Panera to experiment in Chicago with a greatly expanded catering strategy. He said Panera has long provided catering, but “it’s always been an afterthought” to its restaurant business. He wouldn’t disclose financial numbers except to say that catering accounts for a very small percent of sales. The chain has more than 1,200 U.S. locations.Mr. Tristano said any new packaging that keeps the food fresh is a key to successful catering as well as competitive prices and timely service.Panera’s catering costs about $5 per person for breakfast; lunch ranges from about $8 to $12 per person. Mr. Rand said the chain will analyze the success of the new catering efforts in the next year and decide weather to expand the ideas nationally.

You would think that if a retail business closes, those lost sales would be reallocated to other stores in the area. Brownsville, Texas is finding that not to be the case when stores such as Mervyns, Hooters, Taco Cabana, Circuit City, Starbucks, Petco, Kay-Bee Toys and Linens-N-Things closed. During less tumultuous circumstances when one store or restaurant closes its sales shift to another business. But these are extraordinary times. As stores have closed it appears they are taking a portion of their sales receipts.According to Pete Gonzalez, deputy city manager and chief financial officer for the city of Brownsville, sales tax allocations are down more than 1 percent through the first four months of the fiscal year starting in October.And the trend could be accelerating. Total collections for January and February of 2009 are down 7.1 percent compared to the same period in 2008, according to the office of the Texas Comptroller of Public Accounts. Other city’s sales tax “revenues” are down compared to the same month last year, too: Denver, CO down 8.4% Nassau County, NY down .9% Chandler, AZ down 16.8% Montgomery, AL down 10% Longview, TX was up 6.5%, Norman and El Reno Oklahoma were both up about 17% while War Acres, Oklahoma was up 38%.

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.  …

A group of Geeks on Call franchisees are suing their franchisor for essential competing against with an telephone/online service.   I’m sure the FDD permits this.source All of the suits were filed by the counsel for a recently formed franchise association. The suits, all substantially identical, claim that Geeks on Call is responsible for a financial downturn allegedly experienced by the Plaintiffs. The suits point to the recent introduction of CalltheGeeks.com as a cause of diminished revenue. CalltheGeeks.com, remote technical support, is not offered in areas currently served by franchises. Company records show that many of the franchisees who filed suit are, in fact, showing year to date revenue exceeding prior year revenue.  Current economic data indicates that the small business community is choosing to repair rather than replace computers, a trend that bodes well for our franchisees within the IT sector. Unfortunately, rather than working with the Company to seek out and capitalize on this opportunity, these franchisees chose to file suit. Mark Baumgartner, General Counsel for Geeks On Call Holdings, Inc. stated “the allegations in the Complaint are without merit. Numerous Plaintiffs had previously been notified that they were in breach of their franchise agreements. We know that many of these Plaintiffs have been more focused on disparaging the Company than on building their business. Unfortunately, their disparagement harms the Company and the Geeks on Call franchise community as a whole.” It’s always hard franchisees to imagine the nice salesman’s boss would ever dilute your sales by competing against you, but it happens all the time. If you see a clause permitting the franchisor to compete with you even though they won’t open a location within your territory, negotiate that point before signing!!   Insist on restrictions on how they sell in your territory, even when the zor …

A partner in the law firm DLA Phillips Fox in Australia cites Iowa as an example of what happens when a government over-regulates franchisors. “We have seen the effects of over-regulation in various countries and notably also the US State of Iowa where the franchising sector shrunk substantially and franchisors deliberately avoid franchising into Iowa, resulting in lost contribution to GDP and job creation. Various attempts were even made to have the 1992 Iowa Franchise Act declared unconstitutional as it is considered to unlawfully interfere in contractual relationships,” Conaghan said. Is Iowa overreaching?  You be the judge.  You can read more about the drama in Iowa franchise law over the past 15 years here. Iowa (link to current regulations) has gone to great lengths to protect the franchisee.  Below are examples of the protections: restrictions on the franchisors ability to refuse a transfer, imposes financial liability on franchisors who permits encroachment that adversely impact a franchisee’s sales, restrictions on “good cause” for terminating or not renewing the franchise agreement, franchisors cannot require franchisees to sue in another state, good faith required in honoring the franchise agreement, independent sourcing must be permitted, very limited non-competes  after the franchise agreement is terminated, and franchise agreement must apply Iowa law Some of the current political debate in the United States revolves around regulations, which really means imposing rules on private contracts.  Governments must balance regulations with encouraging businesses to operate in your region.  In Iowa, many franchisors simply choosing not to do business there.

