Sales From Closed Stores Shift to Other Stores?

dimeYou 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:

Longview, TX was up 6.5%, Norman and El Reno Oklahoma were both up about 17% while War Acres, Oklahoma was up 38%.

Potbelly’s Sandwich Works in Chicago to Franchise?

The very popular Potbelly’s in Chicago appears to be getting ready to franchise after opening 200+ company owned units.  Even though their web site still denies franchising is in the works, this job description has the following requirement:  

Must have franchisee expereince and knowledge of how to manage a mix company franchise system         

Photos and some random YouTube video of Potbelly’s are below the fold for you Chicago virgins. Read More »

We Don’t Serve Kids

Too funny….

The Sizzler restaurant in Antioch will stop serving students during school hours. It’s a way to stop them from cutting class.

Call me crazy, but I would rather kids hang out at Sizzler than hang out totally unsupervised somewhere else!

Legal v. Ethical – What should a near-bankrupt Franchisor disclose?

Australian franchisees have similar gripes to U.S.A. franchisees – disclosure issues and the renewal rights in agreements for franchisees.

It has not always been so crystal clear when a franchise chain collapses and there is an urgent need to clarify the legal rights, obligations and ranking of franchisees in a liquidation or sale of the business by receivers.           

The article brings up an interesting ethical question:  Is it legal or ethical for Franchisors that are at the brink of collapse to recruit new franchisees to their stricken businesses even as they face the very real prospect of bankruptcy?   

In my opinion, the legal and ethical answers are similar.  The franchisor must not lie or mislead in the sales process and it must disclose risks accurately, but within those boundaries it should do what is necessary to survive. 

Does a cash starved franchisor have tell a prospective franchisee – “We need to sell 10 more franchises this year or we will go bankrupt and you will lose your license” ? No, I do not believe that is or should be a requirement because many businesses live on the edge of financial survival.  But, if the franchisor knows that bankruptcy or winding down the business is a 100% certainty, I do believe the franchisor should ethically stop selling franchises, inform the franchisees of the situation, and work out a sale of the assets in the best interests of all stakeholders.  Franchisors who sell a few more franchises just to pay off some bills or salaries as they wind down the business are indeed unethical.

Being a franchisee in a larger system does have advantages if the franchisor goes bankrupt.  The likelihood is very high that some group will acquire the assets and enable the franchisees to continue operating.  Or, worst case, the franchisees themselves could come together and buy the franchisor’s assets out of bankruptcy.   Small bankrupt franchisors have such little book and IP value that there typically scant interest from investors.

How is a franchisee to know if the franchisor is near its end? The only sure way to know is to analyze at the franchisor’s financial statements such as it’s cash flow and balance sheet. If you don’t know how to do that, HIRE AN ATTORNEY OR ACCOUNTANT/FINANCIAL ANALYST TO GUIDE YOU!

Ontario attorney Michael Webster blogged on this franchisor bankruptcy issue last year. 

Where’s the Beef? You’re Terminated!

Imagine if you were a franchisee and a mystery shopper from the franchisor anonymously visited your store and ordered a sandwich.  The meat in the sandwich you served happened to be 1/2 an ounce smaller that the standard 4.5 ounces.  Would it be fair to lose your franchise because of default?  You did break the rules, eh?  But what if was really a charade to encourage compliance?This was the situation a Denver court had to deal with.    The final judgment was that Quiznos had in fact breached the contract by wrongfully terminating the defendants, and awarded them $349,797.

Columbus, Ohio Meal Prep Industry Tanking

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!

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. 

If I was CEO of one of these companies, I would scale back and only roll out cities with a minimal number of units to leverage advertising.   I would hire great PR and advertising firms to get attention and help develop partnerships.  I would focus on margins and only offer lower-cost meals that met a certain profit margin.

Petland Franchisees Sue

Former Petland Inc. franchisees are suing the Chillicothe chain for fraud, alleging the stores are doomed from the start – and the company knows it….Melick estimates the average investment per franchisee totals up to $250,000, and the firms have been in contact with more than 40 franchisees.

The lead plaintiffs claim Petland fraudulently induced them to start a pet store when it knew, or should have known, the shops couldn’t succeed. A major allegation from franchisees, Melick said, is that pets supplied to the stores through Petland’s vendors were sick or dying.

