Going Green May Loose You Green


Chris Toman’s plan to go green could have put him in the red.

The owner of a local pizza franchise plans to apply for LEED certification for his 2,600-square-foot restaurant space on the back burner because it was going to cost too much.

Toman said he would have to pay between $30,000 and $40,000 to become certified by the U.S. Green Building Council under its Leadership in Energy and Environmental Design program, which awards points to structures that are energy efficient and otherwise good for the environment.

$40,000 for a small restaurant to get green certified is proportionally a huge expense., plus the cost of the alternative materials such as insulation made of old jeans and coke bottles for a countertop. Would that $40,000 be more profitably spent on advertising?

While going green can sometimes attract additional customers in certain markets, the increase in price compared to the market will divert others to your competitors.

Toman is opening a Pizza Fusion franchise, which requires all of its restaurants to be built to LEED standards, as part of its self-described mission to “Save the Earth one Pizza at a Time.”

Not only are the buildings green, the chain delivers pizzas in hybrid vehicles.

The cost of going green for Pizza Fusions in other markets is less than half of what Toman was told he’d have to pay here.

Much of the cost goes to consulting companies that develop energy-efficiency plans for buildings seeking certification. These firms also make sure the buildings ultimately perform the way they were designed and file reams of paperwork required on all projects regardless of their size.

“It seems like they’re overcharging,” he said. “I’m trying to do the right thing, but someone’s taking advantage of it and charging high rates.”

Brave Entrepreneurs

If you were looking for a location for your new coffee & bakery business, would you commit to a location that had a Homer’s restaurant and Erbert & Gerbert’ both fail there within the past year?   And, direct coffee competition from Starbucks, Kopeli and The Coffee House are all within two blocks?  I would be extremely hesitant.

Nevertheless, aspiring franchisor Natalie Bubak of Lincoln, Nebraska will open a nuVibe Juice & Java in the serial failed location.  Gutsy.

After Homer’s closed last May, Erbert & Gerbert’s lasted only a few months, apparently a victim of competition from downtown’s plethora of sandwich shops.

There’s also a great deal of coffee shop competition in the area — Starbucks, Kopeli and The Coffee House are all within two blocks — but Bubak said she thinks nuVibe is different enough that it will complement, rather than take from, the existing coffee businesses.

“I think we’re going to help each other, really,” she said.

Besides coffee, nuVibe also serves all-natural fruit smoothies and gelato.

And Bubak said she’s planning on adding some breakfast and lunch items to the menu, including hot cereal and soups.

She said the new breakfast items will help fill what people have told her is a void in downtown.

Bubak said she has the opportunity to have expanded offerings at the downtown nuVibe because the space is so much larger — 4,500 square feet compared with the 1,500 square feet she has at her Pioneer Woods location.

Domino’s Subs

As if the sub sandwich category wasn’t crowded enough, Domino’s Pizza is adding sub sandwiches to its menu and delivery service.  The $4.99 oven-baked sub sandwiches will include classic favorites like Philly Cheese Steak and Chicken Bacon Ranch.

The move comes five months after Pizza Hut began delivering baked pasta dishes as well as pizzas. And it will be a wake-up call for sub shops Subway and Quiznos, which find themselves competing with pizza chains.

For the pizza giants, the message is clear: If pizza sales aren’t growing in a sour economy, maybe something else will. Besides the hot subs and baked pasta, some pizza chains also deliver chicken wings.

It’s an attempt by the pizza players to try to get back into being a growth industry,” says Ron Paul, president of Technomic, a restaurant research firm. “They’ve all lost their mojo.”

They also are further conflating a fast-food world that’s grown jumbled. McDonald’s (MCD), Burger King (BKC) and Wendy’s sell salads and chicken. Subway and Dunkin’ Donuts have tried pizza. Arby’s, once roast-beef-only, now makes a killing on Market Fresh deli sandwiches and sells toasted subs.

Domino’s U.S. same-store sales fell 5.4% in the second quarter after a 5.2% decline in the first quarter.

Brandon says the move should boost Domino’s lunch business and expects lots of calls from groups of office workers. (The minimum delivery order is $8 to $10, depending on location, and delivery fees are $1 to $2.)

Rivals are unimpressed.

Pizza Hut delivers hot sandwiches regionally but is focused on growing its national pasta delivery sales, says Brian Niccol, marketing chief.

