March 2010 – Same store sales update

Quick service segment 4th quarter average same store sales: -4.7%

  • Arby’s: -11% (only down 7.4% in January)
  • Wendy’s: -3%
  • Sonic:  -13% (blames the heavy snow)
  • Carl’s Jr.: -2.6%
  • Hardees: -6.2%
  • McDonald’s: +.6%

Casual dining segment 4th quarter average same store sales: -4.2%

  • Buffalo Wild Wings:  +2.0%
    • fun facts—-Buffalo Wild Wings essentially sells a neighborhood sports bar concept. It features Buffalo style chicken wings, burgers, and other “bar” foods. Takeout represents about 13% of sales. Another 22% of total sales are derived, not surprisingly, from traditional chicken wings. Boneless wings, which have better margins than the regular kind, were 19% of Q4 sales, up from 17% in Q4 2008.
  • Famous Daves:  -6.3% for company-owned restaurants and -8.5% for franchise-operated restaurants.
  • Morton’s: -11.6%

Fast Casual segment 4th quarter average same store sales: -.08%

  • Panera Bread: +7.4%
  • Cosi: -11.9%

Pizza segment 4th quarter average same store sales: +1.8%

  • Domino’s: +1.8%
  • Papa  Murphy’s +2.0%

Family dining segment 4th quarter average same store sales: -2.7%

  • Steak n Shake: +14.4%
  • Frisch’s Big Boy: -.4%
  • Cracker Barrel: -.2%
  • Denny’s: -6.1% at corporate owned units, -7.2% at franchised units
  • iHOP: -3.1%

Spicy Pickle in Financial Trouble

[updated so moved back to the top]

Founded in 1999, Spicy Pickle is not have a good run.  In 2008 the company’s income was $4.4 million but their expenses were $10 million, for a loss $5.6 million.  In 2009 income was $4.1 million, and they slashed expenses and payroll to $6.1 million, for a loss of $2 million.  They now have $800,000 left in the bank.   They are desperately working on a new round of financing.   I’d have to see unit performance and lease rates, but it could be an attractive acquisition for veteran QSR investor.

It also franchises a brand called Bread Garden Urban Cafe…a Canadian sandwich and bakery QSR I never heard of.   The franchisor employs 28 people.

Update: March 18, 2010, 10:00PM CST

I updated the above financials stats with more details.  I was still curious about Spicy Pickle’s financial predicament so I did more research.

Back in 2007, Spicy Pickle needed to raise more money.  So it sold preferred equity that gave the holders superior rights to its assets and priority to dividend payments, and I’m sure other special treatments were in the agreement like rights of refusal for issuing more preferred equity.  Fast forward to 2009, and Spicy Pickle needs money again.  What’s left to give away?  Not much, so it had to buy back the preferred equity.  In 2009 with around $2 million in cash left, Spicy Pickle paid $1 million of its common stock and $800,000 cash to buyout the preferred equity holders.  Clearly they wanted those preferreds out!

Oversaturation Hitting Qdoba

In Boston, the area developer is not paying its bills.   If Qdoba was the only fast fresh Mexican game in town they’d be doing fine.   That segment is being flooded with new concepts and the industry is suffering.   But, over-staturation is the norm now with with every ‘hot’ franchise segment nowadays.   Things will eventually shake out with the strong surviving.

Former Franchisor Execs Becoming Franchisees

Staying on the pizza topic for a moment…..Little Caesar’s and Donatos (both pizza) have a large number of former company executives that have transitioned to franchisees. That is a good sign and both are adding units faster than their counterparts in the industry, each for different reasons (LC for price, D for uniqueness). Little’s Caesars hot-and-ready pizza deals have been a hit with a simultaneous improvement in quality from high speed impingement ovens. Donatos’ pizza is a very unique thin pizza similar to a St. Louis style or Chicago thin style, and it has operations and pizza assembly down quicker than anyone I’ve seen. Surprisingly, Little Caesars makes their own dough while Donatos uses preformed frozen dough that arrives ready to bake on a disc.

Asking a franchisor salesman how many executives or former executives are franchisees is a great question.

Obika – Mozzarella Bar – Needs Work

I thought Obika, a Fresh Mozzarella Bar concept from Europe, would do fine in the big cities and may ultimately make a good franchise, succeeding by shadowing the locations of Au bon Pain. I assumed their dozen overseas locations would have been prepared a powerful USA launch. But, the NYC location is not earning universal fondness from New Yorkers.

The look is modern and euro, and it has the right formula of escalating a familiar food to a higher level of passion. However, it fails in execution – service is too slow and the sandwiches are simply average. When people are paying a premium ($10 a sandwich), your niche is smaller and there is more pressure to earn repeat business from the local workers. I would imagine they have to do at least 350 transactions per day to break even. Eventually the number of potential new customers will dwindle to unsustainable levels and survival will depend on repeat business. I still think Obika will make it, but the chances of it being a 10+ unit chain in the USA are very slim.