Melick compared the franchisees’ problem to a restaurateur opening a new business and sending dozens of people to the hospital for food poisoning in its first weekend.

“For a large group of these franchisees, sick puppies is a problem when they open,” he said. “You just can never recover.”


KFC Jacuzzi

You’ve probably heard that a couple of teenage female KFC employees took a bath in the big kitchen sink and took pictures.  I’m sure the franchisee was outraged to wake up and deal with this PR disaster (not to mention the parents of the kids).  A news crew was outside showing the pictures to customers who unanimously said “GROSS!”  Ditto…see image to the right.   The article mentioned that zee fired the employees. 

Geeks “Off” Call

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 as a cause of diminished revenue., 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 claims their lawyers require that language.  Ask for a percentage of sales generated within your territory at the very least.I’m not surprised the franchisor chose to not own a single store. For a different perspective, here is an apparently happy franchisee. 

Choose your partners wisely!

The franchisee that owns all 90 Waffle House restaurants in Central Florida has filed Chapter 11 bankruptcy largely to stop the parent company from kicking it out of the 1,600-store system. Northlake Foods Inc., which is controlled by W.B. Johnson, an Atlanta entrepreneur, filed for the bankruptcy court protection in September.  By then, Johnson and his partners in the franchisee group had been fighting one another in court for more than a year.

Waffle House Inc., the Norcross, Ga., company that owns the chain and the rest of the Florida Waffle Houses from Tallahassee across the Panhandle, argues that Northlake’s franchised stores would be profitable had it not been for the way Johnson and his partners split up their personal ownership of assets to settle their own differences.


Overregulation in Iowa

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.

Australian Case: Withholding Consent to Transfer Franchise

Franchisees in Australia beware! A franchisor may withhold consent to transfer a franchise to a 3rd party if it goes against the interest of the franchisor’s known policies and future development plans. Read the case summary here.

When considering whether withholding consent to a transfer is reasonable, a court will assess the reasons advanced by the franchisor against the special nature of the relationship between the franchisor and its franchisees or potential franchisees.

A court will accept reliance on the franchisor’s policies and future franchise development plans. It is necessary to caution that in this instance the franchisor’s policies and plans were well documented and known. Accordingly, a franchisor attempting to rely on an overall system of policies and future development plans will have to ensure that those are documented and known to franchisees.

The ability of a potential buyer to comply with its obligations under the franchise agreement is only one of the factors a court will consider.

In this case, it was common ground that Zupps is a highly respected franchisee but this was outweighed by the franchisor’s broader policy considerations.

Franchisees intending to sell their franchises will be well advised to familiarise themselves with the franchisor’s policies and selection criteria.

Franchisors will also be well advised to document their policies, future plans and selection criteria and apply those objectively and in good faith when considering a franchisee request for consent to transfer of a franchise.

Whilst Justice Douglas clearly followed the likely approach to be adopted by Australian courts, it remains important to appreciate that the outcome will invariably depend upon the facts of each case.

How to Make Subway Look Like a Good Opportunity’s Janean Chun posted an article entitled,  Can You Buy a Big Franchise?  The topic seemed interesting so I read it.  The article essentially says you too can own popular franchise brands, if you meet the net worth requirements.  She supports her proposition by interviewing a Subway agent in California as a credible source, where he implies that Subway is a strict selector of franchisees who only work with entrepreurs, not investors.  What a hoot.  Disgruntled franchisees would disagree.

Another Reason to Read the Franchise Agreement

Three Burger King franchisees in Florida found that every word counts in the franchise agreement.Burger King’s franchise agreements mandate operating hours “at a minimum of 7 a.m. to 11 p.m, seven days a week, 52 weeks a year, unless otherwise authorized or directed by BKC or unless prohibited by applicable law.”The franchisees argued that the language only gave Burger King the authority to exempt franchisees from those minimum hours, but not to mandate extended hours.  The franchisor argued the language clearly gives them the right to require additional hours.I agree with the franchisor that the language “unless otherwise…directred by BKC” clearly gives BKC the authority to change the hours of operations.