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Cuppy’s Accreditation Revoked – No Surprise

The American Association of Franchise Dealers (AAFD), who previously awarded Cuppy’s Coffee a Fair Franchising Seal, has suspended Cuppy’s accreditation pending a determination of the Association’s Board of Directors at a scheduled meeting on September 24, 2008. This comes after many obvious shameful contracts breeches by Cuppy’s old and new management over the past year.   Below the fold you can read the entire statement released by the AAFD.   Here’s a link to the email sent by Robert Purvin, AAFD’s chair, to Cuppy’s owner Dale Nabors informing him of the suspension.  For a full background of articles, see FranchisePick’s biography of this situation.  Also read Paul Steinberg’s recent post on bluemaumau.org Blogger Opinions and Reports: Sean Kelly, Michael Webster, Janet Sparks

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Performance of Franchisees’ Loans

Below is the Small Business Administration’s annual compilation of performance data on thousands of franchisee loans it has guaranteed covering loans made from October 1, 2000, to September 30, 2007. A “failed loan” below is when the SBA must step in and pay back a loan that it has guaranteed. However, does failure rate of a loan equal the number of failed franchises? No, because the chart below only captures the worst of the worst, when someone completely abandons their debt obligations. Definitions are tricky and can mask the true data. Franchisees who sell their units and pay off or transfer their loan or franchisees losing money are not caputred. But, the value in the report card can be a vague checklist for avoiding high-failing franchises. Hat Tip: WSJ REPORT CARD Class Leaders Franchiser Failure Rate Failed loans Total loans Comfort Inn 0% 0 158 Primrose 0 0 110 Edible Arrangements 0 0 104 Massage Envy 0 0 61 Holiday Inn Express 1 1 157 Culver’s Frozen Custard 1 1 150 Hampton Inn 1 1 88 Bruster’s Real Ice Cream 1 1 84 Little Caesars Pizza 1 1 72 Fastsigns 1 1 71 Super 8 Motel 2 8 363 Best Western 2 3 156 Choice Hotels International 2 3 144 Rita’s Water Ice 2 2 103 Arco 2 2 85 Zaxby’s 2 2 81 Anytime Fitness 2 1 65 Econo Lodge 3 4 119 Goddard 3 3 109 Subway 4 84 1,974 Dunkin’ Donuts 4 17 410 Sport Clips 4 8 191 Cartridge World Stores 4 5 112 Travelodge 4 4 91 IHOP 4 3 67 Class Trailers Franchiser Failure Rate Failed loans Total loans All Tune and Lube 48% 37 77 Philly Connection 48 30 63 Cottman Transmission 46 75 163 Blimpie Subs & Salads 37 58 158 …

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First Watch to Franchise

When I lived in Cincinnati, First Watch was the place for the “power breakfast”, where movers and shakers would gather to strategize over coffee and omletes.  Meeting with a venture capitalist or political insider?  You would likely meet them at First Watch.  There is no First Watch where I live in Chicago, but here to breakfast is big deal for meetings with local favorites the Four Seasons,  Orange, Bongo Room, and East Bank Club. First Watch, the Florida-based chain with 76 company-owned restaurants in 11 states is planning to franchise this year.  It’s only open for breakfast and lunch, and is always located in affluent suburbs and downtowns.  Being closed for dinner, I was always skeptical that it could generate enough sales.  Apparently, that is not a problem.  Below If the site meets our criteria, we think it’s a good time to build right now. We’ve weathered this economic climate pretty well so far. We have a very low check average [$7.50], we think we put out a high-quality product, and our value perception is high with our customers. We think that’s actually helping us. So far it’s been OK. You’re not seeing declines in traffic or check averages? We are not. We’re actually on our 25th straight year of same-store-sales increases. We’ve had 24. You never want to say that you’re recession proof, and we certainly don’t think we are. All we’re saying is that for the pressures that the consumer is experiencing now, we seem to be an outlet for that. We don’t know if it’s a trade from another dining occasion, trading off the expensive dinner to maybe a nice brunch on Sunday at our place. But we’ll take that. Are you finding sites fairly easily? No, I wouldn’t say fairly easily. We’re pretty disciplined in what we’re …

