The Friday Franchise Five: I’d Wouldn’t Buy These

I came across a few franchsies that I would not want to own:

  1. Snack-In-The-Box: UK based firm that delivers candy to the workplace (difficult to work and sell)
  2. Nick-N-Willy (founded by former Quiznos exec)/Take-and-Bake: this take-and-bake pizza idea where cusotmer get the raw dough with toppings didn’t catch on 10 years ago, and won’t catch on despite some short-term success driven by PR and unique gourmet toppings. Gourmet pizza that is already baked is where I’d make my bet if I had to enter the pizza business.
  3. The Dinner Station/Meal Assembly (check out the nice store pics): The industry is already seeing a high number of closures; I’d do this perhaps without a franchise
  4. MRI/recruiting franchise: I knew several smart people that tried to make the MRI recruiting franchise work, but had a very tough time generating any placements, and placements from MRI corporate contracts were nil (operating profits and same store sales were down from last year)
  5. It’s Just Lunch: Some locations have been turning over several times each year, with franchisees literally giving them away to escape the cash drain.

Pet Care Franchises and New Competition

dogCamp Bow Wow continues to sell franchises at a fast clip. They have a nice offering and compelling business model for pet lovers. But keep reading…

I’ve visited a good number of non-franchised doggie daycare and doggie hotels, and most were extremely well run and popular.

In my opinion, it’s not the type of business that requires the burden of franchise relationship. For example, Camp Bow Wow requires a $50k franchise fee, 6% royalty, and $300k-500k in total startup costs. A sensible, business-oriented person would ordinarily do much better spending that $50k on advertising and promotions, keep the 6% spread, and not be burdened by the franchise requirements should you have to scale back or alter your operations.

The Competition

The margins in this pet-care business are high, and the big boys have noticed. PetsMart have invested heavily to convert part of their stores into PetsHotel, providing services such as day and overnight care, grooming, training, groomed while staying at the “hotel”. Many locations also have The Pet Hospital with Veterinarians on-site. If I’m a franchisee, how do I compete? There are a few ways, such as pick-up and delivery of pets (I don’t think PetsHotel currently does this)…but that’s a time consuming endeavor and another layer of expense.

My Conclusion

This is a tough decision betweeen I’m Neutral On It or I Wouldn’t Buy It with respect to doggie day/night care franchises. We’ve listed a few pet franchises before, and I can imagine low-competition areas where you can get away with the cost/benefit of a franchise. However, in my own community which even has its own pet service review web site (Chicago), I wouldn’t buy it. There is no evidence here that a franchise give you a leg up on the heavy day/night care competition here.

– – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – –

Here’s a free tip for franchisors – start a franchise specifically for veterinarians called “VetPet Suites”. This franchise would be sold ONLY to veterinarians. Vets are easy to target in your sales effort, they are generally doing well financially, and can leverage their own reputations to build both the day/night pet care buisness and simultaneously expand their own vet practice. They will have an immediate competitive advantage over all other non-vet pet care business (except PetsHotel with The Pet Hospital).

Fall Into the Gap

gapGap, Inc. uses the franchise distribution model in Southeast Asia and the Middle East to enter new markets and comply with local ownership laws:

Gap Inc. signed its first-ever franchise agreement in January with Singapore-based F J Benjamin. That opens the doors for up to 30 Gap and Banana Republic stores in Singapore and Malaysia by 2010. The first South East Asian stores will open around the same time as the first Middle Eastern stores.

Franchising is an effective way to skirt local laws against opening foreign-owned stores. The right franchise partner also helps a retailer tailor its merchandise to local tastes.

