Royalty and Advertising fees of sandwich franchises

Money TalkI pulled together some numbers of required royalty and advertising fees for sandwich franchises:

Required Royalty and Advertising Fees for Sub & Sandwich Franchises
Subway 12.5 %
Quiznos 11 %
Mr. Hero 10.5%
Blimpies 10%
Jersey Mike’s 10%
Philly Connection 10%
Togo’s Eatery 10%
Zero’s Subs 10%
Firehouse Subs 9%
Jerry’s Subs and Pizza 9%
Burger King 8.5%
Charley’s Grilled Subs 8.25%
Capt. Subs 8%
Cousin Subs 8%
Hungry Howie’s Pizza and SUbs 8%
Subs Plus 8%
Great Outdoors Subs 7%
Lenny’s Sub Shops 7%
Moe’s Italian Sandwiches 7%
Nathan’s Famous 7%
Pickerman’s Soup & Sandwiches 7%
Port of Subs 6.5%
Sub Station II 6%
Baldinos Giant Jersey Subs 5%

An 8% difference in the fees for a franchise with $500,000 in sales is $40,000. Many would die to have that extra $40,000 to hire a qualified manager, enabling the franchisee be more of an absetnee owner.

Lower doesn’t necessarily mean better. I would want required pooling of local (maybe regional) funds for collective advertising and promotions.

The Lenny’s Sub Shops hype

Many people think of franchises as individually owned, mom-and-pop run businesses. On the contrary, many large corporate style operators with access to large quatities of capital have been in the business for a while. For example, I’ve heard a lot of about Lenny’s Sub Shop lately but haven’t been in one. The company started in 2001 and now has 63 franchises in the southeastern United States. This week a large investor group of former CEO’s living happily in Florida got together and signed a deal to open 125 Lenny’s Sub Shops in South Florida. The article says the deal is expected to contribute over $1 billion in revenue (that sounds way high, that is over $8 million in sales per store).

Looking at the photos on their web site, the Lenny’s ubs looks very similar to Jersey Mike’s, and somewhat similar to Jimmy John’s.

Lenny’s cost to open a store is claimed to be under $225,000, which includes all fees, build out costs and initial operating capital. The roaylty AND national marketing fees total 7%. Maybe worth a look.

If students can do it without a franchise…

I’ve written a few articles on eBay drop offs. I was neutral on the franchise…

Pros:

  • it’s a service people will use
  • eBay buzz and hype is still strong
  • all franchisors are charging the same 35% fee (for now)

Cons:

  • the business is too simple to start, has no barriers to entry, new competitors will literally springing up overnight
  • existing used and consignment stores will soon add eBay sales

  • the service will have to compete based on fees (who wants a constant lowering on margins?)

I’m sure I’ll be negative on the business within the next 5 years, but for now I’m staying neutral because the next 2-3 years will be strong.

Want proof the eBay drop off store is easy to start and run without a franchise? Campus Easy Sales recently set up shop on the Washington University in St. Louis campus. A couple of fulltime students thought it’d be a good idea and just started it. They do nothing different than any other franchise out there (the hold the item, take pictures of it, post an ad on ebay, ships the item after the auction ends, and send the seller their cut). However, the total fees add up to ONLY 24% COMMISSION off the first $500. Compare to other eBay drop offs who charge 35%. You can bet your dog’s favorite toy this puppy will see their commissions slashed to 25% or less in a few years.

Let’s look at a personal concierge service

I don’t get Entrepreneur Magazine sometimes. According to an article in the Las Vegas Business Press, Entrepreneur Magazine named a personal concierge service called “My Girl Friday” as one of the “hottest new franchises” in 2005. The first franchise was launched in 2005! How can a personal franchise business with one franchise in the personal concierge industry (seems I’ve been hearing its the hottest thing for the past 10 years) be named the “hottest” with ONE franchise?

The article’s author showcases her lack of business knowledge in this paragraph:

Hagenmaier projects that the Las Vegas operation of My Girl Friday will grow from one person to having from five to ten employees in the next 18 months. The company hires independent contractors, which mostly appeals to people willing to work flexible hours. Brommenschenkel explains that college students and retired workers make ideal independent contractors, because of their flexible schedules.

By definition independent contractors are not employees. It’s a small issue but that stood out to me.

