Forums down for two days

I’m upgrading the forum software to deal with the recent influx of spam postings. Sorry for the inconvenience. Feel free to email me using the “contact” page to ask me any questions that you may want me to discuss, or open up for discussion, on the main blog here.

— Ryan Knoll
FranchisePundit.com

Tasti D-Lite acquires Planet Smoothie

I didn’t see this one coming. Planet Smoothie is solid brand with a loyal customer base. I hope Planet Smoothie received a significant premium in this acquisition by Tasti D-Lite, and the existing franchisees have some protections. Tasti D-Lite was acquired by a private equity firm in 2007 majority owned by Jim Amos, who promptly appointed himself CEO after the acquisition. Amos was formerly CEO of Mail Boxes Etc before selling to UPS, former CEO of Sona MedSpa and I Can’t Believe It’s Yogurt. I don’t know Amos personally, but from what I have heard he is a classic promoter. He’s likable and has the right persona for a CEO. But, from what I hear he runs his mouth too much and gets into trouble confidently over-promising results and being extremely difficult with existing franchisees. He’s good as selling franchises and controlling the franchisor’s cash flow. He’s had to settle out of court in a dishonesty-related law suits in his previous CEO roles. The hybride ice cream/yogurt pumped by Tasti D-Lite is smooth and creamy thanks to multiple gums and thickeners, but most people only care about the relatively low calories versus full fat ice cream.

I understand the strategic benefit for Tasti D-Lite: they can distribute their frozen yogurt through the 100+ existing Planet Smoothie locations, the customer base has a lot of crossover, smoothie recipes can incorporate frozen yogurt, and hopefully per-unit increase sales will increase more than 25%.

It looks like the preferred transition option for franchisees is to allow units to co-brand the concept. I’m sure the Planet Smoothie franchise agreement was favorable for Amos. My guess is there is a clause whereby existing franchisees have to at least transition to selling the yogurt menu quite soon, but conversions to dual-branded units probably can’t be forced until the franchise agreement is up for renewal.

I hate to say this but I think the acquisition, all things considered, is probably good for Tasti D-Lite. I haven’t seen a concept work where frozen yogurt was a secondary offering, so Planet Smoothie franchisees may be the ones losing some return on their investment following the conversion.

I’m very interested to see how this situation progresses over the next year.

From press releases:

Earlier this year, the first drive-thru Tasti D-Lite location opened in Columbia, Mo., and the first on-campus store was opened at Duke University. In addition, Tasti D-Lite introduced its first self-serve model to the brand’s long-time full-serve model, and also introduced its first “store-within-a-store” location on Las Vegas Boulevard.

“This acquisition presents an opportunity to combine two iconic brands to create a winning combination for both the customer and the franchisee,” Amos said. “The consumer profiles of Tasti D-Lite and Planet Smoothie are very similar, so combining the two complementary brands will provide both brands an opportunity to increase the scale of the combined store network as well as sales at the store level.”

Following this transaction, Tasti D-Lite plans to offer new franchisees the option to own and operate in a co-branded store concept, which fully integrates both brands into a unique customer experience.

How Quickly the Franchise Segments Fill Up – ShopHouse, Pei Wei


Chipotle’s new fast mexican asian concept dubbed ShopHouse has only been open a few months in Washington DC. Their menu consists of Banh Mi sandwiches and rice or noodle bowls with meats. The reviews on Yelp vary, with an average of 3 out of 5 stars. On the negative side, comments seem to congregate on the odd combinations of tastes, blandness, and unlikable slaw on too many items. On the positive side, employee helpfulness and value seem to rank high.

Many restaurant groups are pursuing this market – Wagamama, Big Bowl, Stir Crazy, Panda Express (and all the indoor mall food court offerings), and Pick up Stix. Technomic claims that sales at limited-service Asian restaurants grew 5.9% in 2010, faster than any other menu category, and in 2011 sales at Asian dining spots are expected to rise 5% compared to 4% for all limited-service restaurants. If you’re a CEO of a restaurant group looking to ride the trends, this is your new market.

P.F. Chang’s, who also owns the popular casual restaurant Pei Wei, is creating a “more casual” concept called Pei Wei Asian Market, to compete in this fast service segment. It won’t be the notorious scoop style forged by Panda Express and Chipotle, but what they call a diner style with no table service. It sounds like the same style of Panera Bread but with a few more ready-to-eat packages at checkout.

