Jimmy Johns sales were almost twice Subway.

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.

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.

Article link in Business Week Birkel and Mauk [former district managers for McDonald’s) thought they could use their know-how to start their own business — as franchisees for Subway, the US sandwich chain. Full of hope, they scraped together their savings, took out a loan for €184,000 ($243,000) and opened a new fast food outlet in the town of Michelfeld in the German state of Baden-Württemberg. …. In the beginning, everything went better than they could possibly have hoped. The Subway system, which allows customers to select their own bread and fillings for their sandwich, was a big hit with customers. The two new entrepreneurs made as much as €16,000 a week. But after three months, turnover began to decline, eventually averaging out at about €6,000 a week. What with the costs of rent, electricity, personnel, interest and advertising, combined with high prices for tuna, chicken and bread and the fees charged by Subway, in the end nothing was left over for Birkel and Mauk. “We didn’t earn a single cent even though we ourselves often stood behind the counter for as long as 12 hours a day,” Birkel complains. After 15 months, bankruptcy was unavoidable — and the restaurant in Michelfeld was sold for just €20,000. “We lost everything we had spent years working for,” Birkel concludes bleakly. …. The franchisees’ objections begin with the English-language franchise contract, which makes a New York City court responsible for arbitration in cases of litigation. On a day-to-day level, the lack of territorial protection for franchisees is more annoying. The DAs are not paid a salary. Instead, they profit from the sale of licenses and receive a percentage of the monthly franchise fees — regardless of whether the franchisee makes a profit or a loss. The system puts the DAs under …

Franchisee’s can sometimes successfully challenge and win in arbitration and court battles with their franchisors. Subway’s founder Fred DeLuca lost his appeal to overturn an arbitration board’s decision that awarded Rottinghaus and Dowell, two midwestern Subway franchisees, $150,000 each. In 1997, DeLuca apparently didn’t want the two franchisees to be elected to the board of the Subway Franchise Advertising Fund, which distributes advertising money to Subway stores across the country. In 2001, the arbitration panel concluded that DeLuca violated Connecticut’s Unfair Trade Practices Act by pressuring the board to cancel the election and resolve new rules that prevented the two men from running. It only took 8 years for this grievance to reach a final conclusion 😉

in reference to: Doctor’s Assoc., Inc. v. Stuart This above case from 1996 illustrates many of the horror stories you read on this blog, particularly site selection and mandatory arbitration clauses. Site Selection: Several Subway franchisees sued Subway corporate for basically screwing them on site selection. First a little insight into Subway’s site selection process described in the court’s opinion. After a Subway franchise is purchased, Subway helps the franchisee to find a site for the Subway shop. If Subway approves the site, it requires each franchisee to sublease the premises from one of several real-estate leasing companies that are affiliated with Subway (red flag!). In 1990, Defendants opened their first Subway sandwich shop in Granite City, Illinois. Later they bought a second Subway franchise. Subway corporate allegedly promised to approve any appropriate site Defendants found for the second franchise in Bethalto, Illinois. After locating two potential spots in Bethalto, Defendants asked Subway corporate for approval, but were told that both sites were too close to another Subway sandwich shop located in Wood River, Illinois. Subway corporate then allegedly permitted another franchisee to open a Subway shop in Bethalto, at or near the spots picked by Defendants. Despite Defendants’ objections, Subway corporate made Defendants locate their second Subway store in Granite City, less than two miles from Defendants’ first store. The opening of this second shop cut into the sales of Defendants’ first Granite City shop. Subway corporate is your landlord. They can dangle an eviction notice in the face of franchisee to compel desired behavior. If Subway had the franchisee’s best interests in mind, that franchisor-landlord relationship could work in theory. Intuitively, you would think that maximizing the franchisee’s profits would maximize Subway’s profit, right? Wrong. (see The hidden ways franchisors make money off franchisees) Arbitration Clause: So …

As you’ve probably heard, Papa Murphy’s was acquired by a private investment firm for $180 million, about $150,000 per store.  I think it will turn out to be a good acquisition even with the steep price.  Papa Murphy’s has a combination of economic advantages that no other pizza chain has – 1)  it doesn’t have the overhead and capital costs of in-store baking, AND 2)  it is gaining strong penetration in grocery stores. I admit, from the consumer’s stand point, a take and bake concept is a little confusing at first. “You mean I have to bake my own pizza?”   But that impression soon fades.   The pizza in its raw form looks fresh and the final product cooked in the home oven is as good as pizza delivery.   One hurdle overcome by the industry was the difficulty of using a home oven to cook a pizza because it doesn’t brown up well with the ordinary pizza dough recipe.   To solve this, chains like Papa Murphy’s increase browning by increasing the sugar percentage and providing a disposable reflective baking tray. Another potential acquisition target is Homemade Pizza, a regional 25 unit chain in IL, MN and DC of classy take-and-bake stores where the average price of an “unbaked” large pizza is almost $20.   It seems to be doing well and has great branding.  Homemade Pizza pizzas are still priced on the high end because it is made with fresh and local ingredients.  The dough is prepared in a commissary to simplify store operations and reduce size requirements. _______________________________________________________ Update:  Below is more interesting history on Papa Murphy’s from a November 2009 article in Portland Business Journal.  Average store sales are about $535k. Papa Murphy’s is a holding of Charlesbank’s Equity Fund V, a $590 million private equity fund that …

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.

