[updated so moved back to the top] Founded in 1999, Spicy Pickle is not have a good run.  In 2008 the company’s income was $4.4 million but their expenses were $10 million, for a loss $5.6 million.  In 2009 income was $4.1 million, and they slashed expenses and payroll to $6.1 million, for a loss of $2 million.  They now have $800,000 left in the bank.   They are desperately working on a new round of financing.   I’d have to see unit performance and lease rates, but it could be an attractive acquisition for veteran QSR investor. It also franchises a brand called Bread Garden Urban Cafe…a Canadian sandwich and bakery QSR I never heard of.   The franchisor employs 28 people. Update: March 18, 2010, 10:00PM CST I updated the above financials stats with more details.  I was still curious about Spicy Pickle’s financial predicament so I did more research. Back in 2007, Spicy Pickle needed to raise more money.  So it sold preferred equity that gave the holders superior rights to its assets and priority to dividend payments, and I’m sure other special treatments were in the agreement like rights of refusal for issuing more preferred equity.  Fast forward to 2009, and Spicy Pickle needs money again.  What’s left to give away?  Not much, so it had to buy back the preferred equity.  In 2009 with around $2 million in cash left, Spicy Pickle paid $1 million of its common stock and $800,000 cash to buyout the preferred equity holders.  Clearly they wanted those preferreds out!

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.

Elevation Burger, the well branded organic better-burger franchise, closed it’s Baltimore franchise.  Reviews were pretty bad. 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, …

I’m a local Chicagoan so Potbelly’s Sandwich Works news is interesting to me.  As you’ve probably heard, Potbelly is now franchising their potbelly stove themed restaurant.  Their web site lists the total cost to open between $500k-$750k with a heavy $40k franchise fee. I predicted this early in 2009 after I noticed job posting listing franchising experience and a little snooping. A previous insider comment to a blog post on Potbelly has always stuck in my head which makes me pause about the opportunity.  I’m pretty sure I know the person who wrote the comment: Potbelly is another stab in the dark venture that suffers from ridiculous logistical design, high labor costs, exorbitant pricey locations, and excessive buildout costs.  Is there any wonder thay GREw so much.  did you expect them to just sit on the 100,000,000 raised by Starbuck’s Maveron Group.  funny, potbelly has turned one quarterly profit in about 6 years and had three presidents in three years.  The lines which everyone seems to think are the sign of success are a sign of basic incompetency and presume people will continue to buy into hype for a three day old bun baked by Turano (same as the other great success story Quizno’s ) and generic low quality meat that’s run through a conveyor oven which can’t be delivered or catered without serious degradation in quality.  other than the expensive logo vanity packaging someone and the illusion of quality based on 500,000 of faux antiques, please explain what is original or significant quality.  the sandwiches are the smallest, the most expensive per ounce, and the worst produced in terms of speed and efficiency than any I have ever seen and the lines aren’t looking too long these days.  Nothing angers me more than a hot concept  and has …

A recent study lumps tanning in tanning beds in the same caustic category as arsenic and mustard gas. The tanning industry is simply a rental business, and the rental business can be very lucrative.  Just ask my hero Wayne Huizenga who made billions from starting integrated rental businesses Waste Management, Blockbuster Video, and partly Autonation. The franchise tanning industry has been positioning itself for a reduction in the ultraviolet tanning beds with the spray tan alternative.   Most have purchase Mystic tanning beds (see video below) that can be rented in the same manner as bulb beds, plus some locations are offering spray-on artists to spray on manually that perfect tan with a high-end spraying device.  Spray tanning has been booming most evidently in the celebrity ranks, with many celebrities even hiring their own full time spra-on tan artists.  Lindsey Lohan is even being sued for allegedly stealing the formula for her new spray tan retail line.  All this points to tan growing trend (remember, the trend is your friend) of spray tanning consumers.  Can traditional tanning franchises offering spray tans grab a sustainable piece of this emerging spray tan market?   In the short term, probably yes. But it will take five-figures of investment and marketing for each location.  Customers previously visited tanning salons to rent 20-minute increments on tanning beds because tanning beds were too expensive to purchase for the home.  But, consumers can now buy spray tan bottles at Walgreens for $5.  The key for the tanning salons is offering customers 1) the “spray on artists” and 2) machines that spray the perfect tan.  Self application of tanning lotions can leave a person looking laughably orange if applied to heavily or unevenly, or left on too long.  So the edge for tanning salons is to have machines and people …

Image by RACINGMIX via Flickr I’ve always been very interested in co-branding. It seems to just make sense to combine operations and leverage resources. An early co-branding franchisee of KFC and A&W speaks about his co-branding experience. “I think the real lesson is, you’ve got to spend the money and do it first class,” he says. “If you try to go in and nickel and dime it, not buy all the equipment, not buy all the seating, not buy all the signage, not train all your people, not have a great manager—it’s just all the same things that we know will work in any restaurant. If we want to be successful, we’ve got to do it right.” White’s results are exactly the same as what Tricon franchisees discovered when co-branding KFCs and Taco Bells. “When we started introducing Taco Bells into KFC in the multi-brand program,” says Gary Masterson, senior director of franchise development for KFC, “we referred to the early program as ‘lick and stick,’ where we just took a KFC and put a Taco Bell sign over the drive thru, changed the pylons from KFC to Taco Bell, and maybe a couple of minor changes to the decor elements, but nothing major. It was just an investment of maybe less than $50,000. “The impact on sales was nowhere near as great as the current program,” says Masterson. “Today, if you want to build a Taco Bell in a KFC, you have to reskin it. You have to tear off the outside of the building and introduce the Series 6000 multibrand look, which is an equal mixture of Taco Bell and KFC. Those restaurants are performing at much higher levels of sales performance than the early ones.” It would be nice if the story could end here, but …