The fast asian fusion segment seems to be one that will have staying power. I like the segment, and there is a place for the Panera of Asian food, a speedy and quality layer above Panda Express. Just like Chipotle forged Mexican cuisine into the weekly rotation of American lunches, the arguably healthy fast asian fusion will also continue to grow and improve.

— Franchising Options —

Most of the good concepts aren’t franchising at this time – Chipotle, ShopHouse, Pei Wei, Wagamama, Panda Express.

IF I wanted to pursue this segment going the franchise route, I’d probably look to Noodle & Company. The branding seems strong, the familiar chinese and thai menu works well for lunch and dinner crowds, and most importantly they seem to successfully attract lines throughout the week. A highly viewable location in a new, upper scale shopping plaza, in a dense residential community would be a strong location for this concept. A warning is there have been store closures in Portland and elsewhere, and at those locations people have complained about the quality of food. In contrast to busy open locations, people seem to praise the food dishes, so there seems to be variance in the quality of the food based on skilled preparation.

There are a good number of other franchises in this asian segment, but most are the “orange and bourbon chicken” joints that belong in an indoor mall. For example, Pick Up Stix in California is akin to Panda Express, but I wouldn’t be a buyer of the Pick Up Stix franchise.

Applebee’s Franchisee Who Pushed for Change

I enjoyed this short discussion with Zane Tankel, a 34-unit Applebee’s franchisee in New York. He pushed corporate for changes such as removing the baggy shirt and tie requirement (he says “who wants to look at girls behind the bar all buttoned up?”). His times square location is the chain’s highest revenue unit at $13.5 million last year. Here’s an example insightful answer:

Q. What have you learned about doing business in those neighborhoods?

A. When we open a restaurant and are interviewing, we will have guys show up with their pants hanging below their crotch, their hat on sideways, answering our questions antagonistically. Our recruiters will say to them, ‘If you’re here for a job, go home and get dressed like you’re applying for a job and then come back.’ Many will go home, change and come back.

I give Applebee’s credit for not axing him from the system, and instead learning to work with him.

Reversal: Franchisor acquiring Franchisees

The trend has been for franchisors, especially for publicly traded ones, to sell more and more of their corporate owned stores. Why? The financial argument has been that earnings are stabilized by managing a franchise operation (simple income streams) rather than managing the nuances of local operating businesses. And, for the most part that makes sense both financial and practically.

One company who is bucking that trend is Swisher Hygiene, acquired in 2004 for less than $20 million by Steven Berrard and Wayne Huizenga…the team behind AutoNation, Blockbuster and Waste Management. While their business haven’t all been models of success except for AutoNation, they have grown business fast and made a lot of money. Berrard was also CEO of Jamba Juice.

You probably have never heard of Swisher Hygiene. The company sells low cost chemicals and cleaning services to business, especially foodservice and restaurants, such as the 3-compartment sink systems where EcoLab has traditionally dominated. In 2004, it was making an average of $17 per week per customer, with a base of about 30,000 clients. They feel the opportunity in this $9 billion market is in increasing sales to each existing customer and acquiring new ones. Swisher also was an amalgamation of 93 franchisees all working out of their trucks. Now, they acquired most of their franchisees, most recently their Chicago franchisee.

The stock has fluctated greatly in the past year when it went from $2 to $10 per share, now it’s back down to about $5 per share.

I don’t know if they will succeed, but it will make for an interesting case study one day. Hopefully the franchisees who took a buyout with stock will be better off than they were as franchisees.

Fitness Clubs See Drop in Memberships

Larger fitness clubs are seeing a drop in membership, and former fast growth clubs are turning flat to negative.

This is not just happening in the USA, but also in Australia where giant Fitness First is seeing a decline in membership. Fitness First has turned flat to negative, with increased competition from Anytime Fitness, personal trainers and low cost rivals.

It’s a tough industry where you have franchises like Planet Fitness offering a no-frills membership for $10/month.

Forums are back up

The discussion forums are back up for people to ask questions and get responses from me and the community. I had to restore with a copy from earlier in the year, so I apologize if I lost your post. Thanks for your patience!

Forum Will Be Back Soon; Blog Posting Will Resume

I apologize for the forum being down for so long. I will install a backup and get it functioning again. There is a lot of great content in there.

On a similar note, I had a new son born a few months ago which has absorbed most of my spare time. I will resume regular posting in mid-August. Thank you for your patience and loyalty.

