More Independent Tart Frozen Yogurt Outlets

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:

Surprise – Quiznos sued by Franchisees Again

quiznos.jpgSource: 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.

 

Performance of Franchisees’ Loans

dollarBelow 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
Golf Etc. 36 24 67
Cornwell Quality Tool 36 19 53
Matco Tools 30 95 316
Atlanta Bread Co. Bakery 30 18 61
Carvel Ice Cream 26 20 76

Note: Listed by percent of SBA-backed loans that failed between Oct. 1, 2000, and Sept. 30, 2007, starting with the highest rate. When percent is the same, companies are listed from highest to lowest number of total loans.

Source: Coleman Report

Meal Prep Trending Down

expert.pngJulie 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.

Subway Franchisee Upset

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.

First Watch to Franchise

First WatchWhen I lived in Cincinnati, First Watch was the place for the “power breakfast”, where movers and shakers would gather to strategize over coffee and omletes.  Meeting with a venture capitalist or political insider?  You would likely meet them at First Watch.  There is no First Watch where I live in Chicago, but here to breakfast is big deal for meetings with local favorites the Four Seasons,  Orange, Bongo Room, and East Bank Club.

First Watch, the Florida-based chain with 76 company-owned restaurants in 11 states is planning to franchise this year.  It’s only open for breakfast and lunch, and is always located in affluent suburbs and downtowns.  Being closed for dinner, I was always skeptical that it could generate enough sales.  Apparently, that is not a problem.  Below

If the site meets our criteria, we think it’s a good time to build right now. We’ve weathered this economic climate pretty well so far. We have a very low check average [$7.50], we think we put out a high-quality product, and our value perception is high with our customers. We think that’s actually helping us. So far it’s been OK.

You’re not seeing declines in traffic or check averages?

We are not. We’re actually on our 25th straight year of same-store-sales increases. We’ve had 24. You never want to say that you’re recession proof, and we certainly don’t think we are. All we’re saying is that for the pressures that the consumer is experiencing now, we seem to be an outlet for that. We don’t know if it’s a trade from another dining occasion, trading off the expensive dinner to maybe a nice brunch on Sunday at our place. But we’ll take that.

Are you finding sites fairly easily?

No, I wouldn’t say fairly easily. We’re pretty disciplined in what we’re looking for, and we don’t like to waver from it. So to find sites that match all that criteria takes a lot of work and a lot of digging.

I will say, over the past two years, we’ve opened 11 and 14 restaurants respectively, which from a percentage basis, we were opening a large percentage of restaurants. Those stores are starting to mature now. Most of them are performing where we want them to be. Some are in markets where we didn’t have a lot of brand awareness, so we’re working a little harder to get up to our average unit volume.

Brand awareness is critical for all restaurants, as the Chief Marketing Officer confirms.  The beauty of franchising is that hopefully you can buy into an established, well-recognized brand that will immediate generate sustainable sales upon opening.

‘Homework’ Key to Restaurants

Great advice to aspiring restaurant operators from veteran Larry Ross who was there from the founding of Darden Restaurants and has been in the industry in various capacities for decades.

Q. Someone comes to you for advice on starting a restaurant. What do you say?

A. Do your homework, do your homework, do your homework. I’ve done a lot of business plans and I’m very good at putting together a 15-page assignment that’ll look like a home run, but it’s packaging. Don’t do that. It’s your life, it’s your money, it’s your dream … do your homework. What’s it really going to cost?

Worst-case it: How many restaurants are there, and how much business are they really doing? What’s the national trend? My advice has been for years and will continue to be, ‘Why don’t you not open a restaurant?’ It is a brutal business, the odds are against you.  Really, if you want to invest in a restaurant, go buy a meal once a week and invest as you go. If you really want to get it out of your system, go work in somebody else’s restaurant. But if I can’t talk you out of it, then do you homework, in every way.

