Recent Same Store Sales, May 24, 2008

Below are select recent same store sales results from publicly traded franchisors and restaurants.

  • SONIC: March: 0.4% decline in system-wide same-store sales resulting primarily from weather-affected sales;  May:  system-wide same-store sales improved as the quarter progressed and returned to the company’s targeted growth range of 2% to 4%; additionally, traffic for the quarter was slightly positive
  • STONEY RIVER: 3.2% decrease in last quarter in same-store sales
  • OLIVE GARDEN: U.S. same-store sales, or sales at locations open at least a year, grew 5.8 percent at the Olive Garden during the quarter.
  • RED LOBSTER; LONGHORN STEAKHOUSE: Same-store sales fell
  • TEXAS ROADHOUSE: Expects its same-store sales to be flat to up 1 percent for the year.

Structuring the New Franchisor

I’ve always thought that the best way to grow a franchisor is not to have the best product or service offering, but to offer the best franchising arrangements with flexibility.  It look like some hotel franchisors are taking that exact route and it is working.

 A spokesman for Wyndham, Richard Roberts, said that all of the company’s brands require franchisees to sign up for a minimum of 15 years, except for Knights Inn, which offers three-year agreements. Asked about Ms. Sanders’s properties, Mr. Roberts said: “We consider details of our relationships with individual franchisees to be a private business matter. Anyone who wants to affiliate with Wyndham does so at their own initiative. The fact is there are 6,500 hotels in our system for a very good reason: We deliver value to our franchisees.” The brands also include Days Inn, Ramada and Howard Johnson.

Ms. Sanders, though, has moved 17 of her 18 hotels to a new brand, Americas Best Value Inn. The company has broken ranks with its competitors by offering franchise agreements that are renewable each year.

Offering an alternative to the industry’s traditional 20-year contracts has helped make Americas Best Value one of the fastest-growing lodging chains. Nine years after it was founded, its name is on some 800 hotels — nearly all of which once waved other companies’ flags.

The company’s chief executive and president, Roger Bloss, sounds a populist message, calling Americas Best Value “a membership association” and allowing franchisees to vote on company policies, from what kind of shampoo to offer to how much they will pay in fees.

Franchisor Strategy: Let Retirees be Franchisees

Article (India)

Amid stiff competition from Chinese shoemakers, Bata India (BIL) is exploring a brand new franchisee model to launch its upcoming retail stores. It has decided to give older members of its workforce who are close to retirement an option to quit their jobs and run the new Bata outlets as franchisees.

Interesting approach to finding qualified franchisees. Most franchisors do not have this type of large operating company to leverage before they choose a franchise model, but those who do may want to try this route.

Using Weather to Increase Sales

Ace Hardware helping their franchisees by project weather-related sales:

Ace Hardware’s Director of Inventory Control, Paul Sikes, pointed out that, “We have been able to make weather part of the DNA and culture at Ace, so that when we talk about sales opportunity, sales risk and past performance, weather is now just a part of that.” Sikes shared an example from ’07-’08 winter season when Ace substantially increased inventories for snow removal products based on Planalytics’ projections. “We made an extra $10 million in sales in a tough economy because we planned it and we bought it. We were able to service 91% on the hottest seasonal category I’ve seen in years at Ace because of the support of Planalytics and the actions we took off that information.”

Subway franchised restaurants using weather to better understand buying trends:

SFAFT is a non-profit organization that provides marketing support to Subway’s franchised restaurants. Adam O’Hara, Manager of Reporting and Analytics for explained in his presentation how the company isolates weather’s impact on sales through “a transaction-based model” specifically developed with Planalytics. “Our weather-driven demand number is tied directly to what percentage of our sales were up or down,” O’Hara remarked. “You would be amazed at the correlation between how our volume performs and how the weather performs.” Identifying the degree to which sales are impacted by weather enables SFAFT to better measure the effectiveness of advertising and to optimize the timing of programs going forward.

Source: News Blaze

Managing Staff, Help from Franchisors

This article provides a good primer on employment issues in the United States, and franchisee/franchisor liability.

The franchisor does expose themselves to employment risks even if it tries to protect themselves in the franchise agreement:

As employment law has evolved, the risk of potential liability to the franchisor under this type of arrangement has increased. In particular, a number of state anti-discrimination laws (such as those of New York, New Jersey, and California) impose liability upon third parties for aiding and abetting discrimination. Even where a franchisor takes a completely hands-off approach with respect to the franchisee’s employees, it may still face potential liability where it knowingly tolerates or condones discriminating practices. In practice, this type of aider and abettor liability now places franchisors in a Catch 22 position. If a franchisor knows of discrimination by the franchisee but fails to act, liability as an aider/abettor may result. Conversely, if the franchisor does take action, that action itself may lead to the imposition of liability as an agent and/or joint employer. This is further compounded by the fact that the size of jury awards and the willingness of juries to give large awards has also increased over the last few years.

