I have close friends in the pretzel and snack-food business (and worked in the snack food industry for a short time), so I think I can speak from an especially knowledgeable perspective on this. Stores like Auntie Anne’s, We’re Rolling Pretzel Company, Pretzel Time (by Mrs. Fields), and Wetzel’s Pretzels must have some of the highest margins in the QSR business. The dough is literally a few pennies per serving, if that. The seasoning and butter is another few pennies, and your selling the product for almost $2 each. I’m sure the franchisors significantly increase the cost of dough and supplies force margins more inline with the typical mall store.

Fresh pretzel businesses need very little square footage, and can often be served from a kiosk. They have the added advantage of smell in a mall, drawing people in with the scent of fresh baked buttery bread (OK, can you tell I love soft pretzels?). Most malls already have at least two pretzel franchises, but some do not. Depending on the rent, storefronts along a busy downtown street can capture enough of the afternoon foot-traffic to possibly turn a profit.

Let’s look at some fees charged by franchisors:

Pretzel Time:

• Initial Franchise Fee: $25,000
• Ongoing Royalties: 7% of Gross Sales
• Advertising Fee: 1-3% of Gross Sales
• Initial Training Fee: No charge for first two individuals
• Total Estimated Initial Investment: $107,000 – $238,500

Wetzel’s Pretzels:

• Initial Franchise Fee: $30,000
• Ongoing Royalties: 6% of Gross Sales
• Advertising Fee: 1% of Gross Sales
• Initial Training Fee: No charge for first two individuals
• Total Estimated Initial Investment: $102,000 – $211,000

Auntie Anne’s:

• Initial Franchise Fee: $30,000
• Ongoing Royalties: 7% of Gross Sales (paid weekly)
• Regional Advisory Council Dues: $300/year
• Audit Fee: All expenses unless if receipts were understated by more than 2%
• Advertising Fee: 1% of Gross Sales (paid weekly)
• Transfer Fee: $3,000
• Franchise Renewal Fee: $15,000 or 50% of current franchise fee, whichever is greater
• Lease Renewal: $2,000
• Polling Set-up Fee: up to $400
• Polling Recurring Fee: up to $100 per month as incurred
• Lease Documentation Late Fee Penalty: $500
• Relocation of Business Fee: 25% of current franchsie fee
• Franchisor’s Lost Profits Following Termination: Royalty and Advertising Fees for the remaining term of the Franchise Agreement plus the greater of 18% per annum for the interest or the highest possible amount under your state’s law
• Operating in Event of Default: $250 + travel + lodging + meals until default is cured
• Initial Training Fee: No charge, minimum of 3 people
• Service Fee: $250/day of help per person
• Franchisee must cover legal and incidental costs incurred by franchisor if franchisor brings an action against the franchisee.
• Total Estimated Initial Investment: $192,550 to $382,500

* I took the time to list most of Auntie Anne’s fees; Wetzel’s and Pretzel Time probably have similar fees

They are all similar, with Auntie Anne’s having the highest initial investment, probably due to their more ornate store style and you are buying into a more valuable and recognizable brand. I heard it’s near impossible for an individual franchisee to open up an Auntie Annie’s anymore in the U.S.A. (Auntie Anne’s Director of Franchise Sales seems to indirectly imply otherwise in the comments), but most other brands are actively seeking individual franchisees. Though Auntie Anne’s is the brand that most everyone knows, my guess is brand loyalty is low particularly for the reason that if you want a pretzel in a mall, you buy what’s available, whether that be Auntie Anne’s, Pretzel Time, etc. Several franchisrs predictably have expanded their menu to include hot dogs, frozen custard and burgers, or from the other direction to include pretzels in their existing menu. When evaluating which franchise system to buy into, I’d pay special attention to the franchisor with the lowest food and supply costs (a location will only support a narrow range of sales no matter what the franchise, so lower costs and fees over the year is very important), and competent level of responsive service. I’d also consider whether there is room for entrepeneurial selling, such as supplying local businesses, schools, or other events with tasty pretzels (the extra sale can make the difference between taking a salary or not).

For those who enjoyed our previous posts on Curves, here is a good background puff article, describing their interesting no frills approach.

A Curves franchise owner:

“We have found a niche — where women who would not necessarily go to a regular gym, feel comfortable here,” Moore says. “Nobody has to dress up — as you see sometimes in the regular gyms — to appeal to men, and they don’t have to here. It’s a very comfortable easy, friendly, supportive atmosphere.”