Quiznos seems to be in perpetual defeat.  Here is another money-losing franchisee from Quiznos:   “We can’t make money,” said Quiznos franchisee Marty Tate, who said his Erie, Pa., store leads the region in sales. Mr. Tate, who is not part of the lawsuit, said 40% of his sales go directly into advertising, royalties and food for the next week. He added that three of seven locations in his county have closed in the past year. Mr. Tate said that when his contract expires next spring, he will open his own independent store. Advertising funds are always somewhat of a mystery. Typically, the franchisee will pay about 5-8% into an advertising pool that is supposed to be leveraged across all applicable markets. Unfortunately, there is often not as much bang for the buck as the franchisor would like you to believe, particularly in the creative production and media buys. Quiznos example: Then there’s the issue of advertising. Quiznos’ agency is Cliff Freeman & Partners. According to TNS Media Intelligence, the chain spent $83 million in measured media in 2007 and $55 million in the first half of 2008. Despite the increase, many franchisees said that they rarely see their own ads, and most say the work isn’t memorable. (By comparison, Subway spent $361 million in during 2007, according to TNS. “The last good Quiznos commercial was Baby Bob, and that was 2004,” said Mr. Tate, who said he’s complained to executives about the creative. “I would challenge anyone to remember the last Quiznos ad they saw.”

Dream Dinners is an example of good idea but profit challenged 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. Franchisees accused the franchisor of false promises and unsubstantiated financial projections. A major point of contention has to do with rosy promises Dream Dinners seemed to have made to its franchisees. Under the Federal Trade Commission’s franchise law, franchisers are not permitted to make “predictions” about franchisees’ financial success–unless they do it in the Uniform Franchise Offering Document, which typically contains a host of disclaimers. Dream Dinners “totally disregarded these regulations,” says Garner. It not only posted financial projections on its company Web site, he says, it also put them in a Power Point presentation given to potential franchisees. Jennifer Hemann, a former Dream Dinners franchisee in Maryland and one of the plaintiffs in the suit, alleges that she was shown that Power Point presentation–which included estimated profit margins for a given volume of customers–when interviewing with the founders. “They told us, ‘Our lawyers said not to show this to …

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 …

Source Chris Toman’s plan to go green could have put him in the red. The owner of a local pizza franchise plans to apply for LEED certification for his 2,600-square-foot restaurant space on the back burner because it was going to cost too much. Toman said he would have to pay between $30,000 and $40,000 to become certified by the U.S. Green Building Council under its Leadership in Energy and Environmental Design program, which awards points to structures that are energy efficient and otherwise good for the environment. $40,000 for a small restaurant to get green certified is proportionally a huge expense., plus the cost of the alternative materials such as insulation made of old jeans and coke bottles for a countertop. Would that $40,000 be more profitably spent on advertising? While going green can sometimes attract additional customers in certain markets, the increase in price compared to the market will divert others to your competitors. Toman is opening a Pizza Fusion franchise, which requires all of its restaurants to be built to LEED standards, as part of its self-described mission to “Save the Earth one Pizza at a Time.” Not only are the buildings green, the chain delivers pizzas in hybrid vehicles. The cost of going green for Pizza Fusions in other markets is less than half of what Toman was told he’d have to pay here. Much of the cost goes to consulting companies that develop energy-efficiency plans for buildings seeking certification. These firms also make sure the buildings ultimately perform the way they were designed and file reams of paperwork required on all projects regardless of their size. “It seems like they’re overcharging,” he said. “I’m trying to do the right thing, but someone’s taking advantage of it and charging high rates.”

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.

As if the sub sandwich category wasn’t crowded enough, Domino’s Pizza is adding sub sandwiches to its menu and delivery service.  The $4.99 oven-baked sub sandwiches will include classic favorites like Philly Cheese Steak and Chicken Bacon Ranch. The move comes five months after Pizza Hut began delivering baked pasta dishes as well as pizzas. And it will be a wake-up call for sub shops Subway and Quiznos, which find themselves competing with pizza chains. For the pizza giants, the message is clear: If pizza sales aren’t growing in a sour economy, maybe something else will. Besides the hot subs and baked pasta, some pizza chains also deliver chicken wings. “It’s an attempt by the pizza players to try to get back into being a growth industry,” says Ron Paul, president of Technomic, a restaurant research firm. “They’ve all lost their mojo.” They also are further conflating a fast-food world that’s grown jumbled. McDonald’s (MCD), Burger King (BKC) and Wendy’s sell salads and chicken. Subway and Dunkin’ Donuts have tried pizza. Arby’s, once roast-beef-only, now makes a killing on Market Fresh deli sandwiches and sells toasted subs. Domino’s U.S. same-store sales fell 5.4% in the second quarter after a 5.2% decline in the first quarter. Brandon says the move should boost Domino’s lunch business and expects lots of calls from groups of office workers. (The minimum delivery order is $8 to $10, depending on location, and delivery fees are $1 to $2.) Rivals are unimpressed. Pizza Hut delivers hot sandwiches regionally but is focused on growing its national pasta delivery sales, says Brian Niccol, marketing chief. Tony Pace, marketing chief of the Subway Franchisee Advertising Fund Trust, says, “Domino’s is watching our success and wondering how to get a piece of the action.” Half of Quiznos’ locations deliver, and …

