Online Ordering

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.

McAlister Franchisee Doing Well

mcalister_counter.jpgThis 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

Loan Balance: $750,000.00
Loan Interest Rate: 8.00%
Loan Fees: 0.00%
Loan Term: 10 years
   

Monthly Loan Payment: $9,099.57
Number of Payments: 120

Cumulative Payments: $1,091,948.32
Total Interest Paid: $341,948.32

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.

Dippin’ Dots Competitors

[Post prompted by a comment on this blog]

Many people believe Dippin’ Dots has a monopoly the cryogenically frozen “popcorn” ice cream.  However, the Dippin’ Dots patent was invalidated by the USPTO in 2007, in part because Dippin’ Dots founders had made sales of a similar beaded ice cream product to over 800 customers more than a year before submitting its patent application, which sales were not disclosed to the PTO – thus the prior art was obvious. (read the court’s ruling here pdf)

Today, there are two main competitors of Dippin’ Dots – MiniMelts and MolliCoolz .

Charitable Goals of Franchisees

I found this article interesting about a group of Boston Pizza franchsiees and their fundraising goals. Even if the franchisees do not have the funds to make significant contributions to charities, organizing or participating in charity events by providing products and services is usually an efficient deductible expense that can be more effective that advertising.

The Enrights’ restaurants have raised more than $600,000 for the Boston Pizza Foundation since 1999 through various fundraising initiatives and partnerships with local businesses.

In the past two years alone, their 10 restaurants across Winnipeg have raised more than $300,000 for the BP Foundation through its Valentine’s Day promotion.

Richard and Kim Enright and their franchisee partners have also developed a $100,000 scholarship endowment fund for the University of Manitoba’s Faculty of Education.

Their Garden City location’s “Celebrity Server Night” featuring the Winnipeg Blue Bombers, Winnipeg Goldeyes, Team Canada athletes and entertainers, raised more than $5,000 for the Seven Oaks General Hospital Foundation.

Real Estate Requirements

Ever wonder what the real estate selection criteria look for a typical sandwich shop? Below is the criteria for a sandwich shop called Which Wich. Landlords are not often willing to dedicate parking spots to particular tenants as noted in the criteria. If you were considering being a franchisee and you were given this criteria, and you plan to open a store on a busy street that only provides street parking, make sure to get agreement from the franchisor prior to signing the franchise agreement.

Self-Service Kiosks

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.

Tart Frozen Yogurt a Fad? Roll Your Own?

Pinkberry CrazeJ. Emilio Flores for The New York Times

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 pdf) (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.

No Financial Disclosures – The Excuse

“We cannot provide you with any financial results of our existing franchisees because the FTC and/or state law prohibits it.”

I can’t count how many times I’ve heard directly from franchisors that they choose not to disclose financial results or franchisees because they are prohibited by law. That is an outright lie, and at the very best, extraordinarily misleading. The FTC wants to encourage franchisors to provide as much financial guidance as possible, but that guidance must be delivered in a consistent and regulated manner so as not to mislead the potential franchisee.

On Michael Webster’s BizOp blog, he looks at Romp ‘n Rolls bogus claim that they do not provide the financial results of their franchisees because FTC prohibits it.

An insiders view on why eBay Franchise Drop Stores failed

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

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

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

Read the whole story

Cross Posted at Let’s Talk Franchising

To Franchise or Not to Franchise?

Franchise Performance StudyPerformance differences between corporate-owned and franchised hotels are slim to none, according to new research.

Leah Sipher-Mann h Sipher-Mann writes in Michigan in the News that, for a company pondering the question, “To franchise or not to franchise?” new research from Michigan’s Ross School of Business suggests that performance differences between corporate-owned and franchised outlets, when chosen right, could be slim to none.

Ross Professor of Business Economics and Public Policy Francine Lafontaine and colleagues Renáta Kosová of Cornell University and Rozenn Perrigot of University of Rennes, studied the effect of vertical integration on the performance of individual hotels. They found that a company’s decision whether to franchise or own a particular hotel has little effect on yield (average price) or performance.

Lafontaine and her team studied an unnamed multi-chain hotel company that has both franchised and corporate-owned hotels under each of its several brands, running the gamut from budget to luxury. They collected data to determine whether organizational form for each hotel has an effect on any of three outcomes: monthly revenues per available room (i.e., what the industry calls “RevPar”), price or yield (average room rate per month), and monthly occupancy rate. Across all three variables, Lafontaine and her colleagues found that franchising per se does not have a statistically significant effect.

“We conclude that the firm chooses which outlets to franchise and which to own in a way that yields no differences in pricing or performance, in the end, between the two sets of hotels,” the authors state. “This result is important as it suggests that when firms can choose, they indeed adjust organizational form in such a way that there are no real differences in outcomes.”

“This does not mean that franchising and company operations do not have different incentive effects, because they do,” says Lafontaine, “but simply that firms are smart about how or where they choose to rely on these differences.”

In the past, empirical evidence had suggested there were persistent performance differences between corporate-owned and franchised businesses. However, the authors note that much of that evidence comes from studying firms that have been forced into a particular organizational structure by legislative intervention. For their research, Lafontaine and her colleagues instead studied a situation in which the decision-maker (here the hotel company) was not forced by legislation into its particular structure.

The authors also ruled out that their findings might be driven by other potential influences on the hotels’ performance such as the presence of air conditioning, swimming pools, or restaurants, as well as proximity to an airport or train station.