2006 First Quarter – Yummy Same Store Sales Increase

  • Yum! Brands (KFC, Taco Bell, Pizza Hut) U.S. blended system-same-store sales increased 5%.
  • Colony-based Pizza Inn pizza chain reported a 1.1% increase in same-store sales, or sales at stores open at least a year, during the first quarter 2006.
  • For the 13 weeks ended March 28, 2006, sales for Panera‘s franchised and company-owned stores rose 9.1% and 8.9%, respectively. Systemwide bakery-café sales increased 9 percent for the 13 weeks ended March 28.
  • Aaron Rents reports 13.7% increase in same store revenues.
  • Brooke Franchise ( distributes insurance, financial and funeral services through a network of more than 560 franchise locations) saw same-store sales decrease about 2.5% for the year that ended Feb. 28, 2006 compared with the prior year.
  • March retails sales growth for the Jean Coutu Group (PJC) Inc. rose 3.5% in Canada, 1.7% in the USA. PJC is the fourth largest drugstore chain in North America and the second largest in both the eastern United States and Canada. The Company and its combined network of 2,173 corporate and franchised drugstores (under the banners of Brooks and Eckerd Pharmacy, PJC Jean Coutu, PJC Clinique and PJC Sante Beaute) employ more than 60,000 people.
  • Tim Hortons first quarter same-store sales increased 8.7% at restaurants in Canada and 9.8% in the United States.
  • Wendy’s same-store sales decreased 4.8% at U.S. company stores and 5.2% at U.S. franchised restaurants.
  • Baja Fresh Mexican Grill’s system same-store sales declined 3.6% to 3.8%.
  • Sonic‘s 1st Q 2006 same-store sales growth of 4.7%, slightly above Sonic’s annual target long-term target range of 2% to 4% growth
  • Sales are climbing at Mr. Jim’s Pizza following the launch of Mr. Jim’s new product, Nacho Stix, and the debut of a new branding and advertising campaign. Same-store sales increased for the first two periods of 2006, including a same-store sales increase of 8.1% in the second period. Nacho Stix is a thin crust pizza, loaded with chicken, onion, jalapenos, mozzarella and cheddar cheese and served with salsa or dipping sauce.
  • Starbucks Corp. (SBUX) reported same-store sales during March were up 10%.
  • GNC: Domestic same-store sales growth of 8.1% in company-owned stores and 1.5% in franchise locations. (notice the BIG difference between corporate and franchised locations)
  • Regis (hair salon) same store sales -0.4%
  • Papa John‘s: Domestic system-wide comparable sales for the quarter ended March 26, 2006 increased 4.2% (composed of a 6.1% increase at company-owned restaurants and a 3.7% increase at franchise restaurants).

Ink Cartridge Franchises

Being a longtime technology geek, I’m always intrigued (but not often impressed) by technology focused franchises. One segment that has seen fast growth lately has been the ink cartridge refill/replacement business.

Trends are important. Many printer manufacturers sell printers below cost in the hopes of profiting from lucrative ink sales. However, generic and private label inks of similar quality to the name brand inks are commonplace. Printer inks, like books or hard drives, have reached a commodity point where most suppliers of the product are of similar quality, so most competition ends up being on price. I would NOT want to be a small retailer where the low-cost seller wins, especially as a franchise where the inherent cost structures prevent you from being the lowest cost seller.

Franchisors like Cartridge World, Rapid Refill, Smart Cartridge, and Caboodle Cartridge will argue that market acceptance of off-brand quality inks is rapidly increasing, providing ample room for aggressive franchisees to capture a piece of this growing market share. While it is true that market acceptance is increasing, so are the alternatives. Office Depot, Staples, Office Max, and nearly all retail stores now offer generic or private labeled inks and cartridges at substantially lower prices than their name-brand counterparts (HP, Canon, Lexmark, etc.).

Internet retailers have matured to offer simple interfaces to locate the proper ink, with prices lower than franchise retailers with free shipping and no sales tax. Business (and many consumers) usually try to use a single source for all their office supply needs, including ink cartridges. Office supply distributors have adjusted to demand and now carry both generic and name brand inks as well.

The competition in this market is plentiful from all angles – big, small, and Internet retailers. Most franchisees will not have the resources to financially sustain operations in a highly competitive, commoditized environment. The puny advertising budgets of franchisees cannot efficiently compete. The cost per new customer acquisition and the cost to keep that customer will be high, and the convenience of the a one-stop-shop for all your office supplies, including ink, is substantial and usually insurmountable for the little franchisee. Therefore, I wouldn’t buy this type of franchise.

Now, it’s time to change my yellow ink catridge on my printer that I bought online for $2.25.