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Using Weather to Increase Sales

Ace Hardware helping their franchisees by project weather-related sales: Ace Hardware’s Director of Inventory Control, Paul Sikes, pointed out that, “We have been able to make weather part of the DNA and culture at Ace, so that when we talk about sales opportunity, sales risk and past performance, weather is now just a part of that.” Sikes shared an example from ’07-’08 winter season when Ace substantially increased inventories for snow removal products based on Planalytics’ projections. “We made an extra $10 million in sales in a tough economy because we planned it and we bought it. We were able to service 91% on the hottest seasonal category I’ve seen in years at Ace because of the support of Planalytics and the actions we took off that information.” Subway franchised restaurants using weather to better understand buying trends: SFAFT is a non-profit organization that provides marketing support to Subway’s franchised restaurants. Adam O’Hara, Manager of Reporting and Analytics for explained in his presentation how the company isolates weather’s impact on sales through “a transaction-based model” specifically developed with Planalytics. “Our weather-driven demand number is tied directly to what percentage of our sales were up or down,” O’Hara remarked. “You would be amazed at the correlation between how our volume performs and how the weather performs.” Identifying the degree to which sales are impacted by weather enables SFAFT to better measure the effectiveness of advertising and to optimize the timing of programs going forward. Source: News Blaze

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Dream Dinners Hammered by Forbes

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 …

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Dippin’ Dots Competitors

[Post prompted by a comment on this blog] Many people believe Dippin’ Dots has a monopoly the cryogenically frozen “popcorn” ice cream.  However, the Dippin’ Dots patent was invalidated by the USPTO in 2007, in part because Dippin’ Dots founders had made sales of a similar beaded ice cream product to over 800 customers more than a year before submitting its patent application, which sales were not disclosed to the PTO – thus the prior art was obvious. (read the court’s ruling here ) Today, there are two main competitors of Dippin’ Dots – MiniMelts and MolliCoolz .

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Tart Frozen Yogurt a Fad? Roll Your Own?

Pinkberry Craze Frozen yogurt is hot again? Well, sort of. Given the implosion of the last frozen yogurt phase, you are wise to be cautious. The last frozen yogurt craze in the 1980’s and early-1990’s was lead by TCBY. According to the International Council of Shopping Centers, TCBY’s same store sales fell 10%-15% annually between 1997 and 2004, particularly when the low-cal and low-fat versions were introduced. The International Dairy Foods Association reported frozen yogurt production in the U.S. went from 118 million gallons in 1990 to 65 million gallons in 2005, a 45 percent drop.This time Pinkberry sure seems to be all the buzz lately, even being features in a recent American Express ad and having their hip tart frozen yogurt dubbed “Crackberry” playfully implying an addiction is possible. Here are photos of a Pinkberry in Manhattan. Founded by Shelly Hwang (coming off several failed small restaurant ventures) and Young Lee (a solo designer), they effectively brought to Los Angeles the tart frozen yogurt now famous in South Korea.Pinkberry has apparently been stretching the healthiness of its yogurt, and in early April 2008 settled a law suit where it was accused of misrepresenting its product as “frozen yogurt” and making bogus health claims, including that the dessert was “all-natural.” Pinkberry admitted no wrongdoing but is paying $750,000 to a local food bank and $5,000 to the “victim”. The article implies that the recipe is not all natural and has higher calories than the founder claims.Nevertheless, sales of the tart frozen yogurt are impressive. Pinkberry has put forth in the media unit sales of $250,000/month and has generated a plethera of copycats across the country, including Berrie Good, Yogurberry, BerrySweet, Red Mango, and recently Berry Chill here in Chicago. Pinkberry has supposedly ceased selling franchises for now. The Concept …

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An insiders view on why eBay Franchise Drop Stores failed

Scott Pooler, a former official eBay Trading Assistant, and a master franchise representative for an eBay drop store franchise chain weighs in on the subject of franchising and stand alone eBay drop stores in Trading Assistant Journal, a weblog that provides news and commentary for eBay consignment specialists. Scott’s experience on both sides of the fence reveals certain truths, and since he was at one time a proponent of the franchise model, his views are helpful to anyone considering the purchase of a new franchise eBay drop store or opening one on their own. These views are Scott’s opinion and do not reflect upon eBay any eBay franchise drop store chain in particular or upon eBay consignment as an addition to any other type of business. His views regarding the stand alone drop store franchise model and why it has failed are worth reading. Read the whole story Cross Posted at Let’s Talk Franchising

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Is that UFOC Updated?