Here’s more of the business description:

Services cost clients anywhere from $30 to $60 an hour, depending on the chore…My Girl Friday offers a full menu of services including traditional concierge services, personal chefs, errand running, pet care, party planning and assisting with business tasks.

She sounds like a personal assistant. So people will hire this woman as both a personal chef or party planner in Las Vegas? I suppose it is possible.

In my opinion, there are not many errands worth $60/hour. Most things for a minimal fee can be delivered and arranged quickly from a web site or one minute telephone call (travel, food delivery, dry cleaning, courier, pet sitter or walker). This business will be fighting technology and streamlined personal services offered directly from the service supplier (remember what happened to travel agents?). This is not a market I see growing or easy to establish a sustainable level of customers. Building a customer base that you serve on a daily or weekly basis will be exceedingly difficult. My Girl Friday franchises cost anywhere from $47,000 to $86,000, including the franchise fee.

Fastest Growing Franchises and other data

You’ll find some interesting information in this document from the 2005 Franchise Finance Conference. Using their methodology, our friend Dippin’ Dots was the fastest growing franchise. The median investment was between $93K – $185K, with CompuChild USA being the lowest with a $8,850 franchise fee.

Sample Uniform Franchise Offering Circular

The Federal Trade Commission (“FTC”) requires that a franchisor provide full disclosure of the business to a prospective franchisee in the form of the UFOC. You must be given the Uniform Franchise Offering Circular (“UFOC”) at least 10 days before signing any franchise agreement or during your first face-to-face meeting, whichever comes first.

Ever wonder what a UFOC look like? Download and check out Durango Grill’s UFOC (pdf). It’s from 2001, so it probably isn’t their current UFOC.

Update 4-27-2005: Fixed broken link to UFOC

OK, I’m back

Well, I made it! Now I live downtown and have a wonderful view of the skyline.

I used eMove to hire some guys to help me move. On that site (owned by U-Haul) you can hire strong laborers by the hour to help you load a truck. I’ve used them 3 times already, and they cost between $15 to $40 an hour per man.

Will post again in a few days

Hello loyal readers. I’m moving and need the next few days to pack and unpack my stuff. I’ll repost again starting Monday, April 25.

Get ready for some educational reads such as REAL financial statements from a variety of franchises that the smart Franchise Pundit fans have emailed in. ๐Ÿ˜‰

Opportunity in School Uniforms?

Business uniform suppliers like Cintas have been wildly successful. The academic uniform business can learn a thing or two from the Cintas’s of the world. Can similar success be found in academic uniforms? So far the company has a compelling and fair proposition. Let’s take a look.

Educational Outfitters is attempting to establish a national presence with academic uniform stores through franchising.

The company claims to be the first franchise opportunity that offers retail stores selling school uniforms and dress code apparel. Their customers are parents of students enrolled in Kindergarten through 12th grade at private, parochial, Christian and public schools.

Pros:

  • no well-known national retail store chain
  • even if uniforms are purchased through a catalog, embroidery of the school’s emblem is usually done locally
  • local store competition is disorganized
  • more and more schools moving towards requiring uniforms
  • the Department of Education promotes uniforms
  • expanding to supply non-school uniforms is possible (sports uniforms, local business uniforms)
  • high repeat business during elementary/high school
  • no national advertising fee, 3% must be spent locally at franchisees discretion (can be rebates/kickbacks to schools)
  • opportunity for non-academic embroidery service and promotional merchandise

Cons:

  • local relationships with school officials may initially be a hurdle
  • uniform sales are seasonally weighted
  • online and mail order competition is growing (i.e. Land’s End)
  • school uniforms are a commodity priced product, must compete on service, price and convenience
  • possible trademark issue in Texas

I thought about this business, and maybe they can improve on the marketing angle by selling the uniforms in a flat-fee uniform service for students. For example, $75 will give the student a uniform with up to 3 “free” exchanges for new uniforms over the year in case of stains, rips or size changes. This worry free approach will enable premium pricing, give parents peace of mind, and tells a simple differentiating story. Or, perhaps they can rent used uniforms for a lower price if the fabric can last that long. Both are examples of moving towards the Cintas uniform rental model.

In my opinion, Educational Outfitters has the makings of successful franchise. The fee structure is fair, the market is growing, non-academic embroidery can supplement income, uniform purchases are required for many students, and the competition is generally inexperienced at competing with aggressive multi-unit retail powerhouse. I’d buy it!

