The Pretzel Business

I have close friends in the pretzel and snack-food business (and worked in the snack food industry for a short time), so I think I can speak from an especially knowledgeable perspective on this. Stores like Auntie Anne’s, We’re Rolling Pretzel Company, Pretzel Time (by Mrs. Fields), and Wetzel’s Pretzels must have some of the highest margins in the QSR business. The dough is literally a few pennies per serving, if that. The seasoning and butter is another few pennies, and your selling the product for almost $2 each. I’m sure the franchisors significantly increase the cost of dough and supplies force margins more inline with the typical mall store.

Fresh pretzel businesses need very little square footage, and can often be served from a kiosk. They have the added advantage of smell in a mall, drawing people in with the scent of fresh baked buttery bread (OK, can you tell I love soft pretzels?). Most malls already have at least two pretzel franchises, but some do not. Depending on the rent, storefronts along a busy downtown street can capture enough of the afternoon foot-traffic to possibly turn a profit.

Let’s look at some fees charged by franchisors:

Pretzel Time:

  • Initial Franchise Fee: $25,000
  • Ongoing Royalties: 7% of Gross Sales
  • Advertising Fee: 1-3% of Gross Sales
  • Initial Training Fee: No charge for first two individuals
  • Total Estimated Initial Investment: $107,000 – $238,500

Wetzel’s Pretzels:

  • Initial Franchise Fee: $30,000
  • Ongoing Royalties: 6% of Gross Sales
  • Advertising Fee: 1% of Gross Sales
  • Initial Training Fee: No charge for first two individuals
  • Total Estimated Initial Investment: $102,000 – $211,000

Auntie Anne’s:

  • Initial Franchise Fee: $30,000
  • Ongoing Royalties: 7% of Gross Sales (paid weekly)
  • Regional Advisory Council Dues: $300/year
  • Audit Fee: All expenses unless if receipts were understated by more than 2%
  • Advertising Fee: 1% of Gross Sales (paid weekly)
  • Transfer Fee: $3,000
  • Franchise Renewal Fee: $15,000 or 50% of current franchise fee, whichever is greater
  • Lease Renewal: $2,000
  • Polling Set-up Fee: up to $400
  • Polling Recurring Fee: up to $100 per month as incurred
  • Lease Documentation Late Fee Penalty: $500
  • Relocation of Business Fee: 25% of current franchsie fee
  • Franchisor’s Lost Profits Following Termination: Royalty and Advertising Fees for the remaining term of the Franchise Agreement plus the greater of 18% per annum for the interest or the highest possible amount under your state’s law
  • Operating in Event of Default: $250 + travel + lodging + meals until default is cured
  • Initial Training Fee: No charge, minimum of 3 people
  • Service Fee: $250/day of help per person
  • Franchisee must cover legal and incidental costs incurred by franchisor if franchisor brings an action against the franchisee.
  • Total Estimated Initial Investment: $192,550 to $382,500

* I took the time to list most of Auntie Anne’s fees; Wetzel’s and Pretzel Time probably have similar fees

They are all similar, with Auntie Anne’s having the highest initial investment, probably due to their more ornate store style and you are buying into a more valuable and recognizable brand. I heard it’s near impossible for an individual franchisee to open up an Auntie Annie’s anymore in the U.S.A. (Auntie Anne’s Director of Franchise Sales seems to indirectly imply otherwise in the comments), but most other brands are actively seeking individual franchisees. Though Auntie Anne’s is the brand that most everyone knows, my guess is brand loyalty is low particularly for the reason that if you want a pretzel in a mall, you buy what’s available, whether that be Auntie Anne’s, Pretzel Time, etc. Several franchisrs predictably have expanded their menu to include hot dogs, frozen custard and burgers, or from the other direction to include pretzels in their existing menu. When evaluating which franchise system to buy into, I’d pay special attention to the franchisor with the lowest food and supply costs (a location will only support a narrow range of sales no matter what the franchise, so lower costs and fees over the year is very important), and competent level of responsive service. I’d also consider whether there is room for entrepeneurial selling, such as supplying local businesses, schools, or other events with tasty pretzels (the extra sale can make the difference between taking a salary or not).