Papa John’s Franchisee to Go Public in Germany, Previous Fraud with Investors?

WorldWide Papa’s is going public on the heels of opening up its 5th store in Russia. But, there are people who claim to have invested with WordWide Papa in Russia but were ignored by the company once they received the investment. The whole story isn’t here, but a company that fails to communicate with its investors in a respectful manner must be avoided.

I’ve seen a lot of investment fraud as an attorney, and I still am amazed at how often folks will steal from people they know.

Graeter’s To Reopen Two Closed Franchise Locations

graetersWhen a franchisee fails, you don’t often see the franchisor swoop in and take over the lease and operate failed location, but Graeter’s is doing just that in Kentucky. Graeter’s corporate is acquiring several stores like it did for another franchisee back in late 2010.

Sales were reported in a broker’s sheet to be in excess of $3 million for the past three years. The asking price is $2.75 million plus a transfer fee.

Read more: Graeter’s Northern Kentucky franchisee puts stores on the block | Business Courier

For you non-Cincinnatians, Graeter’s ice cream is a local marquee brand in the Ohio Valley.

10 Strongest Retail Markets

source: National Restaurant News

1. Washington, D.C.
2. San Francisco
3. New York City
4. Boston
5. San Diego
6. San Jose/South Bay
7. Baltimore
8. Philadelphia
9. Seattle
10. Pittsburgh

I would agree with Washington, D.C. being number 1. I’ve spoken to several small operators, that are expanding to Washington, D.C. One take and bake pizza concept expanded there and within a year it was their best performing store in the system of about 20.

As a rule, franchisees should try to keep their rent 5-9% of gross sales except indoor malls where you’ll be at about 15%. Recently I was evaluating lease rates in the Chicago downtown loop area, and for a nice spot between 1,200-2,000sf you’ll be paying around $50+sf NNN. Compare that to suburbs of Orlando where you’ll easily grab prime shopping center space for $20-25sf with lots of incentives.

Back up!

Dear Franchise Pundit readers,

Sorry for the sudden downtime for the past few weeks.  I had a problem with my web host and had to make a sudden switch, and I had a new baby boy born!  My head is back in the game and I’ll work to get things updated.   I had to use a backup of the web site to get things back up with my new web host, so I lost two months of blog and forum posts.  I’m sorry to all those who contributed and lost their content.

Thank you for you patience and I look forward to reading more of everyone’s contributions,

Ryan Knoll

Crepe Franchises – A big flop

I’ve seen several Crepe restaurant + cafes lately start up in the USA.   I don’t think they’ll be successful like their cousins in Canada and Europe.  It just doesn’t make that good of a sandwich wrap for the American palate and people aren’t used to eating the dessert crepes with Nutella and sprinkled sugar.  If anyone could pull it off it’d be Lettuce Entertain You, one of the country’s most successful restaurant development firms with over 75 concepts in their portfolio…but they closed their crepe start up in Chicago a few months ago.  Here’s a few that are still trying:

Negotiating a Commercial Lease, Especially Restaurants

I just finished negotiating a commercial lease for a restaurant and thought this would be a good opportunity to relay some real time advice on the topic.