Another piece of advice: Do not underestimate the importance of the location. And things like size, keep it small. You have to make one hugely successful before you can even talk about two. There are no real success stories of marginally successful single units that become multiunit chains. It doesn’t work like that.

Here are a few other insightful nuggets:

Q. We recently wrote about Sam Seltzer’s Steakhouse, Roadhouse Grill and some other restaurants’ closing in Lakeland and interviewed James Bronkhorst (owner of Reececliff Restaurant in Lakeland and Christy’s Sundown Restaurant in Winter Haven), who said, “I’ve been running restaurants on my own for 18 years now, and this is the worst I’ve ever seen it.” What are your thoughts on that?

A. He’s probably right. That stuff that started in the late 1960s where everybody was trying to buy restaurants and become restaurant chains started slowing down in the 1990s, but it was still growing. Today, the food-service industry is mature, so you don’t have millions of customers coming on line each day. If you’re going to grow, you pretty much have to take it out of somebody else. You can either generate it organically by getting new customers to your current business or you can generate it by buying another restaurant or opening another restaurant.

But what you see is same-store sales, as a better benchmark, start to go down or flatten out, and then your growth is really kind of artificial. That’s what we’ve been seeing the last couple of years. Growth has begun to slow down, so you see a lot of agglomeration, where this chain buys that chain. Same thing we’re seeing in the airline industry right now and we saw in the banking industry years ago. Well, the big news in the airline industry today is they’re canceling flights. Guess what restaurants have to do? They have to start canceling restaurants.

Q. Who’s in the best position to survive?

A. It’s supply and demand, capacity and demand. In Lakeland right now, we probably have too much capacity for the amount of customers and the amount of money those customers have to spend on their food away from home. The lower end of the spectrum, the Bob Evans, Denny’s, the sit-down restaurants that aren’t dinner houses, they’ll probably do fine. Their average ticket is lower, and again, I don’t stop eating out. When my gas goes up, and my credit card bills cost more, I don’t stop eating, I just trade down on the food chain. Someone like a Bob Evans or Denny’s, they get you – $6.95 is dinner. Carrabba’s at $12.95, maybe they’re losing some cover counts (customers), or Bonefish at $18.95, they’re losing some cover counts. The guys in the middle get squeezed.

Recent Same Store Sales, May 24, 2008

Below are select recent same store sales results from publicly traded franchisors and restaurants.

  • SONIC: March: 0.4% decline in system-wide same-store sales resulting primarily from weather-affected sales;  May:  system-wide same-store sales improved as the quarter progressed and returned to the company’s targeted growth range of 2% to 4%; additionally, traffic for the quarter was slightly positive
  • STONEY RIVER: 3.2% decrease in last quarter in same-store sales
  • OLIVE GARDEN: U.S. same-store sales, or sales at locations open at least a year, grew 5.8 percent at the Olive Garden during the quarter.
  • RED LOBSTER; LONGHORN STEAKHOUSE: Same-store sales fell
  • TEXAS ROADHOUSE: Expects its same-store sales to be flat to up 1 percent for the year.

Structuring the New Franchisor

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.

Franchisor Strategy: Let Retirees be Franchisees

Article (India)

Amid stiff competition from Chinese shoemakers, Bata India (BIL) is exploring a brand new franchisee model to launch its upcoming retail stores. It has decided to give older members of its workforce who are close to retirement an option to quit their jobs and run the new Bata outlets as franchisees.

Interesting approach to finding qualified franchisees. Most franchisors do not have this type of large operating company to leverage before they choose a franchise model, but those who do may want to try this route.

Using Weather to Increase Sales

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

Managing Staff, Help from Franchisors

This article provides a good primer on employment issues in the United States, and franchisee/franchisor liability.