Another Curves Articles

For those who enjoyed our previous posts on Curves, here is a good background puff article, describing their interesting no frills approach.

A Curves franchise owner:

“We have found a niche — where women who would not necessarily go to a regular gym, feel comfortable here,” Moore says. “Nobody has to dress up — as you see sometimes in the regular gyms — to appeal to men, and they don’t have to here. It’s a very comfortable easy, friendly, supportive atmosphere.”

Description of operations:

A Curves club is basically a large room — usually located in a shopping center — filled with about ten pieces of weightlifting equipment. A recorded voice and a pulsing disco music lead patrons through their workout.

Thirty seconds working with the equipment at each station alternates with 30 seconds of running in place. The women keep going for 30 minutes and most come to Curves about three times a week…The monthly membership fee is as basic as the workout, between $40 and $50, quite a bargain compared to most health clubs.

Chipotle Going Public

Chipotle Mexican Grill Inc., a majority owned subsidiary of McDonald’s Corp., plans to offer 7.9 million shares for between $15.50 and $17.50 a share in an initial public offering, according to a regulatory filing on Friday.

http://www.chicagobusiness.com/cgi-bin/news.pl?id=18917

UPDATE: Jan 25, 2006

Chipotle may sell stock at $18 to $20 a share, up from an earlier estimate of $15.50 to $17.50 a share, the Denver-based company said in a regulatory filing

UPDATE: Jan 26, 2006

After the 7.9-million-share offering priced at $22 a share, Chipotle shares doubled to close at $44 Thursday, after reaching as high as $48.28. Chipotle sold 6.1 million shares in the deal, raising about $134 million, while its parent, McDonald’s, sold 1.8 million shares.

The 13-year-old burrito and taco purveyor currently has about 480 stores and produced revenue of $471 million in 2004, up 49% from 2003.

At $44, shares of Chipotle are trading at roughly 80 times earnings. Meanwhile, Applebee’s and Ruby Tuesday are trading closer to 20 times earnings, making Chipotle’s valuation look laced with some irrational exuberance, even when its growth prospects are accounted for.

Part of the IPO proceeds will be used to pay down a $30 million line of credit with Chipotle’s parent.

Comments now fixed

Comments to blog posts were broken for the past few weeks, but they are fixed now.

Example of a Clever Seasonal Menu

As you probably know, I’m positive on soup franchises. The Soup Box, an independent soup restaurant, supplements their summer months with Italian ice (gelato) made from scratch with natural fruits and juices. They coined the summer months storefront name as the “The Ice box” instead of “The Soup Box”. It provides a selecton of 12 hot homemade soups in the winter, and 6 in the summer when they make the Italian ice. Menus are posted daily on the Internet as well. It’s a small location, but I thought the idea was clever enough to mention as an example of maximizing the resources and opportunities.
Does your restaurant franchise have a seasonal offering? I know the franchisee has little or no control over what they can sell, but it should be an evaluation point on hedging sales year-round.  When a customer wants to get into the Christmas spirit, why wouldn’t they (subconsciously) gravitate towards the fun, encouraging store that has their seasonal favorite flavors?

Seasonal menus tend to do quite well. Ever have the Gingerbread Latte at Starbucks? Yum! The seasonal menu builds repeat customer business to predictably provide new selections that build on the goodwill and joy of the season.
Good reviews for The Soup Box. The business also provides a good example of the flexibility a non-franchised store has over their business, compared to those locked in very strict franchise agreements that usually prevent any deviation from the standard offering.

