I should have guessed but was pleasantly surprised that an entrepreneur produced a GPS enhanced software  that managed a crew of delivery drivers and integrates with several POS.  A 21-unit Pizza Hut franchisee just purchased a system.

Pinkberry Craze

Frozen yogurt is hot again? Well, sort of. Given the implosion of the last frozen yogurt phase, you are wise to be cautious. The last frozen yogurt craze in the 1980’s and early-1990’s was lead by TCBY. According to the International Council of Shopping Centers, TCBY’s same store sales fell 10%-15% annually between 1997 and 2004, particularly when the low-cal and low-fat versions were introduced. The International Dairy Foods Association reported frozen yogurt production in the U.S. went from 118 million gallons in 1990 to 65 million gallons in 2005, a 45 percent drop.This time Pinkberry sure seems to be all the buzz lately, even being features in a recent American Express ad and having their hip tart frozen yogurt dubbed “Crackberry” playfully implying an addiction is possible. Here are photos of a Pinkberry in Manhattan. Founded by Shelly Hwang (coming off several failed small restaurant ventures) and Young Lee (a solo designer), they effectively brought to Los Angeles the tart frozen yogurt now famous in South Korea.Pinkberry has apparently been stretching the healthiness of its yogurt, and in early April 2008 settled a law suit where it was accused of misrepresenting its product as “frozen yogurt” and making bogus health claims, including that the dessert was “all-natural.” Pinkberry admitted no wrongdoing but is paying $750,000 to a local food bank and $5,000 to the “victim”. The article implies that the recipe is not all natural and has higher calories than the founder claims.Nevertheless, sales of the tart frozen yogurt are impressive. Pinkberry has put forth in the media unit sales of $250,000/month and has generated a plethera of copycats across the country, including Berrie Good, Yogurberry, BerrySweet, Red Mango, and recently Berry Chill here in Chicago. Pinkberry has supposedly ceased selling franchises for now.

The Concept

The hip tart frozen yogurt concept is simple:

• a few basic flavors of tart all-natural frozen yogurt
• a variety of berry and exotic real fresh-cut fruit toppings in addition to cereal and cookies
• curvy counter and furniture; accented with colorful hip floors and wall coverings
• at least 4 plasma TVs showing something “cool” like music videos or Japanese game shows
• at least 4 plasma TVs above the counter with an animated menu
• charge about $4-$7 for a tart yogurt and 3 toppings of brand-name cereal, fresh fruit, candy, and pastries.

Should you buy a franchise or role your own?

You can easily roll your own. Here are some basic supplies you’ll need to get started:

• get your 2 ice cream machines from Taylor, ($36,000 each)
• tart frozen yogurt mix from YoCream or Cielo
• cups from Jas Wholesale (supplies price sheet ) (500 ct = $59)
• ultra modern flooring, counters, cabinets, and furniture from Ikea (~ $3,500)

I may be more biased to the “role your own” after seeing the success of a single-unit startup in Chicago called Berry Chill. It occupies a small storefront on State Street a few blocks of Michigan Avenue (the Magnificent Mile). The entrepreneurs got the location right, and executed the “feel” of the asian-inspired Pinkberry clones well enough. Berry Chill opened a few months ago during the middle of winter when the weather was below freezing.  However, while most of the frozen custard places close for the winter, there was almost always a line at Berry Chill.  I attribute most of their early success to copying a proven concept and selecting an excellent main street location with lots of tourists and local high-rise condo residents.   I’m sure the store will do well over $1 million in sales during the calendar year. Coincidentally, there is a Cold Stone Creamery (with Soup Man) 1.5 blocks away with a larger store but *probably less than a third of the street foot traffic and it rarely has a line except in the evenings of summer days…what a difference a few blocks and hip attitude make.Would I buy one of the aforementioned franchises? Probably not. I’m a strong believer in historic trends, and I would not want to be financially tied to a concept so easily copied or a category that tanked so quickly in the past few decades. I would be very hesitant to open a unit in a suburban outdoor strip mall, as heavy immediate foot traffic seems to be part of the successful formula.If I was to franchise, I would go with the brand with the high exposure and recognition, which at this time is Pinkberry, unless one of the franchise clones have extremely flexible terms in the Franchise Agreement, such as permitting me to essentially change my store brand if I choose not to renew, and permit me to transfer all assets to my new business without penalty or encumbrance, and if the Franchise Agreement did not require me to refrain from competing for any period of time after owning a franchise. If the concept doesn’t work, I want out of the franchise obligations but I want to still have the option to utilize the assets I paid for (either sell them or use them in a similar/renamed business).