Tony Pace, marketing chief of the Subway Franchisee Advertising Fund Trust, says, “Domino’s is watching our success and wondering how to get a piece of the action.”

Half of Quiznos’ locations deliver, and two-thirds will by year’s end, says Rebecca Steinfort, senior vice president.

The trend is clearly delivery to prevent a loss of sales, and online ordering.

Cuppy’s Accreditation Revoked – No Surprise

The American Association of Franchise Dealers (AAFD), who previously awarded Cuppy’s Coffee a Fair Franchising Seal, has suspended Cuppy’s accreditation pending a determination of the Association’s Board of Directors at a scheduled meeting on September 24, 2008. This comes after many obvious shameful contracts breeches by Cuppy’s old and new management over the past year.   Below the fold you can read the entire statement released by the AAFD.   Here’s a link to the email sent by Robert Purvin, AAFD’s chair, to Cuppy’s owner Dale Nabors informing him of the suspension. 

Read More »

Million Air Franchisee Wants Out

I know a man who became quite wealthy owning one of these.

Franchisee’s Argument (Defendant):

Allison’s FBO network responded with its own lawsuit, filed June 19, “for declaratory judgment and breach of contract.” The lawsuit claims that franchise agreements for the FBOs in Cincinnati, Columbus, Chicago Midway and New Orleans have “expired, been terminated or that the franchisees are entitled to terminate their franchise agreements,” and that agreements for Asheville, Charleston and Lafayette were never executed and that material terms had not been agreed on. The Jason III lawsuit also accuses MAI of “diversion of promotional funds and the dilution of the franchise brand resulting from unstable and deteriorating financial condition of the franchisor.”     

Franchisor’s Argument (Plaintiff):

Million Air Interlink (MAI), the franchising company based in Houston, filed suit against Allison’s FBOs in April, claiming that they “have taken steps to stop making payments required under the franchise agreements. Defendants are also terminating, or attempting to terminate, the franchise agreements and their obligations as franchisees without the contractual right to do so. Under the agreements, defendants are obligated to participate in an insurance program designated for the benefit of the franchisor and all the franchisees. However, defendants have terminated their participation in the insurance program in breach of their contractual obligations. Furthermore… defendants are also executing a plan to compete with MAI in breach of the franchise agreements.” MAI is seeking payment for damages exceeding $5 million plus payment for other costs, such aslegal expenses.     

Source: AINonline.com

News: Buffalo Wild Wings, Denny’s, Baskin-Robbins, Bennigan’s, Donatos

Buffalo Wild Wing’s own restaurants in the second quarter rose 8.3%, and franchises rose 4.5%.  Again, the corporate owned restaurant see double the same-store gains as the franchise.Same-store sales alone can be deceiving because it doesn’t tell the whole picture. Were higher same-store sales a result of additional customers, expensive marketing blitz or promotions, new menu items or new pricing?

Denny’s performance has been mediocre for the 2nd Quarter of 2008. Same-store sales decreased 0.7% at company units and decreased 3.7% at franchised units. Company restaurant operating margin increased by 0.9 percentage points to 12.5% of sales 

Do you live in Cincinnati? If so, Baskin-Robbins wants to open 30 stores in the surrounding counties. 

The Bennigan’s bankruptcy came as no surprise. There are about 150 company-owned Bennigan’s restaurants, compared with 138 franchise locations.Bennigan’s franchisees are unaffected, only the corporate-owned locations are shutting down today. The bankrupcty filings also do not include the Metromedia-owned Ponderosa Steakhouse and Bonanza Steakhouse restaurants. 

One of the best deals in franchising was made when Jim Grote sold Donato’s to McDonald’s and then bought it back for a rumored $50 million, a 1/3 of what he sold it to McDonald’s for just four years prior. Now, Donato’s has remade itself with a new look and expanded menu. [I love their pizza, bias alert] However, I am skeptical of management now that his daughter has taken over running the company. Is the best person to manage this company just happen to the be the daughter of the owner?   

Better Home & Garden real estate franchise

I’m sure they have research to support this effort, but the Better Home & Garden is expanding its brand to include real estate brokerages.I found this comment humorous considering he is the very first operating unit:

Better Homes and Gardens Real Estate unveiled its new Web site, www.bhgrealestate.com.Wilkins hopes to benefit from Better Homes and Gardens’ technology, business systems and advanced tools to help support the growth and operation of their brokerage. Those tools include business planning and strategic services; sales associate talent attraction and retention; training and career development programs; and Web tools and resources.  