I know a man who became quite wealthy owning one of these. Franchisee’s Argument (Defendant): Allison’s FBO network responded with its own lawsuit, filed June 19, “for declaratory judgment and breach of contract.” The lawsuit claims that franchise agreements for the FBOs in Cincinnati, Columbus, Chicago Midway and New Orleans have “expired, been terminated or that the franchisees are entitled to terminate their franchise agreements,” and that agreements for Asheville, Charleston and Lafayette were never executed and that material terms had not been agreed on. The Jason III lawsuit also accuses MAI of “diversion of promotional funds and the dilution of the franchise brand resulting from unstable and deteriorating financial condition of the franchisor.”      Franchisor’s Argument (Plaintiff): Million Air Interlink (MAI), the franchising company based in Houston, filed suit against Allison’s FBOs in April, claiming that they “have taken steps to stop making payments required under the franchise agreements. Defendants are also terminating, or attempting to terminate, the franchise agreements and their obligations as franchisees without the contractual right to do so. Under the agreements, defendants are obligated to participate in an insurance program designated for the benefit of the franchisor and all the franchisees. However, defendants have terminated their participation in the insurance program in breach of their contractual obligations. Furthermore… defendants are also executing a plan to compete with MAI in breach of the franchise agreements.” MAI is seeking payment for damages exceeding $5 million plus payment for other costs, such aslegal expenses.      Source: AINonline.com

I’ve always thought that the best way to grow a franchisor is not to have the best product or service offering, but to offer the best franchising arrangements with flexibility.  It look like some hotel franchisors are taking that exact route and it is working.  A spokesman for Wyndham, Richard Roberts, said that all of the company’s brands require franchisees to sign up for a minimum of 15 years, except for Knights Inn, which offers three-year agreements. Asked about Ms. Sanders’s properties, Mr. Roberts said: “We consider details of our relationships with individual franchisees to be a private business matter. Anyone who wants to affiliate with Wyndham does so at their own initiative. The fact is there are 6,500 hotels in our system for a very good reason: We deliver value to our franchisees.” The brands also include Days Inn, Ramada and Howard Johnson. Ms. Sanders, though, has moved 17 of her 18 hotels to a new brand, Americas Best Value Inn. The company has broken ranks with its competitors by offering franchise agreements that are renewable each year. Offering an alternative to the industry’s traditional 20-year contracts has helped make Americas Best Value one of the fastest-growing lodging chains. Nine years after it was founded, its name is on some 800 hotels — nearly all of which once waved other companies’ flags. The company’s chief executive and president, Roger Bloss, sounds a populist message, calling Americas Best Value “a membership association” and allowing franchisees to vote on company policies, from what kind of shampoo to offer to how much they will pay in fees.

Article (India) Amid stiff competition from Chinese shoemakers, Bata India (BIL) is exploring a brand new franchisee model to launch its upcoming retail stores. It has decided to give older members of its workforce who are close to retirement an option to quit their jobs and run the new Bata outlets as franchisees. Interesting approach to finding qualified franchisees. Most franchisors do not have this type of large operating company to leverage before they choose a franchise model, but those who do may want to try this route.

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 McAlister franchisee with 30+ years of restaurant experience from Oklahoma is doing well. The article has some good tidbits: “Our business is actually up,” said Bothwell, attributing that to McAlister’s market positioning and lunch focus, which accounts for 65 percent of its revenue. “People seem to still be eating out for lunch.”Competing for the fast-casual market with such well-established companies as Panera Bread and Jason’s Deli, McAlister’s offers more than 100 menu items for lunch and supper, targeting health-conscious customers. “We have to get more sales to cover our increased operating costs,” he said, noting his average per-person ticket runs $7.85. His firm ended 2007 with revenue of $10 million, his stores averaging $1.5 million per year. With eateries to open this year in Shawnee; Lawrence, Kan., and Joplin, Mo., as well as at 21st and Yale in Tulsa, he projects 2007 revenue of $20 million.McAlister’s restaurants established in existing shopping centers, like his new midtown Tulsa deli, cost about $750,000 to open, said Bothwell. Stand-alone stores can run $1.5 million to get off the ground. Both employ an average staff of 50, now a greater challenge since Oklahoma’s new immigration law further drained the state’s tapped labor pool. UPDATE: May 29, 2008 @ 5:34pm EST UPDATE #2: June 4, 2008 @ 3:14pm EST There was an interesting comment to this post about whether a stand alone location can realistically justify the $1.5 million build out costs, which is double the $750,000 cost for a strip mall location. The short answer is yes. You wouldn’t need twice the sales, but there would be an incremental increase in sales to have the free cash flow to service more debt. Here’s the analysis: The monthly cost of borrowing an additional $750,000 @ 8% with 10-year repayment term is Loan Balance: …