Here is how franchisor, Jackson Hewitt, gives employment advice:

For example, Jackson Hewitt, the nation’s second largest individual tax preparation company, periodically surveys its franchisees to determine what issues are of most concern to them. It then retains independent employment counsel to provide seminars on those topics at its annual franchisee convention. The company also follows up with the franchisees by way of a post-seminar survey to ensure the training is effective and responsive to their concerns. Training on such things as how to properly interview and hire employees, what to watch for in dealing with discipline/discharge issues, and how to conduct investigations of employee complaints are particularly helpful to franchisees.

Employee training and posting requirements also should be addressed by both parties. Federal law, as well as most states, requires that employers post information summarizing the applicable employment laws on such issues as harassment/discrimination, wage and hour regulations, whistleblowing, and workplace safety. A recent visit to a franchise to interview witnesses with respect to a race discrimination charge revealed that there was not a single required posting on the employee bulletin board. When questioned, the franchise owner simply said “they (the franchisor) never told me anything about that.” Nor had the lawyer who represented him on the purchase of the franchise. As a result, the franchisee’s simple failure to make the required posting was used against it as evidence of its alleged discriminatory intent. This could have been easily avoided. Providing general guidance as to where the franchise may find the information for the state in which it is operating is a good way for the franchisor to do its part in promoting compliance.

Cash Discount for Customers

dimeInteresting article on gas franchisees offering discounts in Connecticut for customers paying cash.

Tala said Hess Corp. was fine with his decision to offer a cash discount. He knew that Connecticut law already allowed cash discounts, but banned surcharges for credit, and decided to begin offering a lower price on Memorial Day weekend after credit card sales became 90 percent of his business. They had been only 40 percent when gas was under $2 a gallon.

Tala said he wound up paying about $12,000 to $13,000 a month at his Newington store for credit card fees. He wasn’t making enough money to cover his costs.

Dream Dinners Hammered by Forbes

DreamDinners-OwnersDream Dinners is an example of good idea but unprofitable business model. It’s just too expensive to attract and retain customers. A Forbes article looked through the Dream Dinners FDD from the state of Washington, and focused on the required audited financial statements.

As of Dec. 31, the company boasted $2.9 million in assets, against which it carried $3.4 million in liabilities. (Such negative book value implies that if Dream Dinners were unwound today, shareholders wouldn’t get much.) That’s a snapshot, but here’s a trend: Last year, the company lost $628,000 on $7.5 million in sales; compare that to 2005, when it earned $928,000 on sales of $4.5 million. …. Typically, new business concepts need up to five years to season before they can be franchised successfully. Dream Dinners–along with its next largest competitor Super Suppers, now with 165 stores–both began franchising in less than two years.

Many of my law firm’s clients are small franchisors, and frankly most do not have experienced managers or have enough invested capital. The new managers often spend way too much time on franchise sales and not enough resources on marketing programs for their franchisees and brand/product development. The franchise sales process is always longer and more expensive than anticipated, and that focus ends up monopolizing the franchisor’s time and money. These franchise programs have an extremely high management risk, meaning that not only is the franchisor’s management unproven in this specific strategy, but they are underfunded which keeps the focus on franchise unit sales.

I used to be extremely skeptical of consultants, and still am to large extent, but I have come to greatly appreciate the need and effectiveness of professional research and design teams to innovate and set the program up for success. The distinction is night and day between franchisors who utilize professional researchers and designers (McDonald’s is the most obvious example), and those who don’t. I have additional perspective on this in the financial industry because my wife is global director of user centered design for one of the world’s largest banks, and I see how many projects get screwed up when the bank’s business units try to short-cut improvements without leveraging the expert teams.

Meal Assembly Watch has an insightful post on how to fix Dream Dinners – 5 Ways to Save Dream Dinners. Executives of the franchisor with poor strategy and execution beyond selling franchise units seem to be the main problem.

Back to the Forbes article…Franchisees accused the franchisor of false promises and unsubstantiated financial projections.