Australian franchisees have similar gripes to U.S.A. franchisees – disclosure issues and the renewal rights in agreements for franchisees. It has not always been so crystal clear when a franchise chain collapses and there is an urgent need to clarify the legal rights, obligations and ranking of franchisees in a liquidation or sale of the business by receivers.            The article brings up an interesting ethical question:  Is it legal or ethical for Franchisors that are at the brink of collapse to recruit new franchisees to their stricken businesses even as they face the very real prospect of bankruptcy?    In my opinion, the legal and ethical answers are similar.  The franchisor must not lie or mislead in the sales process and it must disclose risks accurately, but within those boundaries it should do what is necessary to survive.  Does a cash starved franchisor have tell a prospective franchisee – “We need to sell 10 more franchises this year or we will go bankrupt and you will lose your license” ? No, I do not believe that is or should be a requirement because many businesses live on the edge of financial survival.  But, if the franchisor knows that bankruptcy or winding down the business is a 100% certainty, I do believe the franchisor should ethically stop selling franchises, inform the franchisees of the situation, and work out a sale of the assets in the best interests of all stakeholders.  Franchisors who sell a few more franchises just to pay off some bills or salaries as they wind down the business are indeed unethical. Being a franchisee in a larger system does have advantages if the franchisor goes bankrupt.  The likelihood is very high that some group will acquire the assets and enable the franchisees to continue operating.  Or, worst case, the franchisees themselves could …

I would hate to be a franchisor in the meal assembly business right now.  They have been getting hammered in the press almost weekly across the United States.  Here are articles JUST IN THE PAST WEEK! Losing Their Appetite, The Columbus Dispatch (I am quoted in the article) Investor Sues Failed Suzanne Somers’ Meal Prep Business, Lexington Hearld Leader The only bright spot is that pre-assembled carry-out meals seems to be working, which ironically is opposite of the initial premise of the business.   Can this pre-assembled model save the industry?  Probably not, because most people know that business model simply as a “carry-out restaurant”. The meal assembly business concept sounds enticing – a fun business with an obvious benefit where professional women socialize as they prepare healthy meals for their households, leaving the mess behind.  If you were thinking of getting into this business and asked your friends their opinion, most would say “Yeah, that sounds like a cool business.  I’d use it!”  But, your friends would be leading you estray.  Unfortunately, “good ideas” alone won’t make you money or ensure a sustainable business.  The primary problem with this industry is getting customers in the door and keeping customers coming regularly (like most businesses).  Franchisees had everything going against them and stood little chance of succeeding – higher rents in high-trafficed streets, no initial brand recognition, requires change in customer habits, requires times and hours on the customers part, most need to be educated on the concept and its benefits easy concept for franchisors to develop and launch, so competitors came fast customers’ brand loyalty is negligible most ingredients more expensive “all natural” and “organic”;  higher rate of perishables I hope this industry can work things out, primarily because it does offer a convenient service that can help families be healthy.  And healthy, less stressed families are generally happy families.  …

Former Petland Inc. franchisees are suing the Chillicothe chain for fraud, alleging the stores are doomed from the start – and the company knows it….Melick estimates the average investment per franchisee totals up to $250,000, and the firms have been in contact with more than 40 franchisees. The lead plaintiffs claim Petland fraudulently induced them to start a pet store when it knew, or should have known, the shops couldn’t succeed. A major allegation from franchisees, Melick said, is that pets supplied to the stores through Petland’s vendors were sick or dying. Melick compared the franchisees’ problem to a restaurateur opening a new business and sending dozens of people to the hospital for food poisoning in its first weekend. “For a large group of these franchisees, sick puppies is a problem when they open,” he said. “You just can never recover.” source

Why do many franchisors tend to reduce their holdings of company owned stores?  To stabilize earnings from same store sales swings. Safety In Franchisees 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 …

If you were looking for a location for your new coffee & bakery business, would you commit to a location that had a Homer’s restaurant and Erbert & Gerbert’ both fail there within the past year?   And, direct coffee competition from Starbucks, Kopeli and The Coffee House are all within two blocks?  I would be extremely hesitant. Nevertheless, aspiring franchisor Natalie Bubak of Lincoln, Nebraska will open a nuVibe Juice & Java in the serial failed location.  Gutsy. After Homer’s closed last May, Erbert & Gerbert’s lasted only a few months, apparently a victim of competition from downtown’s plethora of sandwich shops. There’s also a great deal of coffee shop competition in the area — Starbucks, Kopeli and The Coffee House are all within two blocks — but Bubak said she thinks nuVibe is different enough that it will complement, rather than take from, the existing coffee businesses. “I think we’re going to help each other, really,” she said. Besides coffee, nuVibe also serves all-natural fruit smoothies and gelato. And Bubak said she’s planning on adding some breakfast and lunch items to the menu, including hot cereal and soups. She said the new breakfast items will help fill what people have told her is a void in downtown. Bubak said she has the opportunity to have expanded offerings at the downtown nuVibe because the space is so much larger — 4,500 square feet compared with the 1,500 square feet she has at her Pioneer Woods location.

Julie 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. …

Dream 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 …

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.

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

Jan 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 …