Quiznos Sales & Profitablity – Summary Report

Quiznos Sales and Profitability.pdf pdf

“former owner”, a commenter on this site, left a tip on a document posted at the Toasted Subs Franchisee Association. The document purports to be a summary on Quiznos store profitability. Is it legitimate and accurate? I have no idea, but it’s probably in the ballpark. It’s apparently based on estimates gathered by franchisee sources reporting. Here’s snippet:

Quiznos Sales and Profitability – below is a list of sales statistics compiled year-to-date for Quiznos stores as of August 2005. In the Quinzos chain, an average new store (opened in the last 12 months) can break even around $7,000 to $8000, depending on fixed costs. This charts shows the number of stores breaking even or even losing money inthis chain. These sales figures are accurate. The profitabily estimates, are just that…estimates based on franchisee sources reporting.

Thanks “former owner”!

Advice for Entrepreneurs

I heard good reviews on a speech by Jerry Mitchell (a serial entrepreneur) so I checked out his web site.  His web site has many articles and “white papers” to browse that are geared towards young businesses.  A lot of it is elementary for most Franchise Pundit readers, but the “newsletters” and “white papers” sections of his web site, among others, has some worthwhile content for franchisees.

Christmas Franchise

Christmas DecorChristmas Decor is a very interesting franchise, and one of the classic examples of making a business from providing a service people are willing to pay for that makes lives easier (like the weekly dog cleanup services). The franchisees are Christmas house and yard designers, with any kind of lighted scene you can imagine. The franchise is great to provide winter income for those who make most of their money in warm weather (lawn care, nurseries, fence or irrigation builders, etc.). The minimum project is about $3,000 for the customer, and that includes installation and removal of the lights and decoration. The web site claims:

$200 million last year was spent on decorating services during the holidays. With over 800% growth in the past six years, now is the perfect time to begin your Christmas Decor franchise.

It looks like a high margin rental and services business, especially business clients. The concept is a winner, I believe. The devil is the numbers, of course, and a franchisee would have to figure out how many homes can realistically be done and what contribution margins would be to make the personal income worth the time and aggrevation. Most home and business owners are unaware of the service so advertising and PR are important and expensive. But, word of mouth advertising is likely very high.

Here is an article (and another and another) from Entrepreneur Mag.

From Christmas Decor’s web site:

Start up Costs/Working Capital?
This is one of the least expensive businesses to get into because costly equipment is seldom required. For each full service installation crew we estimate ladders and tools at $750-$950, and a start up inventory of $3,000-$5,000. Each additional crew will have about the same cost in ladders and tools, but inventory should be increased about $2,000 per crew.

More Financial Requirements:

start up capital: $10,000 to $30,000
total investment: $45,000 to $100,000

Fees:
-Franchise: $17,500 for terrirtory of 100,000 customers
-Royalty: 4.5%
-Advertising: $180 a year or 20% of the royalty payment

Burger King Franchisee Woes

43 Burger King franchisees operating 1,112 restaurants filed for bankruptcy in the past 5 years, almost 15% of all Burger King units. While costs rose for franchisees (utilities, labor and food), total customer flow and average sales per customer did not. The price wars between McDonald’s, Hardee’s/Carl’s, and Wendy’s did not help. Many franchisees are highly leveraged, so a reduction in in cash flows put a serious strain on finding the money to service the debt.

Burger King charges a $50,000 franchise fee for a 20-year agreement. Renewal after 20 years is possible for another $50,000 fee, but only if the store meets the new Burger King operational and design standards, which usually require about $400,000 in upgrades. Additionally, the Burger King franchise agreement prevented multi-unit owners from closing underperforming stores.

One bright side is that Burger King reported the highest same-store sales in 10 years this past year. With so many franchisees in bad shape, speculative business owners can pick up a franchisee on the cheap. Any takers?

Update November 24, 2005:
Though I’m not a fan of NPR, you can listen to the audio of a reporter slam Burger King’s new “King” character marketing. He wrote this critical article.

News and Gossip Briefs

Sorry for the gap in posting…my time has been clipped by some legal and political endeavors.

Everyone reading this blog should already know this basic pros and cons of opening a franchise, but here is short article listing most of the basic points.

We mentioned DoodyCalls in a previous post and liked the witty franchise, and it looks like they are expanding easily across the US. It’s the type of service that may make a good acquisition candidate for one of the many cleaning or maid services.