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.”

As if the sub sandwich category wasn’t crowded enough, Domino’s Pizza is adding sub sandwiches to its menu and delivery service.  The $4.99 oven-baked sub sandwiches will include classic favorites like Philly Cheese Steak and Chicken Bacon Ranch. The move comes five months after Pizza Hut began delivering baked pasta dishes as well as pizzas. And it will be a wake-up call for sub shops Subway and Quiznos, which find themselves competing with pizza chains. For the pizza giants, the message is clear: If pizza sales aren’t growing in a sour economy, maybe something else will. Besides the hot subs and baked pasta, some pizza chains also deliver chicken wings. “It’s an attempt by the pizza players to try to get back into being a growth industry,” says Ron Paul, president of Technomic, a restaurant research firm. “They’ve all lost their mojo.” They also are further conflating a fast-food world that’s grown jumbled. McDonald’s (MCD), Burger King (BKC) and Wendy’s sell salads and chicken. Subway and Dunkin’ Donuts have tried pizza. Arby’s, once roast-beef-only, now makes a killing on Market Fresh deli sandwiches and sells toasted subs. Domino’s U.S. same-store sales fell 5.4% in the second quarter after a 5.2% decline in the first quarter. Brandon says the move should boost Domino’s lunch business and expects lots of calls from groups of office workers. (The minimum delivery order is $8 to $10, depending on location, and delivery fees are $1 to $2.) Rivals are unimpressed. Pizza Hut delivers hot sandwiches regionally but is focused on growing its national pasta delivery sales, says Brian Niccol, marketing chief. Tony Pace, marketing chief of the Subway Franchisee Advertising Fund Trust, says, “Domino’s is watching our success and wondering how to get a piece of the action.” Half of Quiznos’ locations deliver, and …

Below is the Small Business Administration’s annual compilation of performance data on thousands of franchisee loans it has guaranteed covering loans made from October 1, 2000, to September 30, 2007. A “failed loan” below is when the SBA must step in and pay back a loan that it has guaranteed. However, does failure rate of a loan equal the number of failed franchises? No, because the chart below only captures the worst of the worst, when someone completely abandons their debt obligations. Definitions are tricky and can mask the true data. Franchisees who sell their units and pay off or transfer their loan or franchisees losing money are not caputred. But, the value in the report card can be a vague checklist for avoiding high-failing franchises. Hat Tip: WSJ REPORT CARD Class Leaders Franchiser Failure Rate Failed loans Total loans Comfort Inn 0% 0 158 Primrose 0 0 110 Edible Arrangements 0 0 104 Massage Envy 0 0 61 Holiday Inn Express 1 1 157 Culver’s Frozen Custard 1 1 150 Hampton Inn 1 1 88 Bruster’s Real Ice Cream 1 1 84 Little Caesars Pizza 1 1 72 Fastsigns 1 1 71 Super 8 Motel 2 8 363 Best Western 2 3 156 Choice Hotels International 2 3 144 Rita’s Water Ice 2 2 103 Arco 2 2 85 Zaxby’s 2 2 81 Anytime Fitness 2 1 65 Econo Lodge 3 4 119 Goddard 3 3 109 Subway 4 84 1,974 Dunkin’ Donuts 4 17 410 Sport Clips 4 8 191 Cartridge World Stores 4 5 112 Travelodge 4 4 91 IHOP 4 3 67 Class Trailers Franchiser Failure Rate Failed loans Total loans All Tune and Lube 48% 37 77 Philly Connection 48 30 63 Cottman Transmission 46 75 163 Blimpie Subs & Salads 37 58 158 …

Ace Hardware helping their franchisees by project weather-related sales: Ace Hardware’s Director of Inventory Control, Paul Sikes, pointed out that, “We have been able to make weather part of the DNA and culture at Ace, so that when we talk about sales opportunity, sales risk and past performance, weather is now just a part of that.” Sikes shared an example from ’07-’08 winter season when Ace substantially increased inventories for snow removal products based on Planalytics’ projections. “We made an extra $10 million in sales in a tough economy because we planned it and we bought it. We were able to service 91% on the hottest seasonal category I’ve seen in years at Ace because of the support of Planalytics and the actions we took off that information.” Subway franchised restaurants using weather to better understand buying trends: SFAFT is a non-profit organization that provides marketing support to Subway’s franchised restaurants. Adam O’Hara, Manager of Reporting and Analytics for explained in his presentation how the company isolates weather’s impact on sales through “a transaction-based model” specifically developed with Planalytics. “Our weather-driven demand number is tied directly to what percentage of our sales were up or down,” O’Hara remarked. “You would be amazed at the correlation between how our volume performs and how the weather performs.” Identifying the degree to which sales are impacted by weather enables SFAFT to better measure the effectiveness of advertising and to optimize the timing of programs going forward. Source: News Blaze

