputy city manager and chief financial officer for the city of Brownsville, sales tax allocations are down more than 1 percent through the first four months of the fiscal year starting in October.And the trend could be accelerating. Total collections for January and February of 2009 are down 7.1 percent compared to the same period in 2008, according to the office of the Texas Comptroller of Public Accounts.
Other city’s sales tax “revenues” are down compared to the same month last year, too:
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…)
The franchisee that owns all 90 Waffle House restaurants in Central Florida has filed Chapter 11 bankruptcy largely to stop the parent company from kicking it out of the 1,600-store system. Northlake Foods Inc., which is controlled by W.B. Johnson, an Atlanta entrepreneur, filed for the bankruptcy court protection in September. By then, Johnson and his partners in the franchisee group had been fighting one another in court for more than a year.
Waffle House Inc., the Norcross, Ga., company that owns the chain and the rest of the Florida Waffle Houses from Tallahassee across the Panhandle, argues that Northlake’s franchised stores would be profitable had it not been for the way Johnson and his partners split up their personal ownership of assets to settle their own differences.
A partner in the law firm DLA Phillips Fox in Australia cites Iowa as an example of what happens when a government over-regulates franchisors.
“We have seen the effects of over-regulation in various countries and notably also the US State of Iowa where the franchising sector shrunk substantially and franchisors deliberately avoid franchising into Iowa, resulting in lost contribution to GDP and job creation. Various attempts were even made to have the 1992 Iowa Franchise Act declared unconstitutional as it is considered to unlawfully interfere in contractual relationships,” Conaghan said.
Is Iowa overreaching? You be the judge. You can read more about the drama in Iowa franchise law over the past 15 years here.
Iowa (link to current regulations) has gone to great lengths to protect the franchisee. Below are examples of the protections:
restrictions on the franchisors ability to refuse a transfer,
imposes financial liability on franchisors who permits encroachment that adversely impact a franchisee’s sales,
restrictions on “good cause” for terminating or not renewing the franchise agreement,
franchisors cannot require franchisees to sue in another state,
good faith required in honoring the franchise agreement,
independent sourcing must be permitted,
very limited non-competes after the franchise agreement is terminated, and
franchise agreement must apply Iowa law
Some of the current political debate in the United States revolves around regulations, which really means imposing rules on private contracts. Governments must balance regulations with encouraging businesses to operate in your region. In Iowa, many franchisors simply choosing not to do business there.
For franchised concepts, sales are diffused throughout the entire system, with the franchisor, or parent company, taking a little off the top for themselves in the form of royalty payments. Costs are also shouldered by the franchisees.
The difference between franchisee and company-owned models is evident in the effect fluctuations in same-store-sales, a closely watched industry metric, have on earnings.
At Darden, for example, each percentage point in same-store sales accounts for a roughly 14-cent swing in earnings per share, or roughly 5.1% of annual earnings, according to Larry Miller, restaurant analyst at RBC Capital Markets Inc. Compare that with McDonald’s Corp. (MCD), the fast-food giant that owns a little over 21% of its more than 31,000 stores, which sees EPS move about six cents, or 1.7% of annual earnings, for each percentage point change in comparable sales.
The relative isolation of franchise concepts from same-store-sales swings is one reason why investors have flocked to place their money in companies like McDonald’s, whose stock is up about 29% over the last 12 months, and Burger King Holdings Inc. (BKC), which owns about 12% of its roughly 11,500 stores and whose shares are up almost 9%.
“Right now, people are crowded around the defensive investments,” Miller of RBC said. Comparatively, Darden has lost more than 27% over the previous 12 months, while its casual-dining competitor Brinker International Inc. (EAT), owner of Chili’s Grill & Bar and others, has lost nearly 31%.
To be sure, the mix between franchisee- and company-owned stores is far from the lone factor affecting stock performance. Also contributing to that is a penchant for consumers to “trade down” and eat at fast-food joints rather than sit-down chains.But several chains in recent years have taken measures to transfer some of their company-owned stores off their books. DineEquity Inc. (DIN), formed after the merger of Applebee’s International Inc. and IHOP Corp., is re-franchising its Applebee’s locations, selling them off to investors.
Brinker has also said that its near-term focus will be less on company-owned restaurants, which make up a little more than 55% of its 1,600-plus eateries.
I’ve become much more interested lately in the study of Customer Experience, a rapidly growing field especially in retail and restaurants. Every touch point with the customer, both before, during, and after the visit, impacts the customer’s decision to buy. In franchising, the customer experience is mostly defined by the franchisor, with only minor execution responsibility for the franchisee. The store layout, marketing, the parking lot, the type of flooring, the web site, the lighting, the registers, employee training, customer service processes…all contribute to the customer experience, which in turn, contributes to repeat and referral sales.
Understanding the elements that make a customer experience successful is critical when evaluating a franchise opportunity. Before you can evaluate it, you need to understand what makes a good and bad customer experience. Learning and keeping tabs on the trends in customer experience is easy with blogs. Here is a list of 36 blogs in the area of brand and customer experience.
You seem to be assuming there are profit margins. Why is that? Please be aware that you need to go back in time and recalculate old numbers for current lease obligations. FuwaFuwaUsagi […]
Is this the same Paul W. Steinberg who failed to pay the taxes on his franchise operations to the extent of over $33,000 with the result that NY State had to go to the expenses of issuing a series of Tax Warrants against him. Go to: http://appsext8.d... […]
Quote from: FuwaFuwaUsagi on February 16, 2010, 05:03:15 PMThe Pundit writes:I was browsing through old posts and came across this one. It's a great one for all to read.My reply:Thanks for the kind words Ryan, but did you up... […]
The Pundit writes:I was browsing through old posts and came across this one. It's a great one for all to read.My reply:Thanks for the kind words Ryan, but did you up my karma points - NOOOO!!!!!! Cheap &(*%$&^ - LOL!!!Once a year, whether ... […]
I thought Obika, a Fresh Mozzarella Bar concept from Europe, would do fine in the big cities and may ultimately make a good franchise, succeeding by shadowing the locations of Au bon Pain. I assumed their dozen overseas locations would have been prepared a powerful USA launch. But, the NYC location is not earning universal fondness from New Yorkers. 
Elevation Burger, the well branded organic better-burger franchise, 
Over at the 
I like 
The franchisor’s job of communicating with franchisees is not as easy as you might think. Some franchisees simply shy away from anything technology, some barely speak english, and some franchisees expect regular courtesy phone calls.
A 26-year-old woman became the youngest franchisee in the Schlotzky’s system. Is she too young? You may think, until you read this:
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