Industry Developments

Forbes has a good article on the current status of the Frozen Yogurt industry. Reformulations of the frozen yogurt to a low-fat with fruit mix seem to be working:

MaggieMoo’s International also reformulated its smoothie line, changing it from non-fat to a low-fat, lactose-free ice cream or fruit smoothie called Zoomers. The company made the change after conducting blind taste tests with consumers, 67% of whom preferred a tasty, low-fat smoothie to a non-fat smoothie, says Debbie Benedek, senior vice president of brand marketing. Flavors include a Triple Berry Pomegranate that’s packed with antioxidants. 

After changing its frozen yogurt production process, within six months Dreyer’s/Edy’s Slow Churned watched a double-digit decline in frozen yogurt business turn into double-digit growth, says Suzanne Ginestro, senior brand manager for Dreyer’s and Edy’s Slow Churned ice cream. (Dreyer’s is known as Edy’s east of the Rockies.) By using the slow churn method, fat is better dispersed throughout the product, making it feel richer and creamier. A similar change also boosted the brand’s light ice cream sales.

“We cannot provide you with any financial results of our existing franchisees because the FTC and/or state law prohibits it.”

I can’t count how many times I’ve heard directly from franchisors that they choose not to disclose financial results or franchisees because they are prohibited by law. That is an outright lie, and at the very best, extraordinarily misleading. The FTC wants to encourage franchisors to provide as much financial guidance as possible, but that guidance must be delivered in a consistent and regulated manner so as not to mislead the potential franchisee.

On Michael Webster’s BizOp blog, he looks at Romp ‘n Rolls bogus claim that they do not provide the financial results of their franchisees because FTC prohibits it.

Scott Pooler, a former official eBay Trading Assistant, and a master franchise representative for an eBay drop store franchise chain weighs in on the subject of franchising and stand alone eBay drop stores in Trading Assistant Journal, a weblog that provides news and commentary for eBay consignment specialists.

Scott’s experience on both sides of the fence reveals certain truths, and since he was at one time a proponent of the franchise model, his views are helpful to anyone considering the purchase of a new franchise eBay drop store or opening one on their own. These views are Scott’s opinion and do not reflect upon eBay any eBay franchise drop store chain in particular or upon eBay consignment as an addition to any other type of business.

His views regarding the stand alone drop store franchise model and why it has failed are worth reading.

Read the whole story

Cross Posted at Let’s Talk Franchising

Performance differences between corporate-owned and franchised hotels are slim to none, according to new research.

Leah Sipher-Mann h Sipher-Mann writes in Michigan in the News that, for a company pondering the question, “To franchise or not to franchise?” new research from Michigan’s Ross School of Business suggests that performance differences between corporate-owned and franchised outlets, when chosen right, could be slim to none.

Ross Professor of Business Economics and Public Policy Francine Lafontaine and colleagues Renáta Kosová of Cornell University and Rozenn Perrigot of University of Rennes, studied the effect of vertical integration on the performance of individual hotels. They found that a company’s decision whether to franchise or own a particular hotel has little effect on yield (average price) or performance.

Lafontaine and her team studied an unnamed multi-chain hotel company that has both franchised and corporate-owned hotels under each of its several brands, running the gamut from budget to luxury. They collected data to determine whether organizational form for each hotel has an effect on any of three outcomes: monthly revenues per available room (i.e., what the industry calls “RevPar”), price or yield (average room rate per month), and monthly occupancy rate. Across all three variables, Lafontaine and her colleagues found that franchising per se does not have a statistically significant effect.