QSRs see small sales increases

I pulled some numbers together on the average 1 year same store sales growth in 2004 of quick service restaurants (and a few non-QSRs):

2004 same store sales growth
Tim Horton’s + 12.1%
Qdoba Mexican Grill + 10%
Jamba Juice + 8.0%
Steak & Shake + 7.8%
Boston Pizza + 7.4%
Sonic + 6.5%
Hardees + 6.4%
Pizza Hut + 6.0%
Denny’s + 6.0%
Cosi + 5.9%
McDonald’s + 4.4%
Jack in the Box + 3.1%
Carl Jr. + 3.1%
Taco Bell + 3.0%
Panera Bread + 2.7%
Dominos + 2.1%
KFC + 1.0%
Wendy’s – 2.0%
Gloria Jean’s – 3.5%

Is your QSR doing better or worse? Rumor has it the big sub franchises (Subway, Blimpies, Quiznos) aren’t doing nearly as well. Apparently the franchisors are squeezing the profitable stores by putting in new stores nearby to maximize their franchise fees and royalties. What a great reward for beating the average!

Update April 16, 2005:

Aggregate data:

Same-store sales from 53 quick-service and family-dining chain restaurant companies, representing more than 40,000 units, were up for the 86th consecutive week as of Feb. 21, 2005 and rose 4.6 percent for that week, according to the NPD Group, the foodservice market research firm based here.

NPD, which tracks weekly sales trends at chains and independents, said the average same-store sales increase during the 86-week period was 4.4 percent. The upswing since July 2003 followed two years of flat or negative growth, NPD reported.

Chain restaurants captured an additional 3 percent of the foodservice market between 2001 and 2004, at the expense of independent restaurants, NPD added. It said consumer demand was driven by quick-service restaurants’ new menu offerings that focused on higher quality and innovation. link to source

Update April 17, 2004 (Hat Tip: Brad. Thanks for sending the link!)

And more…

Between 2003 and December 2004:

  • 64% of restaurant operators reported a same-store sales gain
  • 20% of operators reported a same-store sales decline

(source: National Performance Index authored by the National Restaurant Association, 2005)

Dubious Franchise Salesmen

Those looking to buy a franchise should read this article at the Denver Post. It tells the story of a semi-famous author who wanted to get into the smoothie business by buying a Juice Stop franchise (now defunct).

The moral of the story?
When deciding whether to buy a franchise, your diligent independent research is essential. While some franchises have help people achieve their own version of success, too often people are destroyed emotionally and financial.
The prospective franchisee should ignore the saleman’s pitch, and make the decision to buy based on one’s own research and facts.

Those with moderate financial success are accustomed to investing many thousands in stock or real estate without a lot of indepent research. If it looks good and seems like a fair price, we buy it.

An investment in a franchise, however, shifts much of the burden of earning a return on you and the integrity of your franchisor. The upfront independent research must include background checks on the franchisor’s management and interviews with existing franchisees. Hell, pay some franchisees to see and photocopy their financial results. That will give you a model of some realistic financials. It’s that important.

The article ends by describing how the franchisors of Juice Stop filed bankruptcy, and several years later the same people started another juice bar franchise called Squeeze. I know it most people improve after making mistakes, but I don’t trust those guys. It’s one thing to fail, but your true character is exposed when you lie and ignore your franchisees on the way down.

This story should keep you on your skeptical toes when investigating franchise opportunities.

Tom’s Foods vending franchises

Vending seems like a stable, low overhead, recession proof business, right? Not for Tom’s Foods and their franchisees. They filed bankruptcy last month.

Tom’s Foods Inc. has reported a lender has filed a motion in the New York Supreme Court seeking $60 million plus interest that Tom’s owes it…..

The company has changed hands three times in the past 21 years and hasn’t turned a profit in more than a decade, posting a loss of $3.3 million in 2003 on revenue of $196 million. Tom’s today sells more than 300 snack food products in 43 states. It operates manufacturing plants in California, Florida, Tennessee, Texas and Georgia, including three in Columbus. It employs 1,650 people.

You can look in the back of Entrepreneurship Magazine and see dozens of ads for snack food and candy vending franchises (remember the 6-foot gumball machine?).

Maybe their franchise infrastructure and training have contributed to the problem. Check this out in the FAQ:

5. Am I required to attend any training programs?
No. Tom’s has no requirements that you attend training programs…

No training is required for franchisees? Maybe they give franchisees a magic truck that overcomes any lack of training.