Better Burger Trend Peaking?

Elevation Burger, the well branded organic better-burger franchise, closed it’s Baltimore franchise.  Reviews were pretty bad.

As a whole, healthy, all-natural, and organic concepts have been having a hard time making their sales goals,  except for notable exceptions like Chipotle.  Everybody says they’ll go for healthy options, right?

You have to watch what people do and not what they say.  I’m sure most people reading this post would say during a focus group, “Yes, I’ll pay a little premium for the organic meal”.  But, in reality what do you do?   Most of the time you purchase based on convenience, taste and price as long as you deem the quality above an acceptable level.  I was reminded of this recently from a PepsiCo executive.  Chipotle is the rare bird – it succeeds because it tastes good, is priced competitively, the line moves very fast, and most people don’t even realize the food is mostly organic.

Another “healthy” brand to watch is Naked Pizza because it has signed several area development agreements for hundreds of units but lacks experienced management. A reviewer on Yelp stated, the “cheese was rubbery and the pizza was cardboard” – ouch! Naked Pizza has gathered remarkable attention for only having a single location.  The buzz is the result of winning an open venture funding call in a blog post from billionaire Mark Cuban.  It’s also reknowned for embracing of twitter (a billboard simply lists it’s twitter address).  A recent article summarizes the Naked Pizza idea:

NakedPizza’s solution is an all-natural, fortified pizza, made with simple, unprocessed ingredients, informed by science and made affordable and available through the proven carry-out and delivery model. It’s signature difference is a crust made with a diverse blend of “ancestral” whole grains, seeds and beans fortified with prebiotic fiber and probiotics (live, beneficial, cultures) for digestive health, balance and well being. The sauce, cheese, meats and vegetables toppings are all-natural with no added sugar, trans fats or high-fructose corn syrup. The company also offers a glutten-free crust and all-natural soy cheese. With less calories, lower glycemic index, and more protein than traditional pizzas and benefits including bone health and immunity, NakedPizza is the world’s first functional pizza.

Seattle’s Best Coffee in Burger Kings; $1 Menu Update

Seattle’s Best will replace BK JOE’s coffee program in Burger Kings by September 2010.

I’m sure this is a good financial deal for Seattle’s Best (owned by Starbucks) and will help BK increase its perceived coffee quality, but in the long run I believe this will hurt Seattle’s Best perceived brand quality.  Why?  Because BK is unable to enforce quality standards in its stores.

Most people have an above average perception of Seattle’s Best Coffee, a somewhat premium coffee brand akin to Caribou Coffee or Gloria Jean’s.  On the other hand, Burger King quality image is quite poor, with people citing dirty stores, low quality meals and lazy employees.  Quality issues are due almost entirely to unmotivated employees and lack of leadership from the absentee franchisees.  It’s clear as soon as you step into a BK that there is little company pride or culture.  And when your employees don’t give a crap, your coffee standards (brewing methods, time in the pot, keeping coffee at ideal temperatures, etc.) will be ignored, to the eventual detriment to Seattle’s Best.

On a side note, Burger King is wisely taking a page from McDonald’s by dropping a slice of cheese from it’s $1 double cheeseburger.  The article mentions that BK is signaling removal of the $1 double cheeseburger from the dollar menu in the spring, and it’s testing higher prices for its $1 Whopper Jr.   Was the $1 double cheeseburger really worth all the fighting with franchisees?

Discounted Franchise Fees, My Perspective

dollarOver at the BlueMauMau blog, there was a post about Huddle House discounting their upfront franchise fee from the magical $25,000 to $5,000 and waiving the royalty for the first five months. Some comments frowned upon franchisors who discount franchise fees. Here my opinion:

Count me as one who loves to see franchisors discount their fees as done by Huddle House. The goal of the franchisee should be to get the highest likely return on invested capital for their risk profile. My point is that franchisors should be more willing to base their fees on market demand like all other services.

Nearly all industries (and even financial instruments liked bonds) fluctuate their pricing based on many internal and external factors, particularly balancing prices with demand. Selling franchises should be no different.

Support suffers to the point of reduced sales for the franchisee if fee are discounted? Perhaps in some instances, but it is the exception rather than the rule. Per franchisee support expenses between can vary tremendously between franchisors, and the use of technology and other efficiencies can dramatically reduce support expenses. Maybe the franchisor’s fees were too high to begin with and now they are drifting in line?