Update: April 13, 2006, 6:00AM

More competitor differentiations:

Will [franchisee] feels confident that Caboodles’ new approach to offering remanufactured cartridges is more attractive than the traditional model of refilling cartridges in the store [Rapid Ink, etc.] as the customer waits. Caboodle offers ink and toner cartridges that are professionally cleaned and refilled in specialized factories which assures much higher quality. Until now, cartridges were refilled in a hurry by the same store technician that had to handle many different cartridges. There was no time to properly clean and service the cartridge.

Brazilian Churrascaria Steakhouses

churrascaria steakhouseIn the past week, three people have raved to me about various Brazilian churrascaria steakhouses, particularly Fogo de Chao in Chicago and Las Vegas. Unfortunately, the restaurant does not franchise. It’s a unique approach to dining, especially for the many low-carb carnivores, myself included. People always mention Fogo de Chao’s outstanding salad bar, and how they made the mistake of filling up on salad and couldn’t eat that much meat (beef, pork, lamb and chicken on skewers is carved at your tableside).

The restaurants follow a centuries-old tradition in which “gauchos,” or Brazilian cowboys, put meat on a stick and cooked it over an open fire.

The only franchised Brazilian steakhouse I’m aware of is Fire of Brazil ($50,000 franchise fee). This was interesting regarding Fire of Brazil:

If Florida isn’t far enough, how about the Kingdom of Bahrain, Saudi Arabia, Kuwait, Lebanon or Algeria? Those are some of the Middle Eastern and North African locations that could soon see a Fire of Brazil restaurant. The company has sold the master franchise rights for the Middle East and North Africa to a company called the Living Concepts out of the Kingdom of Bahrain. Spokeswoman Mary Lou Rodgers said it also plans to sell franchises in this country. Right now, the company has four restaurants — two in the Atlanta area, one in Wellington, Fla., and one in Nashville.

The concept is strong and proven popular. Fogo de Chao paved the way and proved the right formula, and soon I’m sure entrepreneurs will franchise nearly identical concepts in the coming years. Done right (see Fogo de Chao or El Gaucho), this concept in my opinion will be a winner over the next decade.

Tim Hortons is Going Public in Canada

Tim Horton’s, a 2,885 upscale coffee and donut outlet, is entering the public capital markets of Canada.

The reporter characterized the IPO as “destined to go down as the most popular IPO this country has seen to date” and “The frenzy around this doughnut deal is putting Google to shame”. Is the author over embellishing? Tim Horton’s IPO buzz seems to be more in line with fellow Chipotle’s enthusiastic IPO, not the crazed delirium over Google’s IPO.

Is going public good for franchisees? I haven’t explored arguments on both sides, but my initial impression is no. The pressure to increase margins, meet analyst expectations, and pay for the increasing regulatory costs is going to increase the pressure for franchisors to squeeze more money and profit from their relationships with franchisees.

Thoughts on Due Diligence & Exclusive Territories

Why does this site often post negative horror stories about franchisees who don’t do enough due diligence or franchisors who appear to take advantage of naive entrepreneurs? Because the “scared straight” method often works, and you’ll be happy you spent a little extra time researching the financial and legal aspects of the business. The franchise salesman and commissioned consultants rarely fully apprise the franchisee of the risks and obligations from entering into a legal contract that could potentially have the franchisee on the hook for hundreds of thousands of dollars.

Franchising can be wonderfully prosperous and rewarding endeavor, or it can be an angry and bankrupting experience. The later can usually only be controlled BEFORE you pay the franchise fee and sign the franchise agreement. For example, if your franchise agreement grants the exclusive territory in such a way that another location can be theoretically constructed 2 blocks away, perhaps you are best to walk away if this will obviously overly dilute your customer base to the point of unsustainable sales. Franchisors are notorious for milking profitable locations by stacking franchises as close as legally possible. Why? Because franchisors make more money from each additional $25K franchise fee plus the additional gross revenue, and two stores will always gross more than one. Some poorly organized and managed franchisors get themselves into a virtual Ponzi scheme where the company must keep earning increasingly more franchise fees to support their growing franchisor operations that is not sustainable by royalties alone. If the franchisor won’t carve out a territory big enough for you to make a comfotable profit, you don’t have to ask why, you know why.

Here is an extreme example (Caught in a Franchise Fiasco, The Toronto Star, Mar. 14, 2006) of what can happen when the franchisor-franchisee relationship evolves in unanticipated ways.