Dippin’ Dots decent

Dippin Dots logo
Dippin’ Dots has a good reputation as a franchise, this link is one example. I have been unable to find a single unhappy franchisee, though I’m sure at least a few exist.

Some of you have heard this story before. Microbiologist Curt Jones, using a scientific background in cryogenics as his guide, invented his beaded ice cream product and founded Dippin’ Dots in March 1988.

Here are some pictures so you can get a better feel of the franchise:








Dippin’ Dots now has 55,000 square feet of production facility in the U.S. and 20,000 square feet in South Korea. Dippin’ Dots are sold in 250 retail locations and thousands of entertainment venues and special events nationwide. The company’s Global division oversees licensees in nine countries. The flavored ice Dippin’ Dots are Kosher to ๐Ÿ˜‰ .

Qualifications to buy a franchise
Net worth requirement is $250,000, liquidity requirement is $75,000. The initial franchise fee is a low $12,500 and royalty is only 4%. What’s the catch, you say? Well the ice cream (dippin’ dots) must be purchased from the franchisor, of course. But the franchisees seem happy, 95% own more than one franchise and few are for sale (I’m going to call the company and get the exact number for sale).

Via Dippin’ Dots corporate web site, the estimated initial investment ranges from $69,539 to $214,750 (kiosk or built-in store)

Would I buy a franchise?
The biggest threat I see is the increasing alternative sales channels creeping on my territory. For example, Dippin’ Dots will soon be served in McDonald’s restaurants. Dippin’ Dots vending machines are popping up, including in suburban malls where most Dippin’ Dots kiosks are located. Offices, catering parties, and school and charity fundraisers can order their Dippin’ Dots directly from the corporate web site, bypassing franchisees.

Still, the market is young and the novelty of the dots are unlikely to wear off. The product is well protected by at least 11 patents, and has few disgruntled franchisees and few franchises available for resale. I still want to speak to a few franchisees but I’m leaning toward buying this franchise.

FYI: Forum is now open!

The Franchise Pundit discussion board (or forum as some call it) is now ready and waiting for you! On the forum you can ask questions, share you experiences, make recommendation, dish the dirt, spread the gossip, complain, and much more ๐Ÿ˜‰ .

There is a permanent link in the upper right corner of this page.

Copycat franchises

It’s amazing how similar some franchises look. Here are two lady-only fitness franchises – Liberty Fitness (left) and Curves (right) :

It looks like the identical building, identical machines, and identical recovery boards. I’m sure the corporate offices can tell you the difference between these franchises, but, more importantly, can potential customers tell the difference?

Entire Agreement

Have you seen this clause in your franchise agreement? I bet you have. It goes by several names, but usually it is headed as “Entire Agreement” or “Merger Clause”. Unfortunately, franchisees often underestimates the power of this clause in their contract:

Entire Agreement: This Agreement and the Attachments hereto constitute the entire agreement between Franchisor, Franchisee and Franchisee’s Principals concerning the subject matter hereof. All prior agreements, discussions, representations, warranties and covenants are merged herein. THERE ARE NO WARRANTIES, REPRESENTATIONS, COVENANTS OR AGREEMENTS, EXPRESS OR IMPLIED, BETWEEN THE PARTIES EXCEPT THOSE EXPRESSLY SET FORTH IN THIS AGREEMENT. Except those permitted to be made unilaterally by Franchisor, any amendments or modifications of this Agreement shall be in writing and executed by Franchisor and Franchisee.

I know the franchisee sales reps are funny, confident, smart and seem trustworthy, but they earn a commission for selling you a franchise. Unless a claim they made is specifically written in the franchise agreement, they probably won’t deliver on it. If you ask the sales rep to include a claim or promise they made in writing and they refuse (and say, “Legally we can’t put it in writing, but don’t worry…we’ve been around a long time and you can trust that we’d never do anything to hurt our franchisees”), you can bet your goat they won’t make good on it.

Courts almost always enforce the above Entire Agreement clause even if the franchisor made different claims before the contract was signed. Most of the rules governing franchises are state specific (except the FTC rules), so speak to a franchise lawyer in your state and get informed! Call your local or state bar association and ask for a list of attorneys practicing franchise law.

I’ll write a post on how to select a good franchise lawyer soon.