“We conclude that the firm chooses which outlets to franchise and which to own in a way that yields no differences in pricing or performance, in the end, between the two sets of hotels,” the authors state. “This result is important as it suggests that when firms can choose, they indeed adjust organizational form in such a way that there are no real differences in outcomes.”

“This does not mean that franchising and company operations do not have different incentive effects, because they do,” says Lafontaine, “but simply that firms are smart about how or where they choose to rely on these differences.”

In the past, empirical evidence had suggested there were persistent performance differences between corporate-owned and franchised businesses. However, the authors note that much of that evidence comes from studying firms that have been forced into a particular organizational structure by legislative intervention. For their research, Lafontaine and her colleagues instead studied a situation in which the decision-maker (here the hotel company) was not forced by legislation into its particular structure.

The authors also ruled out that their findings might be driven by other potential influences on the hotels’ performance such as the presence of air conditioning, swimming pools, or restaurants, as well as proximity to an airport or train station.

“We view the results as suggesting that multi-unit firms can choose organizational form in a way that is responsive to the differences in market conditions across outlets, such that when all is said and done, organizational form itself has no direct effect on outlet-level performance or pricing,” says Lafontaine.

Lafontaine and her team recognize that while their findings are conclusive, the evidence is limited to data from a single company. Future research might strive to include data from multiple firms and different industries.

Cross Posted on Let’s Talk Franchising

Franchisors are always protecting their butts to the fullest extent possible, and that is often what franchisors hire me to do as their attorney. But, franchisees should be aware the rights they are giving up when signing a release, such as the one below from the 2007 UFOC of Snap Fitness.

The release requires the franchisee to give up any right to sue for any reason. Many U.S. states reserve certain legal action by franchisees to protect their financial investments from fraud, making the release unenforceable under certain circumstances. But signing a release does in many situations prevent a franchisee from using the courts to enforce a right or to protect themselves. And if you can’t sue, the franchisee will have little leverage over the issue when dealing with the franchisor.

Below is the release from Snap Fitness.

Jan Dennis, Business & Law Editor of News Bureau, reports that a new study co-written by Steve Michael a professor of business administration in the University of Illinois at Urbana-Champaign reveals that fast-food restaurants and other chain outlets are less likely to fail when super-sized training programs prepare fledgling owners for the challenges ahead.Advance, in-depth training on everything from bookkeeping to dealing with customers and suppliers is a key to survival for franchise outlets, said Steve Michael, a professor of business administration in the U. of I. College of Business.

But while some chains put aspiring entrepreneurs through months of schooling, others turn them loose in as little as two weeks, increasing the odds of failure, said Michael, whose study was published in January’s Journal of Small Business Management.

“The notion of just watching while somebody else does the job for a while is a mistake,” Michael said. “People need to realize these are sophisticated businesses that require extensive training. The more time you spend at Hamburger University or Dunkin’ Donuts University, the lower the failure rates.”

Michael and Florida State University business professor James Combs studied nearly 90 national restaurant chains to gauge whether franchisors contribute to the success or failure of franchisees, which number about 700,000 worldwide in industries ranging from lodging and office supplies to tax-preparation and cleaning services.

Along with training, franchisors can help keep franchisees afloat by pumping money into advertising that promotes the company brand, according to the study, “Entrepreneurial Failure: The Case of Franchises.” “Chains that are out there promoting themselves create value and drive up demand. When they don’t, franchisees are more likely to fail,” said Michael, who says the study is the most extensive look to date at how chains influence the fate of franchises.

The study also found that rules set down by some chains help franchise outlets succeed, such as offering exclusive territories that restrict intra-brand competition or requiring franchisees to be owner-operators. “Franchisors could be viewed as bullies for forcing owners to actually manage the franchise, but it helps both of them survive for the obvious reason,” Michael said. “If someone puts their full time and effort into an operation, they’re more likely to be successful.”