  1. Everything is negotiable in a lease agreement.  You simply have to ask for it in a sensible and compelling manner.  But just because everything is negotiable doesn’t mean you should try to negotiate everything.  Pick your battles, and accept some reasonable offers.
  2. When you’ve been emailing red-lined lease drafts back and forth with the landlord and you’ve reached a stalemate on several key issues, schedule a face-to-face meeting to hammer out the rest.  It will usually help drive things to completion.
  3. Be reasonable.  Don’t try to hammer the landlord on every aspect of the lease.  For example, if the price per square foot is reasonable compared to the market, then offer to pay the full rate and focus on other things like build out assistance, CAM, start of lease payments, hiatus of lease payments for remodeling, personal guarantees, etc.  Some landlords hold dear the price the receive per square foot but will heavily negotiate many other things.
  4. List everything in an exhibit what you will take with you at the expiration or termination of the lease, or the landlord will claim it as a permanent fixture or improvement and not let you take it.
  5. Most parties routinely start a lease negotiation with a Letter of Intent (“LOI”) to hammer out the big details like pricing, tenant improvements and the like.  A minority of other will recommend not starting off with a LOI, such as the self-proclaimed “Lease Coach” who touts his $1k-$7k services at the National Restaurant Association trade shows.  What’s my opinion?  In a perfect world I’d prefer starting out with the lease but I don’t think in the end it really matters whether you start negotiations with an LOI or lease.  Either way your negotiating the same details.  If the landlord insists on an LOI to start things off and you refuse, the landlord will view you as a pain-in-the-butt difficult tenant and he will be less likely to make concession on your lease demands.  Landlords will definitely make extra concessions for tenants they like and trust.
  6. Support your reasonable requests with research.  For example, if you are attempting to lease a shell with a dirt floor and you are asking for a vanilla box plus $35/sf of tenant improvement (“TI”) money for a new build out, then have comparable offerings from neighboring landlords.  Often the landlord doesn’t know what the competition is offering to lure in tenants.
  7. Economic Abandonment.  Include an out in your lease that gives you the option to accelerate the termination of your lease upon 60 days notice if the trailing twelve months sales are below a certain amount (i.e. $375,000).   This is a huge benefit and basically gives you a way to end the lease early if sales aren’t good.  I’ve seen several tenants do this like GNC and I think it’s a great idea.
  8. Vanilla box is a generic term.  Always define it very specifically and list exactly what you want the landlord to provide in the vanilla box – ADA bathrooms, size of hot water tank, plumbing issues like size of water line and PSI, separately metered utilities, minimum 4-inch concrete depth with 4000psi strength and termite treatment, emergency lighting, electrical and HVAC details and capacity (i.e. 1 ton of A/C per 200sf), tap and meter fees, drop ceiling specifications, fire alarms up to code, electrical J box for outdoor sign, lighting, etc.
  9. Have your architect inspect the premises before you finish the LOI.  Make sure the ingress/egress comply with the state code or you may need to install additional exits.  Make sure the square footage provided by the landlord is actually square footage that is usable by you and doesn’t include pillars, angled corners, etc.
  10. Always try limit your personal guarantee as much as possible.  You never know what can go wrong, even things outside of your control like a war, natural disaster, or 10 new competitors within a few blocks.   If they landlord insists on a personal guarantee for the entire lease, try to ask for just the initial 5-year or 10-year term, or if you have the cash offer to pay an extra deposit that will be refunded in a year or two in exchange for a shorter personal guarantee.
  11. Pay attention to insurance requirements.  There are some things that are cheaper for the landlord to insure as a rider to his insurance than you.
  12. Possession Date.  This is the date you will have the right to start building in the space.   If the landlord is performing some build out on the space for you, make sure the landlord gives you sufficient notice such as at least 4 weeks so you have time to get your general contract organized and ready.
  13. If parking is on site, make sure it is enough. Try to negotiate your own dedicated parking spaces.
  14. Exclusivity is a big deal.  Can the landlord rent to your competitor?  If the landlord won’t grant you an exclusive (i.e. Deli sandwiches for Jimmy Johns), then ask for an option to terminate the lease or get an automatic reduction in rent if a direct competitor moves in.  Often it will be defined as someone generating more than 10% of sales from “ice cream” if it is an ice cream exclusive.   But, be careful and make sure terminations are not automatic but optional for the tenant or tenant can easily remove you by letting a competitor move in.
  15. Landlords can be sneaky and unethical.  If they see a successful pizza shop in their shopping center, a leasing manager may want his lazy son to open up pizza shop there and thanks to you proving the concepts work in that spot, he’ll figure out how to get you out of your lease quickly.  What will automatically terminate the lease?  What are breaches and how are they cured?  A favorite method is using a failure to timely notify the landlord within the Notice Period of your intent to extend the lease for another term.

Starbucks New Logo

Starbucks changed its iconic logo. The most noticeable change is removing the Starbucks name and making it a bit more simple.

It’s a bold move. I’m not sure how many people know that female image is actually the Starbuck’s logo. I’m sure it will work just fine and they have the research to back up this decision. What do you think?

Urban Flats – How to Fix this Failing Restaurant

last edited: December 7, 2011, 9pm [added recommendation on beer & wine]; also edited on December 13, 2010, 1:05am [improved a few poorly worded sentences]

I’ve noticed several franchised “Urban Flats Flatbread & Wine Co.” closing this year in the southeast, such as Orlando FL, Winter Park FL, Lawrenceville GA,  and Atlanta GA (pictured to the right).  Something clearly isn’t resonating with potential and repeat customers.   Many franchises suffer from this ‘surprise’ problem leaving execs scratching their heads about what is going wrong.    I’ll put on my pundit hat and give you my opinion and recommendations.