Cold Stone has grown very quickly, though the franchisees I’ve spoken to say their store are barely churning a positive operating cash flow. Ice cream catering is becoming a popular side business for the franchisees, especially at kids parties and bar mitzvah where parents are willing to spend big bucks.

I’m surprised to see Panera Bread franchises selling for only about $1.3 million each which include repurchasing some area development rights in Indiana.

Chili, really?

When I first heard of a chili franchises 10 years ago, I thought it was a stupid idea.  How often are people really going to each chili?  Then I spent time in Cincinnati, OH, home of Skyline Chili and Goldstar Chili.  I soon became a loyal fan, endulging in 4-ways (spaghetti noodles, chili, mustard, onions and cheese) and Cheese Coneys (hot dog, chili, cheese) like I never imagined.  Apparently, the chili has a hint of chocolate and licorice that adds to the uniquely smooth flavor and addiction.

Skyline Chili is the champion in Cincinnati and the surrounding markets.  It’s so popular that fans often try to duplicate the secret Skyline Chili recipe at home.  Of course, a small minority of people hate the chili with equal passion.

Each restaurant has a drive through and inside seating resembling a 1960’s diner.  Skyline is open late for the night crowd coming home from the bars.  The business lunch crowd is big, and so is the early evening with families and college students.

Fransmart’s Red Rock Chili Company looks similar, but I have no experience with it. 

Skyline Chili, Inc. is currently franchising in the states of Ohio, Indiana, Kentucky, Michigan, Pennsylvania (western), West Virginia and Florida.  Residents of the following states may not purchase a franchise: California, Hawaii, Illinois, Maryland, Minnesota, New York, North Dakota, South Dakota, Oregon, Rhode Island, Virginia, Washington or Wisconsin.

Background Skyline Chili Research:

 Pros:

  • Proven successful concept in Cincinnati
  • Fast preparation times
  • Fun food and atmosphere
  • Reasonable franchise fee ($20,000), royalty (4%), and advertising (4%)
  • Small space needs: 2,800 square feet; free standing, store front, strip center, end cap

Cons:

  • Chili must be purchased from franchisor
  • Franchise popularity may take extra time to build if no other chili franchises are in the market
  • High Average net worth and total investment is $650,000
  • High Average Number of Employees: 15 FT, 20 PT

From a concept standpoint, this niche QSR play is a winner.  From a profitability standpoint, I do not have enough data to comment.

 

Banning employees from speaking foreign languages

"Speaking a language other than English is not only disrespectful, it’s also prohibited" allegedly read the sign posted at a Supercuts on Michigan Avenue in Chicago.

The stylists claim Supercuts managers prohibited foreign languages (Spanish) from being spoken by employees anywhere on the business property, including break rooms. 

Is this prohibition of speaking foreign languages even in private conversations where customers can’t hear (in break rooms) a violation of the of the 1964 Civil Rights Act that prohibits employment discrimination based on national origin?   Probably yes.  But, the Suprecuts franchisee (owner of 20 Supercuts) denies such a policy existed as alleged.

The Equal Employment Opportunity Commission ("EEOC") joined the stylist in a civil law suit against the Supercuts franchisee. 

The EEOC has already given direct guidance on this issue.

…an employer’s rule which require employees to speak English at all times, including during their work break and lunch time, is one example of an employment practice which discriminates against persons whose primary language is not English.

However, an employer may require employees to speak only English at certain times and this would not be discriminatory, if the employer shows that the rule is justified by business necessity. The employer must clearly inform its employees of the general circumstances under which they are required to speak only English and the consequences of violating the rule.

If the reported facts are accurate, the EEOC will probably win this one.

Whether the EEOC’s regulations goes too far in interferring with employer-employee relationships is a debate worth having.

Unique pet franchises

Do you love animals?  Sometimes the best franchise opportunities are the ones you’ve never thought of and are a labor of love.  Here are some I found unique and interesting: