From Krispy Kreme’s 10-K…, focusing on smaller stores with lower overhead. I guess it took them a while to learn from Dunkin’ Donuts that selling only $.50 donuts and coffee doesnt add up to enough revenue for a large store.

The Company is working to refine its domestic store operating model to focus on small retail concept shops, including both satellite shops and shops that manufacture doughnuts but which are smaller and have lower capacity than traditional factory stores. Satellite stores in a market are provided doughnuts from a single traditional factory store or commissary at which all doughnut production for the market takes place. The objectives of the small retail concept model are to, among other things:

• reduce the investment required to produce a given level of sales and reduce operating costs by operating smaller satellite stores instead of larger, more expensive factory stores;
• achieve greater production efficiencies by centralizing doughnut production to minimize the burden of fixed costs;
• achieve greater consistency of product quality through a reduction in the number of doughnut-making locations;
• enable store employees to focus on achieving excellence in customer satisfaction and in-shop consumer experience; and
• stimulate an increase in on-premises sales of doughnuts and complementary products by increasing the number of retail distribution points to provide customers more convenient access to the Company’s products.

If you own a wing restaurant, like Wing Stop, and your in the middle of the $540k average store sales (see Item 19 of their FDD) for Wing Stop, then your costs went up $44,226 in December.  Why?  The price of wings has increased 39% since December 2008. 

Most restaurants are experiencing a decline in sales and customer traffic.  Unless you can obtain a 40% off lease deal, I would recommend holding off on restraurant related franchises until your targeted customer group spending escalates.  The cost of the franchise will likely be the same now as it would be in upcoming years when hopefully the economy is better, so I would wait on investing in a restaurant franchise until the consumer spending trends are more positive.  Remember, the trend is your friend!

The franchisor’s job of communicating with franchisees is not as easy as you might think.  Some franchisees simply shy away from anything technology, some barely speak english, and some franchisees expect regular courtesy phone calls.

Fast Casual has an insightful article on how some brands communicate.

To communicate news and information, brands like Qdoba, FOCUS and Salad Creations use newsletters, representative committees that will communicate back to the franchisees, and technology tools such as intranets, online videos, webinars (voice-over presentations viewed from the franchisees’ computer)

You’ve probably heard about the cost savings of prefabricated modular building.  Church’s Chicken is going with a new prefab building to reduce startup costs, hopefully attracting new franchisees.

…Church’s Chicken estimates that the pre-fabricated buildings will cost 25 percent less than its traditional stand-alone structure, Brown said. The low-end of pricing for a traditional structure is about $660,000.

The modular store has a slightly smaller footprint than the store’s traditional prototype. The 1,750 square-foot building has 23 seats in the dining room, down 10 from the traditional standard.

Brown said he doesn’t see the smaller seating capacity affecting operations in most locations. The company is considering a 1,200-square-foot model to replace its small walk-up neighborhood units. It also may look into developing a larger store for regions where in-store dining is more popular.

While Church’s Chicken used modular buildings about 30 years ago, the new structures have advanced well beyond their forebears. Advances in metal extrusion and other technology have allowed for a building of equal quality to traditional construction, he said.

The modular store is designed to fit local building requirements, with each unit built according to pre-approved state building codes depending on the location.

Financing…

One program is an internally funded equipment leasing program in which the company would directly lease full equipment packages to franchisees. The leasing program, valued at $200,000-$220,000, would cover all necessary equipment, from smallwares to fryers, Brown said.

Church’s Chicken is offering an 11 percent annual rate on the seven-year leasing package — a rate equal to the corporation’s cost, Brown said. Franchisees can purchase the equipment at the end of the lease for $20,000-$30,000.

Brown said franchisees with great credit may be able to getter a better deal by purchasing the equipment with financing. But it’s a good deal for those who need to lease.

Current CEO Rick Shaden in a Fox Business interview talks about his competition with Subway and the new torpedo sandwich.  A few notes:

• Blames slowdown on “economy and increased costs”
• Says customers want cheaper sandwiches
• Touts the $4 Torpedo sandwich, claims it is the “first portable sub”, “modern sandwich”
• Head to head to Subway, more innovative and edgy
• Frames Quiznos as a “challenger brand” to Subway

If I’m a franchisee, and my problem is low profit margins, I do NOT want to LOWER my prices…it just makes the problems worse.  However, from a franchisor’s perspective, earnings are based on TOTAL system sales.  So if forcing lower-priced sandwiches increases total system-wide sales but still lowers the franchisee’s profitability, some CEO’s may think that is necessary tradeoff.   Their short-term financial rewards often pave this path.  The interest between the franchise and franchisor are unfortunately are misaligned.If you haven’t seen the torpedo sandwich Shaden speaks of, here is a commercial for it:The Million Sub promotion left many customers upset when many stores refused to honor the “free sub” coupons, including a member of my family. The franchisees apparently are not reimbursed by corporate for the coupon – OUCH!Quiznos is in a tough spot. Their toasted sub concept is no longer unique, and the food and operational costs are still inflated due to franchisor imposed required purchasing.

There has been a lot of talk lately, from Joel Libava’s Franchise King blog to recent MSNBC article, looking at whether 401(k) retirements savings should be used to fund a new franchise.  Many franchisors for obvious reasons like this idea, such as Westshore Pizza & Cheesesteaks who focuses their sales pitch as a great 401(k) investment.Use 401(k) money to buy a franchise?  My legal and financial opinion is almost always a NO!  It is too risky to gamble your needed retirement funds in a franchise.  If you need to tap your 401(k) to buy a franchise, you cannot afford to buy a franchise.  If your entire retirement life is already FULLY funded and you have plenty of cash, then use your excess cash for the franchise opportunity.

Professional investors always take a little cash off the table, and your 401(k) is what you took off the table.   Keep it there, don’t risk it away.  You could easily lose ALL your money in a franchise, but you couldn’t lose all your money in a 401(k) even if you tried.  Additionally, a single unit franchise will almost certainly not make enough money to payout and match a six-figure retirement account in less than a decade.

Tax and Match Advantages – Big DifferenceIs 401(k) a good investment in the first place?  YES!  Since your 401(k) investments are done with pre-tax income, you are saving about 30% more than you would have with after-tax income.  Plus, an employer match will nearly double the money that goies into your 401(k) than if you just invested the income from your final paycheck.  Upon retirement, you can control the 401(k) withdrawals to minize income taxes.  Even if the employer is not matching, the certainty of pre-tax investing is powerful because it is taken out automatically, but once the paycheck hits your bank it is much more likely to be spent rather than invested.

Back in 2006, I listed MRI (Management Recruiters International) on a list of franchises I wouldn’t buy.  Today, a commenter named Bob Stewart in the forum reiterated from his own experience which included false representations about who actually was a valid franchisee.Here is Bob’s web site listing his alleged misrepresentations, with emails from MRI and MRI’s parent company CEO.  It certainly is an interesting case study.

Quiznos is helping franchisees renegotiate leases at no cost to the franchisee. Good move.

Since the teams have been in operation, Quiznos has negotiated more than 40 leases thus far, with an average reduction of 15-20 percent in lease payments

Here is one franchisee’s experience in the press release

Thomas Mihailovich, a franchise owner in Rochester Hills, MI, participated in the lease renegotiation program in late February. Quiznos and a third-party team worked with Mihailovich and his lessor to arrange a reduction in rent of more than 20 percent, a cost savings of $50,000 over the term of the lease.

“I began the process and within one week I was saving nearly $500 per month on my rent,” said Mihailovich.

How do you renegotiate a lease?


If you are currently leasing a space for your franchise and want to renegotiate the lease, you do have a few leverage points. First, the landlord doesn’t want to lose a tenant because it will usually mean unrecoverable expenses and vacant space for a period of time. Second, along the same lines, a long-term stable lease makes landlords smile, so offering to extend or renew a lease for a longer number of years is very attractive, even at a reduce price per square foot.

Here is a sample approach. Find another space nearby that fits your needs equally well and is less expensive. Then approach your landlord and ask him to match the rent or you intend to move. See what the response is. From that point, ask permission to sublet. Depending on how long you have on your lease, ask also offer to sign a longer lease in exchange for reduced lease payments.

Getting the assistance of a real estate broker or better yet an attorney is usually well worth the money in renegotiating a lease.

Here is an insightful article with examples on the subject.

Potbelly’s Sandwich Works with its core markets being Chicago, Washington D.C., and Texas, is walking away from some potential new locations, and renegotiating leases on existing locations to “reflect the new market conditions.”

In recent months the sandwich chain has walked away from at least two prospective deals in the suburbs, in Hillside and Romeoville, and local real estate sources say company executives have told them Potbelly is pulling back its growth plans here.

Potbelly founder Bryant Keil said last year that the chain could double its Chicago-area stores to more than 150, and hired former Sears CEO Aylwin Lewis to spearhead growth nationwide. Mr. Lewis said he wanted to accelerate expansion and at the very least maintain Potbelly’s growth rate of about 40 new restaurants a year.

But the dramatic drop in the economy over the last six months has hit even the private Chicago-based company known for its kitschy décor, toasted subs and fresh-baked cookies. Potbelly’s costs to build its stores are higher than its rivals’, sources say, so the company can’t afford too many mistakes in a climate where sales are likely to be slow.

Most restaurants have or would live to have a thriving catering business to augment sales.  A restaurant with a successful catering business typically increases sales sales by10% to 20%.  Here is a great article with advice from experienced caters on equipment, deposits, and marketing.  

“Our biggest catering customers are schools, offices and churches,” says Preston. “We market our service on our menus, on the Web, in the paper, and in schools and offices. We also hand out catering information at functions, feature it in our EClub newsletter, visit local businesses and leave info (then follow up with a phone call), and get involved in local charity events.” If you’re worried about spending too much money on advertising in the beginning, Skvorecz says, “Start slow and advertise to your existing customers by printing out your offerings and placing an easily visible sign on your countertop. Get through a holiday period and see how it goes; then consider expanding your ads into the Sunday paper or other media.” The possibilities for game days alone are amazing, according to Skvorecz. You can free up a lot of your time on days such as Super Bowl Sunday if customers have called ahead to cater their parties and already have their food before the game even starts.