A major point of contention has to do with rosy promises Dream Dinners seemed to have made to its franchisees. Under the Federal Trade Commission’s franchise law, franchisers are not permitted to make “predictions” about franchisees’ financial success–unless they do it in the Uniform Franchise Offering Document, which typically contains a host of disclaimers. Dream Dinners “totally disregarded these regulations,” says Garner. It not only posted financial projections on its company Web site, he says, it also put them in a Power Point presentation given to potential franchisees. Jennifer Hemann, a former Dream Dinners franchisee in Maryland and one of the plaintiffs in the suit, alleges that she was shown that Power Point presentation–which included estimated profit margins for a given volume of customers–when interviewing with the founders. “They told us, ‘Our lawyers said not to show this to you, but if you write fast, you can get it all down,'” she says… The slides, provided by Garner, present some tantalizing figures: Allen and Kuna projected that, at 187 customers per month, a franchisee could expect to earn $75,400 in profit annually, or 18.9% of total revenue. On the high end, at a quoted 328 customers per month, net profits jumped to $163,300, or 23.3% of sales. The estimated distance customers would be expected to drive: two to five miles. Allen and Kuna insist that “the figures were realistic and based on the actual performance of stores.”

The owners look innocent and reliable enough in the picture, eh? I would be tempted to believe Allen and Kuna. But, how could you have seen past their persuasive projections?

  1. Looking at the audited financial statements would have revealed a tightening financial situation.
  2. If the profits were as high as the owners said, they would be raising money to open company-owned stores.
  3. The inexperienced co-founders are still playing a leading role in the company…are they really the best people to be managing a fast-growing organization?
  4. …post your ideas on the waring signs in the comments below

Financial Performance Representations

A good primer article on FRP (Financial Performance Representations) was posted by attorney Gary Duvall from the law firm Dorsey & Whitney LLP. He believes that two trends may increase the percentage of franchisors who will be using financial performance representations in the FDD:

  1. the general availability of cost-effective financial reporting software that communicates easily between franchisee and franchisor
  2. the new FTC Rule allows more information to be given to prospective franchisees outside Item 19 of the FDD.

Why, in Duvall’s opinion, don’t more than 25% of franchisors provide earnings claims? He gives three reasons:

  1. Lack of reliable financial data
  2. Variability of financial results due to each unit’s local business environment
  3. “Sell the Sizzle”, meaning unit results are likely lower than potential franchisees’ expectations

On a side note, one representative I spoke from an Arizona-based BBQ franchisor stated that he did not believe earnings claims were good for franchisees because they discouraged the franchisee from doing research.  I believe he was right in that providing an abundance of information and financial results may lessen the overall research done by a franchisee.  I don’t believe that is the primary reason these executives decided not to disclosure FRP.

Back to the article…Duvall adds:

if a franchisor has reason to know that franchisee profitability is extremely low, for example, that few if any franchisees are profitable, or that most franchisees will probably close in the near future, non-disclosure of these problems as a risk factor arguably violates the duty to disclose all material facts, although this is a grey area of the law.

Advice from a McDonald’s Franchisee in U.K.

This article from the United Kingdom highlights some of the positive aspects of franchising.

He said: “Choosing the right franchise is a big decision – it’s your own money on the line and you need to be sure that you are investing in a sound business model. McDonald’s employs some of the most talented professionals around and it helps to be able to draw on that knowledge and expertise.”

There are significant advantages to running a franchised business, as a new idea has already been tested to ensure it is successful. What’s more, larger franchises will have a well-established trading name and are likely to offer marketing support and comprehensive training programmes in a wide range of business skills. Good franchisors can also help secure initial funding.

Mr Thomas said: “McDonald’s has some fantastic training opportunities for staff at all levels, which means that when I identify talent I have the tools to help my staff develop their skills.”

“At the same time, I can operate on a local level too and I’m involved in a number of community initiatives. I am deputy chair of the Trust for Sick Children in Wales, and regularly give talks on business and entrepreneurship at local schools and offer work experience placements through Careers Wales.”

He added: “For entrepreneurial people owning a franchise is a great opportunity to take a fantastic brand and make your own mark.”

The only portion I have issues with his last statement. For truly energetic entrepreneurs, owning a single franchise provides limited entrepreneurial satisfaction because of the lack of flexibility and adaptability limits built into the franchise operating structure.

Online Ordering

Most of my friends order food online whenever possible, especially pizza like Domino’s and Papa John’s.  Online ordering is making up 20% this Papa John’s franchisee’s sales:

In fact, Chesley estimated, about 20 percent of her store’s sales arrive via the Internet.Customers can insert exactly what they want and it saves on labor costs since the staff doesn’t have to spend as much time on the telephone taking orders, Chesley said. “We do great with online ordering.”

Potential franchisees should make sure you are free to engage an online ordering network such as Order Network, CityWaiter, eHungry, Kudzu Interactive, or GrubHub.

McAlister Franchisee Doing Well

mcalister_counter.jpgThis McAlister franchisee with 30+ years of restaurant experience from Oklahoma is doing well. The article has some good tidbits:

“Our business is actually up,” said Bothwell, attributing that to McAlister’s market positioning and lunch focus, which accounts for 65 percent of its revenue. “People seem to still be eating out for lunch.”Competing for the fast-casual market with such well-established companies as Panera Bread and Jason’s Deli, McAlister’s offers more than 100 menu items for lunch and supper, targeting health-conscious customers.