Franchisors must keep their UFOC’s up-to-date, and at a minimum, must be updated when: The information contained in the UFOC document must be current as of the close of the franchisor’s most recent fiscal year. After the close of the year, the franchisor must prepare a revised disclosure document within 90 days. The franchisor must update its disclosures to reflect any material changes within a reasonable time after the close of each fiscal year quarter. A material change is generally “any fact, circumstance, or set of conditions which has a substantial likelihood of influencing a reasonable franchisee or a reasonable prospective franchisee in the making of a significant decision relating to a named franchised business or which has any significant financial impact on a franchisee or prospective franchisee.”  Examples of a “material change” include: changes in the franchisor’s management, corporate structure, address or interim financial statements; changes to the offer itself; closing or failing to renew a significant number of franchisees; and the filing of material litigation or administrative proceedings. Third, the FTC Rule contains specific updating requirements if a franchisor makes earnings representations. A franchisor must notify prospective franchisees of any material changes in the information contained in its attached earnings claim document prior to entering into the franchise relationship.

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Little Caesars Veterans benefits

U.S. Veteran and Little Caesars franchisee Patricia Evans celebrates the opening for her new Little Caesars Pizza Restaurant in Valdosta, Georgia. Evans is the fifth veteran to open a store under the Little Caesars Veterans Program which offers honorably discharged, service-disabled veterans who qualify as Little Caesars franchisees a benefit of up to $68,000. Honorably discharged, non-service-disabled veterans who qualify as Little Caesars franchisees are eligible for a benefit of $10,000. http://news.yahoo.com/nphotos/slideshow/photo//080130/480/60cbb1da1d1f490eb8e41cb12271e710/

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PR Through Surveys

Clever. Pay for a survey about Super Bowl eating habits, get free publicity, get your brand associated with “healthy” and “Super Bowl”. SUBWAY Restaurants, which has long been committed to promoting “better-for-you” meal options among both children and adults, conducted an Omnibus survey of more than 1,000 Americans regarding their Game Day snack consumption habits and learned they overeat the most during the Big Game (27%)–trailing only Thanksgiving (85%) and Christmas (61%). More than half surveyed (59%) admitted to overeating during the Big Game and reported gorging themselves on nachos, fried chicken, chicken wings, pizza and other generic “junk food.” Methodology: An Omnibus survey conducted a telephone survey on behalf of SUBWAY(R) Restaurants of a nationally representative probability sample of households; 1,090 interviews were completed among adults ages 18+ (53 percent female, 47 percent male). Interviewing took place January 7-9, 2008.

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Quiznos Claims More Profits for Franchisees

I would not let one semi-positive article influence my opinion of Quiznos, but here it is: A year after some franchise owners sued Quiznos over business practices, the restaurant chain’s chief executive said Monday he expects franchisee profits to increase 60 percent overall in the wake of improvements to the system. 60% increase sounds fantastic, but it is relative from the starting profit level. Going from a $20,000 profit to a $32,000 helps but doesn’t save the day. Danny Kessels, a Quiznos store owner in Boulder who said he was not invited to the meeting, said he knows of other Quiznos store owners who are struggling. “Nothing’s really changed, in my opinion,” said Kessels, the head of an Quiznos independent franchise group called the Toasted Subs Franchisee Association. “The whole system is still on shaky ground.” It looks like the new CEO-turnaround specialist is trying to make changes, but as I have personally learned in business – don’t try to catch a falling knife.