“I can’t stress enough how important it is to have the proper equipment,” says Preston. “Keep your hot food hot and your cold food cold with a stackable Cambro (hot box); invest in midto high-quality chafing dishes; and don’t forget your canned heat! Make sure all catering platters, plates, flatware and serving utensils are kept in storage, and never (unless you want to buy more) put them into restaurant/pizzeria circulation.” Preston also advises being a stickler for details: “Be sure to qualify special requests and leave no loose ends,” he says. “The devil is in the details; I use email, which gives me a written record, which wins all discussions.” Get a deposit, too: “I shoot for 50% and will accept no less than 25%,” he says. “Of course, that can change with repeat customers.”

U.S. News & World Reports takes a stab at listing the healthiest fast food restaurants.

1.  Panera Bread
2. Jason’s Deli
3. Au Bon Pain
4. Noodles & Company
5. Corner Bakery
6. Chipotle
7. Atlanta Bread Company
8. McDonald’s
9. Einstein Bagel Bros.
10. Taco Del Mar

 Implyign that everything on the menu is “healthy” is decieving.  For example, a single burrito at Chipotle is likely to have 1,500 calories. 

Panera to experiment in Chicago with a greatly expanded catering strategy.

He said Panera has long provided catering, but “it’s always been an afterthought” to its restaurant business. He wouldn’t disclose financial numbers except to say that catering accounts for a very small percent of sales. The chain has more than 1,200 U.S. locations.Mr. Tristano said any new packaging that keeps the food fresh is a key to successful catering as well as competitive prices and timely service.Panera’s catering costs about $5 per person for breakfast; lunch ranges from about $8 to $12 per person. Mr. Rand said the chain will analyze the success of the new catering efforts in the next year and decide weather to expand the ideas nationally.

The pizza industry is in a larger downturn than I would have predicted.  Papa John’s is even delaying scheduled increases in their royalty: 

Papa John’s, meanwhile, is extending sweeping financial assistance to its franchisees. The company is delaying for at least six months an increase in its royalty rate on sales to 4.5% from 4%. It also is rolling back the royalty it collects on Internet-generated sales, a fast-growing part of its business, to 2% from 3%, and markedly cutting the price of cheese it sells to franchisees. Finally, those franchisees suffering the most will get special marketing support.  

While hamburger chain McDonald’s Corp. has posted consistent gains in its domestic same-store sales, with 4% growth in 2008, U.S. franchised same-store sales at Domino’s fell 1.7% in 2007 and 5.6% in the first nine months of 2008. Papa John’s is predicting its same-store sales will be flat to down 2% this year, and Pizza Hut, whose same-store sales slipped 1% in the fourth quarter of 2008, is off to a slower start than expected this year, according to Yum, which has called the division its biggest challenge.Pizza’s woes started before the current recession gripped the nation. Figures compiled by Chicago-based restaurant-consulting firm Technomic Inc. show that while the overall U.S. fast-food category experienced compounded annual growth of 6.4% from 2002 to 2007, pizza sales rose only 2.5% during that period.

Day’s Inn paid $600,000 for a shooting that occurred in a franchisees parking. Details and arguments below:

The national chain argued that it was a separate entity and that it did not maintain sufficient control over the local franchisee such as to establish an agency relationship.

….

The one area not specifically dealt with in the manual was guest safety. The victim’s lawyer argued that the chain’s failure to address security did not relieve it of liability for the negligence of the franchisee. The Trial Court agreed.

Both the local motel and the franchisee were liable to the victim because the area of Exit 97 off Interstate 95 where the Selma Days Inn was located had a long history of criminal activity including a pair of armed robberies at a hotel next door just two weeks before the victim was shot. Evidence would have been that the motel franchisee and the chain failed to take adequate precautions to protect their guest, including the victim.

After the Judge refused to release the national chain, the defendants agreed to $600,000 to settle the case.

The actual photo of the Selma Day’s Inn is to the right.

A 26-year-old woman became the youngest franchisee in the Schlotzky’s system. Is she too young? You may think, until you read this:

Jessica Johnson worked at the Schlotzky’s in Teays Valley for nine years – working her way from cashier to manager.Then in October, even though some people thought it was a little crazy, Johnson got a Small Business loan and bought her very own store.That made her the youngest franchisee in the Schlotzky’s chain.”I was not scared to do this because I believed 100 percent” Johnson said. “I knew it was something I wanted to do and if for whatever reason it didn’t work out I knew there was someone looking out for me and it wasn’t meant to be.”Johnson says she has been focusing on catering, delivery and customer service to keep profits up despite the economy.

She is probably more experienced and ready than 90% of Schlotzky’s independent franchisees.