“We have to get more sales to cover our increased operating costs,” he said, noting his average per-person ticket runs $7.85.

His firm ended 2007 with revenue of $10 million, his stores averaging $1.5 million per year. With eateries to open this year in Shawnee; Lawrence, Kan., and Joplin, Mo., as well as at 21st and Yale in Tulsa, he projects 2007 revenue of $20 million.McAlister’s restaurants established in existing shopping centers, like his new midtown Tulsa deli, cost about $750,000 to open, said Bothwell. Stand-alone stores can run $1.5 million to get off the ground. Both employ an average staff of 50, now a greater challenge since Oklahoma’s new immigration law further drained the state’s tapped labor pool.

UPDATE: May 29, 2008 @ 5:34pm EST

UPDATE #2: June 4, 2008 @ 3:14pm EST

There was an interesting comment to this post about whether a stand alone location can realistically justify the $1.5 million build out costs, which is double the $750,000 cost for a strip mall location. The short answer is yes. You wouldn’t need twice the sales, but there would be an incremental increase in sales to have the free cash flow to service more debt.

Here’s the analysis: The monthly cost of borrowing an additional $750,000 @ 8% with 10-year repayment term is

Loan Balance: $750,000.00
Loan Interest Rate: 8.00%
Loan Fees: 0.00%
Loan Term: 10 years

Monthly Loan Payment: $9,099.57
Number of Payments: 120

Cumulative Payments: $1,091,948.32
Total Interest Paid: $341,948.32

To cover this $9,100 in additional monthly debt service not including the extra taxes and maintenance, the store would need to attract an extra 1,160 tickets monthly @ $7.85 average per ticket. A store with $1.5 million in sales is attracting 524 patrons per day. Can a standalone location attract at least 38.6 more people per day versus a strip mall front? Sure, it is possible with a significantly more prominent street exposure.

Dippin’ Dots Competitors

[Post prompted by a comment on this blog]

Many people believe Dippin’ Dots has a monopoly the cryogenically frozen “popcorn” ice cream.  However, the Dippin’ Dots patent was invalidated by the USPTO in 2007, in part because Dippin’ Dots founders had made sales of a similar beaded ice cream product to over 800 customers more than a year before submitting its patent application, which sales were not disclosed to the PTO – thus the prior art was obvious. (read the court’s ruling here pdf)

Today, there are two main competitors of Dippin’ Dots – MiniMelts and MolliCoolz .

Charitable Goals of Franchisees

I found this article interesting about a group of Boston Pizza franchsiees and their fundraising goals. Even if the franchisees do not have the funds to make significant contributions to charities, organizing or participating in charity events by providing products and services is usually an efficient deductible expense that can be more effective that advertising.

The Enrights’ restaurants have raised more than $600,000 for the Boston Pizza Foundation since 1999 through various fundraising initiatives and partnerships with local businesses.

In the past two years alone, their 10 restaurants across Winnipeg have raised more than $300,000 for the BP Foundation through its Valentine’s Day promotion.

Richard and Kim Enright and their franchisee partners have also developed a $100,000 scholarship endowment fund for the University of Manitoba’s Faculty of Education.

Their Garden City location’s “Celebrity Server Night” featuring the Winnipeg Blue Bombers, Winnipeg Goldeyes, Team Canada athletes and entertainers, raised more than $5,000 for the Seven Oaks General Hospital Foundation.

Real Estate Requirements

Ever wonder what the real estate selection criteria look for a typical sandwich shop? Below is the criteria for a sandwich shop called Which Wich. Landlords are not often willing to dedicate parking spots to particular tenants as noted in the criteria. If you were considering being a franchisee and you were given this criteria, and you plan to open a store on a busy street that only provides street parking, make sure to get agreement from the franchisor prior to signing the franchise agreement.

Self-Service Kiosks

I believe that self-service ordering kiosks will be a fixture at many big-name restaurants and fast food outlets in the next decade, much as the self-checkout in grocery stores have become common place.  It makes sense for customers and it makes sense for the restaurant owners.  These self-service kiosks are aimed at increasing the average transaction and speedier service.  At this point I’d be satisfied with a “refill my drink” button at my table.

The extreme evolution of this concept is the Baggers restaurant in Germany where guests choose their meals from a touch screen at their table and food is delivered by a “mini-railway” from the kitchen located on the floor above.   The inventor’s gravity feed rail system is patented in Germany and he is seeking protection for the invention internationally so that he can license it to restaurants abroad.  You have got to watch this quick BBC video showing how the restaurant works.