Required Facelifts & Capital Expenditures

From the forum:

March 20 ’06 issue of NRN cover story states that KFC franchisor-mandated remodels ($250-500K per unit) may force smaller franchisees to sell;

When buying a franchise, remember to ask about any upcoming mandated capital improvements. Particularly in the hospitality industry, many franchisors have a schedule for upgrades/remodels; this is necessary to keep the brand image fresh.

What appears to be a “bargain” price from a selling franchisee may cost more than an “expensive” alternative outlet if the higher-priced outlet has the current decor and the cheaper outlet will be needing a facelift.

Hat Tip: Paul Steinberg

Celebrity Competition in Meal Prep & Assembly Franchises

In the forum, we batted around the new meal preparation and assembly kitchens concept such as Super Suppers and Dream Dinners. There are lot of non-franchised startups, and they already have their own trade association called the Easy Meal Preparation Association. The general sentiment from the forum is that this concept is a “maybe”, with the big questions being

  1. how much you can charge customers (and margins) before customers will just order restaurant takeout?
  2. is the change of behavior and lifestyle too much to create a solid base of loyal customers?
  3. how many competitors, if any, can enter the market and you still survive?  what if they have slightly lower prices and a nicer, larger facility and more creative menu?

A surprising celebrity newcomer is jumping in this arena – Suzanne Somers. Inc. magazine did a feature article and mentioned this tidbit.

And next? Suzanne’s Kitchen, an entry in the red-hot meal prep category, in which customers move from station to station inside retail stores, assembling family-size dishes from chopped meats, vegetables, and sauces. The first two outposts of Suzanne’s Kitchen, which Somers and her husband and business partner, Alan Hamel, expect to franchise, will open later this year.

Why is she getting in this business? I think it has more to do with an attempt to leverage her brand name to command higher franchise fees rather than this being an inherently superior and profitable business model. Certainly Somers will draw media attention to the industry, which currently suffers badly from low recognition amongst its target audience.

SBA Guaranteed Loan Program Q&A

A banker answers questions about the SBA’s guaranteed loan program @ Franchise Times. Here is a summary:

  1. When is a SBA loan a good choice for borrowers?
    • anytime
  2. What can I finance with a SBA loan?
    • any legitimate business need
  3. How much down is typical?
    • 10%-30% (higher for startups)
  4. What do I do first?
    • write a business plan and see your banker
  5. What are some basic term guidelines for an SBA 504 and 7a program?
    • 7a: These are general small business loans. The term of the loan tends to mirror the use of funds (how long you can amortize the asset, length of equipment loans are based on the life of the equipment). They’re one through the bank but SBA guarantees a portion of the loan.
    • 504: These are restricted to expenditures that will spark job creation or retention. Generally used for long-term fixed assets and facilities (not working capital). Max net worth of applicant must be under $7.5 million.
  6. Can they be used together?
    • Yes.
  7. Can you give me an example of a deal that works with both 7(a) and 504?
    • restaurant
  8. How does a construction loan work?
    • Short-term loans that typically require interest-only payments during construction and become due upon completion.
  9. How is the money I borrow actually disbursed?
    • The bank distributes the money as needed and planned. The contractor will submit a draw request monthly to cover the labor and materials for work completed to date.
  10. How long does the draw approval process take?
    • Ideally 3 days
  11. How long does it take to obtain a construction loan approval?
    • No timeframe given

New Quiznos Lawsuits

Quiznos is facing more class-action lawsuits over delays in getting locations approved for its franchisees, and keeping their $25,000 franchise fee.

More from the Denver Post article:

The case alleges “deceptive business practices” in the company’s franchise sales method and demands that the company stop selling franchises in New Jersey until all existing franchisees get locations or are refunded their franchise fees.

In a separate case filed in December in the Ontario Superior Court of Justice, the plaintiffs allege that the company is violating Canadian franchise law by not disclosing to potential franchisees full details and processes for securing locations.

Quiznos, of course, denies violating any law.

Hat tip: Paul Steinberg

Franchisors usually carefully craft the franchise agreements to enable wiggle room in stalling or denying approval of locations. Warning flags include evidence of high franchisee turnover or higher proportion of revenue from non-royalty revenue which can sometimes be gathered and deduced from the UFOC Items 19-21. I know of a major dating franchise where one location in a big city has been sold 3 times over in the past few years, with the most recent franchisee begging the previous franchisee who sold it to him to take it back for FREE because it was draining money. If he closed the business, he would have breached the franchise agreement and would be obliged to pay tens of thousands in fees, charges and damages.