“We view the results as suggesting that multi-unit firms can choose organizational form in a way that is responsive to the differences in market conditions across outlets, such that when all is said and done, organizational form itself has no direct effect on outlet-level performance or pricing,” says Lafontaine.

Lafontaine and her team recognize that while their findings are conclusive, the evidence is limited to data from a single company. Future research might strive to include data from multiple firms and different industries.

Cross Posted on Let’s Talk Franchising

Invest $240,000, but don’t hold me responsible for anything!

Franchisors are always protecting their butts to the fullest extent possible, and that is often what franchisors hire me to do as their attorney. But, franchisees should be aware the rights they are giving up when signing a release, such as the one below from the 2007 UFOC of Snap Fitness.

The release requires the franchisee to give up any right to sue for any reason. Many U.S. states reserve certain legal action by franchisees to protect their financial investments from fraud, making the release unenforceable under certain circumstances. But signing a release does in many situations prevent a franchisee from using the courts to enforce a right or to protect themselves. And if you can’t sue, the franchisee will have little leverage over the issue when dealing with the franchisor.

Below is the release from Snap Fitness.

Read this doc on Scribd: snap-fitness-release

Franchise systems that train extensively, help keep franchisees afloat, study says

Steven Michael, UIUCJan Dennis, Business & Law Editor of News Bureau, reports that a new study co-written by Steve Michael a professor of business administration in the University of Illinois at Urbana-Champaign reveals that fast-food restaurants and other chain outlets are less likely to fail when super-sized training programs prepare fledgling owners for the challenges ahead.Advance, in-depth training on everything from bookkeeping to dealing with customers and suppliers is a key to survival for franchise outlets, said Steve Michael, a professor of business administration in the U. of I. College of Business.

But while some chains put aspiring entrepreneurs through months of schooling, others turn them loose in as little as two weeks, increasing the odds of failure, said Michael, whose study was published in January’s Journal of Small Business Management.

“The notion of just watching while somebody else does the job for a while is a mistake,” Michael said. “People need to realize these are sophisticated businesses that require extensive training. The more time you spend at Hamburger University or Dunkin’ Donuts University, the lower the failure rates.”

Michael and Florida State University business professor James Combs studied nearly 90 national restaurant chains to gauge whether franchisors contribute to the success or failure of franchisees, which number about 700,000 worldwide in industries ranging from lodging and office supplies to tax-preparation and cleaning services.

Along with training, franchisors can help keep franchisees afloat by pumping money into advertising that promotes the company brand, according to the study, “Entrepreneurial Failure: The Case of Franchises.” “Chains that are out there promoting themselves create value and drive up demand. When they don’t, franchisees are more likely to fail,” said Michael, who says the study is the most extensive look to date at how chains influence the fate of franchises.

The study also found that rules set down by some chains help franchise outlets succeed, such as offering exclusive territories that restrict intra-brand competition or requiring franchisees to be owner-operators. “Franchisors could be viewed as bullies for forcing owners to actually manage the franchise, but it helps both of them survive for the obvious reason,” Michael said. “If someone puts their full time and effort into an operation, they’re more likely to be successful.”

Michael compared his findings with those of previous studies on the keys to success for chains and found that overall what helps the franchisee survive also helps the franchisor survive. The lone difference, he said, is royalty fees, which tend to help franchisors but hurt franchisees. “It’s often billed as a symbiotic relationship in trade publications and the fact is that seems to be true,” Michael said.

The study found that 13 percent of franchise restaurants in the survey failed – higher than results of some previous studies but far lower than failure rates for traditional start-up businesses that can approach 70 percent. But driving franchise failure rates even lower would be welcome news for the nation’s economy, with chains accounting for more than 40 percent of U.S. retail sales annually.

“It’s a big chunk of the economy,” Michael said. “And it’s a growing part of the economy as more people seek self employment, either because of changes in the macro-economy or just because they don’t want to work for someone else anymore.”

Cross Posted at: Let’s Talk Franchising

Dairy Queen Remodeling Fight

dairy-queen.jpgDairy Queen franchisee associations with members in Arizona, West Virginia, Ohio, Virginia, Maryland, Pennsylvania, Kentucky, Missouri and Illinois filed law suits to halt required remodeling:

Dairy Queen franchisees’ arguement:

The lawsuit contends Dairy Queen is trying to force franchise owners to spend between $275,000 and $450,000 to remodel stores to adhere to an unproven concept — one that will cost more to operate, double staffing requirements, and cut into profits.

“No one should have to make this conversion that is quite expensive unless they want to,” Caruso says. “If the DQ Grill & Chill concept was such a promising new concept, then the free market would solve this problem.”

That hasn’t happened, according to the lawsuit.

As of December 2006, the complaint says, just 105 Grill & Chill restaurants had opened in the United States. Some have performed poorly, and two have closed.

Dairy Queen franchisor’s argument:

Moreover, Mooty maintains no one is being forced to do anything. Dairy Queen does require about 70 percent of franchises to modernize restaurants periodically. But Mooty says Dairy Queen has capped the required investment at $75,000 for 2008, $85,000 next year and $95,000 in 2010. The required modernization should be no surprise to franchise owners because it’s standard in most of their contracts, Mooty says.

“It is not making somebody spend hundreds of thousands,” he argues. “And it is not forcing somebody to go to another concept.”

Mooty said it is the franchise-owner associations, which compete with the corporation to supply the restaurants, that are stirring up trouble. Dairy Queen is cutting margins on its supply business, which is hurting the associations, he contends.

“They are losing membership, they are losing market share and they are having to take more drastic measures in creating fear and concern.”