HOW RESTAURANTS ARE JUDGED BY CUSTOMERS:

People will instinctively judge a restaurant on three elements, and to draw repeat business you need to excel in at least two of these (and be at least average in the third) in the eyes of your local customer base:

  1. FOOD:  Is the food memorable and superb all around?
  2. PRICING: Is the pricing at or below the competition; does it provide value?
  3. AMBIANCE/EXPERIENCE:  Is the customer experience superb with a unique and comfortable interior design?

A restaurant could succeed by satisfying only two of three criteria.  For example, you could provide an excellent customer experience and have great food, but prices are too high.   Cheesecake Factory and J. Alexanders are examples of this but both still generate excellent sales.

HOW URBAN FLATS RATES:

According to most of the reviews I’ve read online, Urban Flats rates as follows:

  1. FOOD: Average food, flats are minimalistic…not bad but not excellent either
  2. PRICING: A bit high – $10 cheeseburger, $8.50 Loaded Potato appetizer, $10 “flats” pizza
  3. AMBIANCE/EXPERIENCE: Average, some described it as trying too hard to be cool.   Music is too loud to talk.  If you have to describe your restaurant as hip in advertising, you probably are not.

Other repeat comments are that visitors expected a walk up ordering counter and self seating, but it’s a sit down wine bar.   The menu is surprisingly diverse for a “flats” restaurant.  It showcases very high end salads and entrées ranging from salmon and tandori chicken.  People understandably describe the “flats” as “pizza” even though there is no mention of pizza on the menu.

Also see: Urban Flats Menu

FIXING THE BUSINESS

I could see this concept get on the path to profitability by switching to a limited menu of “flats” priced at the fast casual norm of $6-$8.  And, only selling sides that support the “flats” sales such as  salads.  The service style should be fast (under 5 minutes to receive your order) and be located in storefronts where you’d find fast casual restaurants like Panera Bread, Go Roma, or Noodle & Company.

Ditch the waiters and table service, ditch trying to be a hip bar.  Ditch the menu items that do not support the “flats”, shrink your footprint to under 3,000 square feet. Make the seating comfortable to individuals and groups.  Try to infuse “authenticity” into your brand story, focus on the unique “flats”, don’t fight the pizza comparison.   Hire a new chef consultant (you need outside unbiased help right now) to restructure the menu, and rework foods to get the food costs well under 30%.   Hire an experienced research firm to test and improve the menu (email me if anyone wants research firm recommendations).  Let the chef consultant work closely with the research firm for best results.  Since stores already have bars and liquor licenses, have a couple of low-cost wines and decent draft beers with the pizza, but I’d drop the hard liquor permits if possible and just do beer and wine.  Flipper’s Pizzeria and Go Roma do this successfully while keeping it family friendly.  You may be tempted to go the sports bar route but I wouldn’t recommend it in this instance because you’ll get lost in the shuffle as most sit down pizza places already pseudo try that.

Currently, there is little unique about Urban Flats other than their “flats” pizza.  Luckily, there is a market void for quality under-5-minute pizza restaurants (Red Brick Pizza is currently trying to exploit this niche with high-temp stone hearth ovens that cooks pizza in 3-4 minutes…I’ll do a review of Red Brick Pizza soon because I think they’re screwing up too).   If I owned Urban Flats, I’d bet the farm on branding the restaurant entirely around the “flats”.   Try being more kid friendly with the menu and seating in your suburban locations and you’ll get many more of the coveted large family groups.   Gimme’ a combo that includes a flat, salad or side and drink for $10.

The foundation and sole goal for this turnaround is getting people in the door, returning every week, and encouraging their friends to check it out.  Once customers consistently fill the seats and gross sales are high enough to at least reduce prime costs under 60% and rent under 10%, then owners/managers can pontificate on increasing profitability by increasing average liquor sales, optimizing labor schedules, table turnover times, and getting their friends posh jobs at the bar.

As I write this I’m reminded of the reality show “Kitchen Nightmares” starring Chef Gordon Ramsey.  Ramsay doesn’t come out and say it but his formula for saving restaurants from bankruptcy hinges on fixing the three criteria above.  He (1) reduces the complexity and size of the menu, (2) reduces the prices to encourage repeat business and match competition, and (3) remodels the interior design and employee’s attitudes.