Description of operations:

A Curves club is basically a large room — usually located in a shopping center — filled with about ten pieces of weightlifting equipment. A recorded voice and a pulsing disco music lead patrons through their workout.

Thirty seconds working with the equipment at each station alternates with 30 seconds of running in place. The women keep going for 30 minutes and most come to Curves about three times a week…The monthly membership fee is as basic as the workout, between $40 and $50, quite a bargain compared to most health clubs.

Chipotle Mexican Grill Inc., a majority owned subsidiary of McDonald’s Corp., plans to offer 7.9 million shares for between $15.50 and $17.50 a share in an initial public offering, according to a regulatory filing on Friday.

http://www.chicagobusiness.com/cgi-bin/news.pl?id=18917

UPDATE: Jan 25, 2006

Chipotle may sell stock at $18 to $20 a share, up from an earlier estimate of $15.50 to $17.50 a share, the Denver-based company said in a regulatory filing

UPDATE: Jan 26, 2006

After the 7.9-million-share offering priced at $22 a share, Chipotle shares doubled to close at $44 Thursday, after reaching as high as $48.28. Chipotle sold 6.1 million shares in the deal, raising about $134 million, while its parent, McDonald’s, sold 1.8 million shares.

The 13-year-old burrito and taco purveyor currently has about 480 stores and produced revenue of $471 million in 2004, up 49% from 2003.

At $44, shares of Chipotle are trading at roughly 80 times earnings. Meanwhile, Applebee’s and Ruby Tuesday are trading closer to 20 times earnings, making Chipotle’s valuation look laced with some irrational exuberance, even when its growth prospects are accounted for.

Part of the IPO proceeds will be used to pay down a $30 million line of credit with Chipotle’s parent.

Here is a list of companies that have voluntarily signed up with the SBA for streamlined franchisee loan application reviews.

Comments to blog posts were broken for the past few weeks, but they are fixed now.

As you probably know, I’m positive on soup franchises. The Soup Box, an independent soup restaurant, supplements their summer months with Italian ice (gelato) made from scratch with natural fruits and juices. They coined the summer months storefront name as the “The Ice box” instead of “The Soup Box”. It provides a selecton of 12 hot homemade soups in the winter, and 6 in the summer when they make the Italian ice. Menus are posted daily on the Internet as well. It’s a small location, but I thought the idea was clever enough to mention as an example of maximizing the resources and opportunities.
Does your restaurant franchise have a seasonal offering? I know the franchisee has little or no control over what they can sell, but it should be an evaluation point on hedging sales year-round.  When a customer wants to get into the Christmas spirit, why wouldn’t they (subconsciously) gravitate towards the fun, encouraging store that has their seasonal favorite flavors?

Seasonal menus tend to do quite well. Ever have the Gingerbread Latte at Starbucks? Yum! The seasonal menu builds repeat customer business to predictably provide new selections that build on the goodwill and joy of the season.
Good reviews for The Soup Box. The business also provides a good example of the flexibility a non-franchised store has over their business, compared to those locked in very strict franchise agreements that usually prevent any deviation from the standard offering.

Quiznos Sales and Profitability.pdf

“former owner”, a commenter on this site, left a tip on a document posted at the Toasted Subs Franchisee Association. The document purports to be a summary on Quiznos store profitability. Is it legitimate and accurate? I have no idea, but it’s probably in the ballpark. It’s apparently based on estimates gathered by franchisee sources reporting. Here’s snippet:

Quiznos Sales and Profitability – below is a list of sales statistics compiled year-to-date for Quiznos stores as of August 2005. In the Quinzos chain, an average new store (opened in the last 12 months) can break even around $7,000 to $8000, depending on fixed costs. This charts shows the number of stores breaking even or even losing money inthis chain. These sales figures are accurate. The profitabily estimates, are just that…estimates based on franchisee sources reporting.

Thanks “former owner”!

I heard good reviews on a speech by Jerry Mitchell (a serial entrepreneur) so I checked out his web site.  His web site has many articles and “white papers” to browse that are geared towards young businesses.  A lot of it is elementary for most Franchise Pundit readers, but the “newsletters” and “white papers” sections of his web site, among others, has some worthwhile content for franchisees.