From the Better Homes & Garden web site:

Key differentiators of the Better Homes and Gardens® Real Estate brand include:

  • Financially oriented service platform
  • National agent recruiting program
  • Targeted direct-to-consumer marketing programs
  • Web 2.0 principles to engage today’s consumer, along with best-in-class systems and tools
  • A focus on the environment through our green initiatives
  • A developing international real estate network to enhance global networking opportunities

At least their CEO is the former Chief Operating Officer for Coldwell Banker Real Estate LLC.

More Independent Tart Frozen Yogurt Outlets

The modern atmosphere and different taste driving the growth of the tart frozen yogurt industry will almost certainly continue for several more years.  But a crash similar to the previous frozen yogurt industry is likely to occur.

Here are a few new entrants:

Surprise – Quiznos sued by Franchisees Again

quiznos.jpgSource: Daily Courier (Pittsburgh)A law suit was filed on July 3, 2008 by a few dozen franchisees in Western Pennsylvania.  

The allegations are:

The lawsuit alleges that Quiznos engages in a “pattern of racketeering” and generates “grossly inflated profits” at the expense of franchises that usually fail. It also accuses the company of saturating geographic areas with more franchises that can be supported.

Quiznos is accused of allowing customers to redeem coupons for free or discounted sandwiches, a practice that allegedly benefits the company but not the franchise holders, who are not compensated for the loss of revenue, according to the lawsuit. Quiznos, according to the filing, requires its franchise owners to buy products they do not need and work only with suppliers connected to Quiznos who charge high prices.  

The financial strain on the franchisees causes the business to fail, the suit maintains. When the franchise fails, Quiznos threatens the owners with lawsuits to enforce the agreement, which requires them to pay royalties for 15 years even if the business has been forced to close, according to the lawsuit.    

Quiznos Response:

Richard Emmett, general counsel for Quiznos, said the allegations in the lawsuit are similar to those in an action filed two years ago in Illinois that was dismissed recently by a federal judge.”This is a copycat of that lawsuit,” Emmett said. “We’re confident the claims have no merit and this lawsuit, like the other one, will be dismissed.”  

He added that the allegations contained in the action arose several years ago.”

They have nothing to do with the way we’re operating now. It’s historical rather than present day,” Emmett added.


Performance of Franchisees’ Loans

dollarBelow is the Small Business Administration’s annual compilation of performance data on thousands of franchisee loans it has guaranteed covering loans made from October 1, 2000, to September 30, 2007. A “failed loan” below is when the SBA must step in and pay back a loan that it has guaranteed. However, does failure rate of a loan equal the number of failed franchises? No, because the chart below only captures the worst of the worst, when someone completely abandons their debt obligations. Definitions are tricky and can mask the true data. Franchisees who sell their units and pay off or transfer their loan or franchisees losing money are not caputred. But, the value in the report card can be a vague checklist for avoiding high-failing franchises.
Hat Tip: WSJ


Class Leaders

Franchiser Failure Rate Failed loans Total loans
Comfort Inn 0% 0 158
Primrose 0 0 110
Edible Arrangements 0 0 104
Massage Envy 0 0 61
Holiday Inn Express 1 1 157
Culver’s Frozen Custard 1 1 150
Hampton Inn 1 1 88
Bruster’s Real Ice Cream 1 1 84
Little Caesars Pizza 1 1 72
Fastsigns 1 1 71
Super 8 Motel 2 8 363
Best Western 2 3 156
Choice Hotels International 2 3 144
Rita’s Water Ice 2 2 103
Arco 2 2 85
Zaxby’s 2 2 81
Anytime Fitness 2 1 65
Econo Lodge 3 4 119
Goddard 3 3 109
Subway 4 84 1,974
Dunkin’ Donuts 4 17 410
Sport Clips 4 8 191
Cartridge World Stores 4 5 112
Travelodge 4 4 91
IHOP 4 3 67

Class Trailers

Franchiser Failure Rate Failed loans Total loans
All Tune and Lube 48% 37 77
Philly Connection 48 30 63
Cottman Transmission 46 75 163
Blimpie Subs & Salads 37 58 158
Golf Etc. 36 24 67
Cornwell Quality Tool 36 19 53
Matco Tools 30 95 316
Atlanta Bread Co. Bakery 30 18 61
Carvel Ice Cream 26 20 76

Note: Listed by percent of SBA-backed loans that failed between Oct. 1, 2000, and Sept. 30, 2007, starting with the highest rate. When percent is the same, companies are listed from highest to lowest number of total loans.