A few commenters missed the point and disagreed, arguing that reduced fees makes it almost certain you’ll earn lower returns.  My response:

Come on – I wasn’t suggesting investors focus on year one returns, nor was I suggesting you ignore non-financial issues.  I am suggesting that a franchisor reducing upfront and ongoing fees often can, but not always, make the investment more attractive.

Projecting your return on invested capital is based on the entire expected life of the investment.  After you review your expected return on invested capital, then you consider and adjust for intangible factors such as franchisor quality, location, levels of controllable and non-controllable expenses, desired income and investment return given the risk, alternative investments, and so forth.

Forums Down Temporarily

The forums are temporarily down due to technical issues with the web hosting company.  I’ll get them back up shortly.  Thanks for your patience!

  •  Update Feb 9, 2010: We’re back in business, all is fixed. 

Smart Money Buys Dominos Franchisee In Japan

Bain Capital employs some of the smartest financial and strategic professionals in the USA.  Bain Capital originally funded Dominos Pizza back in the late 1990’s and reaped a hefty profit when it went public in 2004.  Now, Bain Capital is jumping back in with Dominos by acquiring the Japanese master franchisee, who delivers pizzas that often cost over $40 in Japan.  With Bain’s history in Dominos, I would bet that this is a smart investment.

Pizza chain sales down across the board

Pizza chain sales are down:

  • Pappa Johns: -5.7%
  • Pizza Hut: -12.9%
  • Dominos: -6.5%
  • Sbarro: -6% domestic, -13% internationally (taking into account increase in US dollar)

Sbarro’s attributes a drop in sales to a drop in mall traffic.
What is up?  Frozen pizza sales.

Frozen pizza sales rocketed to $4.4 billion in America last year from $3.1 billion in 2000, the Minneapolis Star Tribune reported this week, citing market research by Datamonitor Inc.  Sales of private-label brands (produced by chains such as Walmart, Jewel, Dominick’s and Target) have risen more than 20 percent in the past year.  Clearly, cost and an acceptable level of quality is at play here.

In related news, Kraft Foods Inc., maker of DiGiorno, Tombstone and Jack’s, said it selling their brands to Nestle so it can fund an acquisition of Cadbury.

Potbelly’s Sandwich Works in Chicago Begins Franchising

I’m a local Chicagoan so Potbelly’s Sandwich Works news is interesting to me.  As you’ve probably heard, Potbelly is now franchising their potbelly stove themed restaurant.  Their web site lists the total cost to open between $500k-$750k with a heavy $40k franchise fee.

I predicted this early in 2009 after I noticed job posting listing franchising experience and a little snooping.

A previous insider comment to a blog post on Potbelly has always stuck in my head which makes me pause about the opportunity.  I’m pretty sure I know the person who wrote the comment:

Potbelly is another stab in the dark venture that suffers from ridiculous logistical design, high labor costs, exorbitant pricey locations, and excessive buildout costs.  Is there any wonder thay GREw so much.  did you expect them to just sit on the 100,000,000 raised by Starbuck’s Maveron Group.  funny, potbelly has turned one quarterly profit in about 6 years and had three presidents in three years.  The lines which everyone seems to think are the sign of success are a sign of basic incompetency and presume people will continue to buy into hype for a three day old bun baked by Turano (same as the other great success story Quizno’s ) and generic low quality meat that’s run through a conveyor oven which can’t be delivered or catered without serious degradation in quality.  other than the expensive logo vanity packaging someone and the illusion of quality based on 500,000 of faux antiques, please explain what is original or significant quality.  the sandwiches are the smallest, the most expensive per ounce, and the worst produced in terms of speed and efficiency than any I have ever seen and the lines aren’t looking too long these days.  Nothing angers me more than a hot concept  and has never managed to turn a profit.  Think Cosi, Planet Hollywood, etc.  that’s why the restaurant business gets a bad rap.  Anyone with a brain could say hmmm lowest check average, slowest production line, highest rent, most labor and they don’t make money?  Duh!

Social Media, What Can Franchisees Do?

Most franchisees will not have social media addressed specifically in their Franchise Agreements.  So, there is not much stopping franchisees from participating in social media web sites.  New franchisees are now starting to see company’s social media policies in their franchise agreements.What is the big deal with a franchisee setting up a Twitter or Facebook page?  Here are a few:

  • A franchisee’s page is neglected and it reflects poorly on the brand.
  • A franchisee posts a coupon on his Twitter page but isn’t clear that it is only valid at his store.
  • A franchisee’s personality can become evident over time with social media – is this good for the brand, is it confusing?

In my opinion, from what I’ve seen with social media for 99.5% of restaurants – an proactive social media strategy is really on good for sending discount promotions to a ready pool of your customers.    You can sometimes get ‘buzz’ from online communities,  but the resulting increase in sales is almost always negligible.