The franchisor does expose themselves to employment risks even if it tries to protect themselves in the franchise agreement:

As employment law has evolved, the risk of potential liability to the franchisor under this type of arrangement has increased. In particular, a number of state anti-discrimination laws (such as those of New York, New Jersey, and California) impose liability upon third parties for aiding and abetting discrimination. Even where a franchisor takes a completely hands-off approach with respect to the franchisee’s employees, it may still face potential liability where it knowingly tolerates or condones discriminating practices. In practice, this type of aider and abettor liability now places franchisors in a Catch 22 position. If a franchisor knows of discrimination by the franchisee but fails to act, liability as an aider/abettor may result. Conversely, if the franchisor does take action, that action itself may lead to the imposition of liability as an agent and/or joint employer. This is further compounded by the fact that the size of jury awards and the willingness of juries to give large awards has also increased over the last few years.

Here is how franchisor, Jackson Hewitt, gives employment advice:

For example, Jackson Hewitt, the nation’s second largest individual tax preparation company, periodically surveys its franchisees to determine what issues are of most concern to them. It then retains independent employment counsel to provide seminars on those topics at its annual franchisee convention. The company also follows up with the franchisees by way of a post-seminar survey to ensure the training is effective and responsive to their concerns. Training on such things as how to properly interview and hire employees, what to watch for in dealing with discipline/discharge issues, and how to conduct investigations of employee complaints are particularly helpful to franchisees.

Employee training and posting requirements also should be addressed by both parties. Federal law, as well as most states, requires that employers post information summarizing the applicable employment laws on such issues as harassment/discrimination, wage and hour regulations, whistleblowing, and workplace safety. A recent visit to a franchise to interview witnesses with respect to a race discrimination charge revealed that there was not a single required posting on the employee bulletin board. When questioned, the franchise owner simply said “they (the franchisor) never told me anything about that.” Nor had the lawyer who represented him on the purchase of the franchise. As a result, the franchisee’s simple failure to make the required posting was used against it as evidence of its alleged discriminatory intent. This could have been easily avoided. Providing general guidance as to where the franchise may find the information for the state in which it is operating is a good way for the franchisor to do its part in promoting compliance.

Cash Discount for Customers

dimeInteresting article on gas franchisees offering discounts in Connecticut for customers paying cash.

Tala said Hess Corp. was fine with his decision to offer a cash discount. He knew that Connecticut law already allowed cash discounts, but banned surcharges for credit, and decided to begin offering a lower price on Memorial Day weekend after credit card sales became 90 percent of his business. They had been only 40 percent when gas was under $2 a gallon.

Tala said he wound up paying about $12,000 to $13,000 a month at his Newington store for credit card fees. He wasn’t making enough money to cover his costs.

Dream Dinners Hammered by Forbes

DreamDinners-OwnersDream 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

Financial Performance Representations

A good primer article on FRP (Financial Performance Representations) was posted by attorney Gary Duvall from the law firm Dorsey & Whitney LLP. He believes that two trends may increase the percentage of franchisors who will be using financial performance representations in the FDD:

  1. the general availability of cost-effective financial reporting software that communicates easily between franchisee and franchisor
  2. the new FTC Rule allows more information to be given to prospective franchisees outside Item 19 of the FDD.

Why, in Duvall’s opinion, don’t more than 25% of franchisors provide earnings claims? He gives three reasons:

  1. Lack of reliable financial data
  2. Variability of financial results due to each unit’s local business environment
  3. “Sell the Sizzle”, meaning unit results are likely lower than potential franchisees’ expectations

On a side note, one representative I spoke from an Arizona-based BBQ franchisor stated that he did not believe earnings claims were good for franchisees because they discouraged the franchisee from doing research.  I believe he was right in that providing an abundance of information and financial results may lessen the overall research done by a franchisee.  I don’t believe that is the primary reason these executives decided not to disclosure FRP.

Back to the article…Duvall adds:

if a franchisor has reason to know that franchisee profitability is extremely low, for example, that few if any franchisees are profitable, or that most franchisees will probably close in the near future, non-disclosure of these problems as a risk factor arguably violates the duty to disclose all material facts, although this is a grey area of the law.

Advice from a McDonald’s Franchisee in U.K.

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.