Source: Coleman Report

Meal Prep Trending Down

expert.pngJulie Moran Aletrio from New York’s LowHud.com did a great job in her article on the meal prep trend in New York’s Lower Hudson Valley. Thanks for quoting me in the article. Here are a few highlights:

From a Let’s Dish franchisee:

“This concept is meant to help a busy person, but people found themselves so busy that they didn’t know how to incorporate this into their lives,” Hunerson said.

Closings nationwide:

By the end of last year, there were 1,353 meal-prep stores in the United States, according to the Easy Meal Prep Association.

Although the idea spread quickly, the failures followed with 264 meal-prep stores closing last year and another 200 expected to fail this year.

Industry consultant Bert Vermeulen, who founded the association in 2005, said the idea was too new to support the number of stores that opened.

“This is a concept where the stores got ahead of the market. The majority of the target market is not aware of this concept and why it works,” he said.

New concepts:

Rolling out a new concept requires a deep commitment in marketing from the franchiser, Vermeulen said, something that Let’s Dish and others didn’t provide.

“Many of the franchisers thought it was easier than it was. They sold franchises without thinking through the marketing program they were going to run,” he said.

Vermeulen pointed to Pappa Murphy’s Pizza, which has more than 1,000 stores, as a franchiser that did it right.

“If you remember 10 years ago, there was something militarily called the Powell Doctrine, which meant going in with overwhelming force. Pappa Murphy’s wouldn’t go into a particular metro area unless they went in big so they could establish awareness of their concept. Their concept is pizzas you pick up uncooked that you cook at home. It’s not that different from meal prep, but the rollout was very different,” he said.
And those outlets will be very different from the original stores that struggled to find customers. In 2004, 90 percent of meals were assembled by the customer. Vermeulen said more store owners are adopting a “grab-and-go” model where they assemble meals for time-pressed consumers reluctant to spend up to two hours crafting a pack of meals themselves.

He predicts that by 2010, 80 percent of the meal-prep industry’s revenue will come from grab-and-go meals.

Subway Franchisee Upset

Source: http://www.stuff.co.nz/4599872a13.html

Keely Clements also says her repeated pleas for support from Subway management were ignored, despite telling them her Northlands Mall store was losing money.

That franchise was closed on Monday, after mall management terminated the lease, because it was owed $164,000 in unpaid rent.

Clements also stands to lose her second store, in Kaiapoi, after Subway served her with papers to terminate her lease on July 1, meaning there was no way for her to on-sell the store and recoup capital.

Clements has been protesting outside Subway stores in Christchurch this week to highlight her situation. Christchurch has 23 stores, one for every 16,000 residents.

Clements worked at Subway before buying a franchise in Kaiapoi in 2005 for $480,000. After the success of that store, a year later she bought a second franchise at Northlands Mall for $410,000.

First Watch to Franchise

First WatchWhen I lived in Cincinnati, First Watch was the place for the “power breakfast”, where movers and shakers would gather to strategize over coffee and omletes.  Meeting with a venture capitalist or political insider?  You would likely meet them at First Watch.  There is no First Watch where I live in Chicago, but here to breakfast is big deal for meetings with local favorites the Four Seasons,  Orange, Bongo Room, and East Bank Club.

First Watch, the Florida-based chain with 76 company-owned restaurants in 11 states is planning to franchise this year.  It’s only open for breakfast and lunch, and is always located in affluent suburbs and downtowns.  Being closed for dinner, I was always skeptical that it could generate enough sales.  Apparently, that is not a problem.  Below

If the site meets our criteria, we think it’s a good time to build right now. We’ve weathered this economic climate pretty well so far. We have a very low check average [$7.50], we think we put out a high-quality product, and our value perception is high with our customers. We think that’s actually helping us. So far it’s been OK.

You’re not seeing declines in traffic or check averages?