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Franchise News Roundup – 11/26/2007

Gas prices hurting delivery drivers. New owner of Shoney’s hopes to fix the brand by improving the food freshness, more upscale menu items, and upgrade the buildings. Quote: Franchisee Glenn Wood rum, who owns 21 Shoney’s in South Carolina, Georgia and Florida, said he sometimes disregarded corporate norms in the past in an attempt to boost his own profits, but now he’s looking forward to more continuity from headquarters. “Any change in the right direction is what we want,” he said. You will be seeing a lot more co-branded Noble Roman’s Pizza and Tuscano’s Italian Style Subs.  ….The Area Development agreements entered into thus far provide for the sale of a total of 868 units over multi-year periods as defined in the various individual agreements. The company will continue to market its traditional co-brand business by offering additional development territories. Additionally, the company has also sold 53 traditional co-brand franchises directly to individual franchisees… The company’s traditional co-brand franchise program would be strengthened by several operational enhancements. These enhancements include: more rigorous franchisee selection criteria; a longer, more robust training period for new franchisees; more direct franchisee involvement in the construction and marketing processes; and intensified monitoring and enforcement of operating standards and unit performance. Recognizing that these steps could slow the speed of franchise development within territories covered by existing Area Development agreements, the company intends to offer reasonable accommodations to the exclusive development time frames specified in those agreements so as to align the interests of Area Developers and the company in sustainable growth of the traditional franchise program. In Taiwan, franchisee are mostly between 30 and 40 years old.

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Franchise Benefiting from Slump in Housing

Homevestors garnered a positive article in the Washington Post yesterday. HomeVestor franchisees pay a $49,000 fee upfront and must have net assets of $200,000 in cash or cash equivalents. They also pay the parent company $775 for every house they acquire, plus interest on credit lines the company extends to enable them to buy multiple properties. Some HomeVestor franchisees buy, fix, rent or resell 100 or more houses a year, thanks in part to high volumes of potential sellers — more than 200,000 this year, Hayes said — who are driven to them by the company’s advertising campaigns. Subprime mortgage delinquencies and foreclosures are swelling those numbers significantly, he said, along with plunging prices in some local areas. Softening markets also are driving down the expected discounts on troubled houses. Whereas in past years, “we might offer 65 percent of a property’s expected value after repair, now in some places we’re looking at 50 percent,” Hayes said. A $100,000 starter home with a seriously delinquent mortgage and in need of renovation, for instance, might draw an offer of $50,000 to $55,000 cash from a HomeVestor franchisee. I was with a real estate broker the other day when he received a buy offer for his client’s residence that was 50% below asking. The broker scoffed and refused to take the offer to the seller (which is unethical unless the owner gave instructions not to accept anything below a certain price; I think part of it too was the broker wanted his commission to be higher). Nevertheless, companies like Homevestors provide liquidity to distressed properties. It’s hard to believe that a perfectly good property would drop in value 50% in a few years in popular part of the country (Miami in this article), but at the end of the day the …

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Prices on Required Purchases

From the Columbus Dispatch: DavCo Restaurants Inc., a Maryland company that owns 160 Wendy’s restaurants, contends that Wendy’s required franchisees to buy only Coca-Cola products, set a price higher than market value for those products and used the funds for advertising. Dave Norman, DavCo’s chief financial officer, said his company believes its agreement with Wendy’s allows DavCo to suggest alternate suppliers. Further, Norman said, Wendy’s didn’t give DavCo a credit against its required contribution to the national advertising campaign. Both constituted breaches of the franchise agreement, he said. Franchisors will claim that the mandatory vendors are passing on savings to franchisees through volume discounts it can achieve through negotiations. Franchisees will claim that the vendors prices still are inflated partly because of the rebate paid to the franchisor. There’s a “very significant difference” between the cost of products in Wendy’s contract with Coke and the price an open bidding process would bring, Norman said. Competition and competitive bids almost always produce lower prices and better service. Franchisees should look for franchisors that are flexible with their vendor requirements, permitting the franchisee to select their own suppliers and vendors so long as the quality is the same as the required vendor. If this is important to you, there MUST be language iinserted into the franchise agreement stating that such supplier substitutions are permitted and permission will not be unreasoably withheld.

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