Clever. Pay for a survey about Super Bowl eating habits, get free publicity, get your brand associated with “healthy” and “Super Bowl”. SUBWAY Restaurants, which has long been committed to promoting “better-for-you” meal options among both children and adults, conducted an Omnibus survey of more than 1,000 Americans regarding their Game Day snack consumption habits and learned they overeat the most during the Big Game (27%)–trailing only Thanksgiving (85%) and Christmas (61%). More than half surveyed (59%) admitted to overeating during the Big Game and reported gorging themselves on nachos, fried chicken, chicken wings, pizza and other generic “junk food.” Methodology: An Omnibus survey conducted a telephone survey on behalf of SUBWAY(R) Restaurants of a nationally representative probability sample of households; 1,090 interviews were completed among adults ages 18+ (53 percent female, 47 percent male). Interviewing took place January 7-9, 2008.

This should be obvious to franchisees, but do not act or allow employees to act, point out, or otherwise draw unnecessary attention to an employee’s disability. As the below Subway franchisee discovered, it cost him $166k in court awards plus (I’m guessing here) another $75,000 in legal fees. Subway Franchise to Pay $166,500 for Disability Bias, Jury Rules in EEOC Lawsuit The Dallas jury of five women and two men awarded former area supervisor Tammy Gitsham $66,500 for lost wages and emotional harm and an additional $100,000 in punitive damages in the EEOC’s suit under the Americans with Disabilities Act of 1990 (ADA) in U.S. District Court for the Northern District of Texas. The EEOC charged in the case that Subway Owner Robert Suarez and one of his managers subjected Gitsham to a disability-based hostile work environment, including teasing and name-calling, because she is hearing impaired and wears hearing aids. EEOC presented evidence that Gitsham was forced to resign her position after both the owner and human resources/training manager repeatedly mocked her privately and in front of other employees, creating a hostile workplace, with taunts such as: “Read My Lips” and “Can you hear me now?” and “You got your ears on?”

After growing a successful franchise selling desserts, Bruster’s Real Ice Cream  is ready to serve up a full meal.Tim Schooley reports in the Pittsburgh Business Times, that the Bridgewater, PA, based ice cream chain recently began a strategy to co-brand its stores with The Nathan’s Famous Corp., the publicly traded New York-based hot dog chain known for its nationally televised Fourth of July hot dog-eating contests. So far, six of Bruster’s 260 locations have become two-in-one Bruster’s/Nathan’s stores, including the region’s first in Dormont, said Dave Guido, vice president of concept development for Bruster’s. Two more area locations are slated for conversions, said Guido, estimating that 15 to 20 Bruster’s could operate jointly with Nathan’s by the end of the year. While Bruster’s only began testing the co-branding strategy in February, and the Dormont location was the pilot store, Guido sees broad potential from early sales tallies, which he declined to disclose. “The results are going to tell the tale. But early on, we’re very, very happy with how it’s gone,” said Guido, adding the company is considering co-branding with other franchises, although he declined to name them. “If we continue to get favorable results, it will be an option for everyone who is an existing store.” Randy Watts, vice president of operations for Nathan’s, sees the co-branding franchising effort as a way for Nathan’s to reach new markets through Bruster’s territory, which extends throughout the eastern United States. “It seemed like a natural synergy for the two brands to use their real estate a little better,” Watts said. “We’re the No. 1-selling all-beef premium hot dog in the world. We definitely think they have a real top-quality ice cream brand.” Co-branding is nothing new for Nathan’s, which also owns Kenny Rogers Roasters. Nathan’s also operates joint locations with …

Quiznos CEO puts turnaround skills to work The former Burger King boss is applying his turnaround expertise to the troubled sandwich chain, whose dissatisfied franchise owners have complained about low profits, company operating requirements and the franchisee recruiting process. Since jumping into the fray in January, Brenneman has worked to reduce food costs by as much as 4 percent, improve communication with franchisees and test new products, like a Quiznos taco, to boost profits. … Last year, private equity firm J.P. Morgan Partners became an ownership partner, and Brenneman later became a partner through his company, Turnworks. Through the roller-coaster ownership ride, the chain expanded quickly, to at least 5,000 stores. Today it’s ranked third behind Subway and Arby’s by Technomic, an industry analyst firm.  Although Quiznos does not release much information, Technomic restaurant industry analyst Darren Tristano said Quiznos has average sales of about $425,000 a year per store while Subway has average sales of about $375,000. Quiznos’ success has come with growing pains. Lawsuits by franchise owners in Illinois, Michigan and Wisconsin allege the company draws in prospective owners, who pay $25,000 for a franchise, but doesn’t give them complete facts about restaurant locations and business operations. … Lawyer Justin Klein contends many franchisees sign contracts only to wait a year or more for the company to build a restaurant. The suits also accuse the company of requiring franchise owners to buy all supplies from Quiznos at higher prices than if they bought locally. The company denies the allegations and filed motions to dismiss the suits. Brenneman, meanwhile, has reached out to franchisees and targeted their food and other costs. If he can cut food costs by 3 percent and coupon discount offers by 4 percent, Brenneman believes he can add $25,000 to $30,000 in franchisees’ profits. …