Update: March 1, 2006
You can track the Ontario case on Goldman Sloan Nash & Haber’s web site, the Canadian law firm representing the plaintiff. The firm posted the detailed statement of claim (complaint) against Quiznos.

Hat tip: Michael Webster

Delivery-only Restaurants

A participant in the discussion forum brought up a good point whether a “delivery only” local restaurant business was an especially good business model. Steak-Out was the franchise mentioned, which delivers char-broiled steak and chicken dinners, salads, sandwiches….you get the idea. Why do you get the idea? Because the food is similar to the restaurants we all know – Applebee’s, TGI Friday’s, and Chili’s. The difference is Steak-Out is delivery or pickup only, and the others are sit-down AND are starting to contract out delivery to local entrepreneurs.

Having a dinning room exposes your menu to more people. In turn, more people will be familiar with your menu and more likely to think about using you for delivering business lunches or family dinners. The more you are exposed to a product, the more likely your to think of it when the time for the service comes. It’s partly a numbers game, and I’d rather have my customers experience my product in person in my controlled atmosphere then exposing them to my product on a piece of paper, coupon or flyer.
I’m not saying delivery only business are a bad idea, I just wouldn’t want to take the risk when my competitors out-of-the-box are going to be exposed to exponentially more customers. That raises my marketing costs. Pizza is the only food that has carved out room for delivery-only stores. Papa John’s is going from delivery only to delivery + sit down.

A 75-unit Subway franchisee group in South Florida bought the telephone number 888-SUB-TO-GO. Orders are processed via the store’s POS system and then delivered by Subway employees. Can a delivery-only subshop startup and compete with that? I doubt it, and I wouldn’t want to risk my capital trying.

If you are buying a restaurant, you should consider what provisions in the franchise agreement address delivery. If you think delivery may be an important distribution channel for revenue and competition reasons, then only consider businesses that are willing to address the issue before you hand over your franchise fee.

Mobile Oil Changes

mobile oil changeOne concept I heard about several years back that I still think is a good idea are mobile oil changes franchises.  Specifically, those franchises that contract with large businesses to service their employees’ cars in the parking lot while they’re working.
Providing businesses and office buildings (especially in the suburbs where everyone parks in the same lot) with on-site routine services such as dry cleaning, child care, oil changes, and other concierge type is tremendously convenient. Often, in the case for oil changes, there is only a time saving benefit and no extra cost to the employer unless they want to subsidize it.

The oil change “van” is customized to hold the equipment to rapidly suck out the old oil and pump in the fresh oil (I’m sure companies use different methods, but that is how I understand one method). While the employees are working, the oil changer collects the keys and car descriptions. In a few hours and $25 later, the employee has a freshly oil auto. The employer has probably gained a half-hour of work from the employee. Maybe the franchisee offers other services, like windshield repair, minor maintanence, car detailing, tire changes, or inspections…maybe even a mobile mechanic.

I would feel comfortable selling and coordinating this type of service with corporate customers. You have a very compelling story with real cost and time savings for the employees.

A quick search on my favorite search engine turned up these companies:

If you want to start this business on your own, the equipment per truck costs about $10,000.
I haven’t heard of the big guys (Penzoil, Jiffy Lube, you know who they are) getting into this, but don’t be surprised if the do. In that case, the no-name small franchisees will be squeezed hard.

Here is some guy selling a biz plan for starting a mobile oil business for $25 by email. It looks a little shady so be careful. If you are going to go into this business on your own, you had better already have related experience working in the industry and know exactly how to sell employee benefit services.

I would feel most comfortable in this business if it was tied to a traditional quick lube service center. It gives you a revenue base and additional word-of-mouth. And, I’d only do this if I thought I could employ two or three trucks at least 9 months out of the year.

RSS Feeds Not Working

The site’s main RSS feed is only showing the comments instead of story posts as it is supposed to. Sorry, about the problem. It is a known bug in WordPress and has been reported, and I’m guessing it will be fixed a week or two by the developers. Thanks for you patience.