We are not. We’re actually on our 25th straight year of same-store-sales increases. We’ve had 24. You never want to say that you’re recession proof, and we certainly don’t think we are. All we’re saying is that for the pressures that the consumer is experiencing now, we seem to be an outlet for that. We don’t know if it’s a trade from another dining occasion, trading off the expensive dinner to maybe a nice brunch on Sunday at our place. But we’ll take that.

Are you finding sites fairly easily?

No, I wouldn’t say fairly easily. We’re pretty disciplined in what we’re looking for, and we don’t like to waver from it. So to find sites that match all that criteria takes a lot of work and a lot of digging.

I will say, over the past two years, we’ve opened 11 and 14 restaurants respectively, which from a percentage basis, we were opening a large percentage of restaurants. Those stores are starting to mature now. Most of them are performing where we want them to be. Some are in markets where we didn’t have a lot of brand awareness, so we’re working a little harder to get up to our average unit volume.

Brand awareness is critical for all restaurants, as the Chief Marketing Officer confirms.  The beauty of franchising is that hopefully you can buy into an established, well-recognized brand that will immediate generate sustainable sales upon opening.

‘Homework’ Key to Restaurants

Great advice to aspiring restaurant operators from veteran Larry Ross who was there from the founding of Darden Restaurants and has been in the industry in various capacities for decades.

Q. Someone comes to you for advice on starting a restaurant. What do you say?

A. Do your homework, do your homework, do your homework. I’ve done a lot of business plans and I’m very good at putting together a 15-page assignment that’ll look like a home run, but it’s packaging. Don’t do that. It’s your life, it’s your money, it’s your dream … do your homework. What’s it really going to cost?

Worst-case it: How many restaurants are there, and how much business are they really doing? What’s the national trend? My advice has been for years and will continue to be, ‘Why don’t you not open a restaurant?’ It is a brutal business, the odds are against you.  Really, if you want to invest in a restaurant, go buy a meal once a week and invest as you go. If you really want to get it out of your system, go work in somebody else’s restaurant. But if I can’t talk you out of it, then do you homework, in every way.

Another piece of advice: Do not underestimate the importance of the location. And things like size, keep it small. You have to make one hugely successful before you can even talk about two. There are no real success stories of marginally successful single units that become multiunit chains. It doesn’t work like that.

Here are a few other insightful nuggets:

Q. We recently wrote about Sam Seltzer’s Steakhouse, Roadhouse Grill and some other restaurants’ closing in Lakeland and interviewed James Bronkhorst (owner of Reececliff Restaurant in Lakeland and Christy’s Sundown Restaurant in Winter Haven), who said, “I’ve been running restaurants on my own for 18 years now, and this is the worst I’ve ever seen it.” What are your thoughts on that?

A. He’s probably right. That stuff that started in the late 1960s where everybody was trying to buy restaurants and become restaurant chains started slowing down in the 1990s, but it was still growing. Today, the food-service industry is mature, so you don’t have millions of customers coming on line each day. If you’re going to grow, you pretty much have to take it out of somebody else. You can either generate it organically by getting new customers to your current business or you can generate it by buying another restaurant or opening another restaurant.

But what you see is same-store sales, as a better benchmark, start to go down or flatten out, and then your growth is really kind of artificial. That’s what we’ve been seeing the last couple of years. Growth has begun to slow down, so you see a lot of agglomeration, where this chain buys that chain. Same thing we’re seeing in the airline industry right now and we saw in the banking industry years ago. Well, the big news in the airline industry today is they’re canceling flights. Guess what restaurants have to do? They have to start canceling restaurants.

Q. Who’s in the best position to survive?

A. It’s supply and demand, capacity and demand. In Lakeland right now, we probably have too much capacity for the amount of customers and the amount of money those customers have to spend on their food away from home. The lower end of the spectrum, the Bob Evans, Denny’s, the sit-down restaurants that aren’t dinner houses, they’ll probably do fine. Their average ticket is lower, and again, I don’t stop eating out. When my gas goes up, and my credit card bills cost more, I don’t stop eating, I just trade down on the food chain. Someone like a Bob Evans or Denny’s, they get you – $6.95 is dinner. Carrabba’s at $12.95, maybe they’re losing some cover counts (customers), or Bonefish at $18.95, they’re losing some cover counts. The guys in the middle get squeezed.