Michael compared his findings with those of previous studies on the keys to success for chains and found that overall what helps the franchisee survive also helps the franchisor survive. The lone difference, he said, is royalty fees, which tend to help franchisors but hurt franchisees. “It’s often billed as a symbiotic relationship in trade publications and the fact is that seems to be true,” Michael said.

The study found that 13 percent of franchise restaurants in the survey failed – higher than results of some previous studies but far lower than failure rates for traditional start-up businesses that can approach 70 percent. But driving franchise failure rates even lower would be welcome news for the nation’s economy, with chains accounting for more than 40 percent of U.S. retail sales annually.

“It’s a big chunk of the economy,” Michael said. “And it’s a growing part of the economy as more people seek self employment, either because of changes in the macro-economy or just because they don’t want to work for someone else anymore.”

Cross Posted at: Let’s Talk Franchising

Here’s your self-test with questions and insightful examples.

Hat Tip: Pete Olson’s “Solo in Chicago” blog

Preliminary advice for the would-be franchisee in the country of South Africa is very similar to advice given to would-be US-based franchisee.  Best point in the article:

• “Thus every franchisee will be expected to operate a carbon copy of the franchisor’s original business, and individuals who thrive on ‘doing things their way’ are unlikely to be happy as franchisees.”

Dairy Queen franchisee associations with members in Arizona, West Virginia, Ohio, Virginia, Maryland, Pennsylvania, Kentucky, Missouri and Illinois filed law suits to halt required remodeling:

Dairy Queen franchisees’ arguement:

The lawsuit contends Dairy Queen is trying to force franchise owners to spend between $275,000 and $450,000 to remodel stores to adhere to an unproven concept — one that will cost more to operate, double staffing requirements, and cut into profits.

“No one should have to make this conversion that is quite expensive unless they want to,” Caruso says. “If the DQ Grill & Chill concept was such a promising new concept, then the free market would solve this problem.”

That hasn’t happened, according to the lawsuit.

As of December 2006, the complaint says, just 105 Grill & Chill restaurants had opened in the United States. Some have performed poorly, and two have closed.

Dairy Queen franchisor’s argument:

Moreover, Mooty maintains no one is being forced to do anything. Dairy Queen does require about 70 percent of franchises to modernize restaurants periodically. But Mooty says Dairy Queen has capped the required investment at $75,000 for 2008, $85,000 next year and $95,000 in 2010. The required modernization should be no surprise to franchise owners because it’s standard in most of their contracts, Mooty says.

“It is not making somebody spend hundreds of thousands,” he argues. “And it is not forcing somebody to go to another concept.”

Mooty said it is the franchise-owner associations, which compete with the corporation to supply the restaurants, that are stirring up trouble. Dairy Queen is cutting margins on its supply business, which is hurting the associations, he contends.

“They are losing membership, they are losing market share and they are having to take more drastic measures in creating fear and concern.”

It was announced in Convenience Store News that Dinner by Design, a meal assembly chain based in Grayslake, Ill., has unveiled a new package of convenience services that the company expects will change the easy meal prep industry.

Specifically, Dinner by Design’s new services include:

• Delivery services that allow people to preorder entrees and side dishes and have them delivered to their company, daycare, school or other organization. Based on a test marketing effort, the company already has more than 300 group delivery clients nationwide. Home delivery will be unveiled and tested in one location in mid-March.
• Pick Up meals for busy people who don’t have delivery service. Take & Bake entrees, desserts and side dishes are premade and can be picked up anytime during expanded business hours. Orders can be placed online, e-mailed, faxed or phoned in.
• Dinner Tonight selections geared for people who need something for dinner without defrosting time. This service helps meet the needs of nearly 37 percent of people who don’t think about dinner until just before preparing it, the company stated.
• Group delivery, Pick Up service and Take & Bake selections are already available and operating successfully at most locations nationwide. Dinner by Design has nearly 60 kitchens open, and agreements for another 40 locations in the U.S. and Canada.

“This is the wave of the future,” president and CEO John Matthews said in a company statement. “This new business model has been very attractive to existing and potential franchise owners alike. We anticipate that the new meal assembly model will mean added growth for Dinner by Design owners and operators.”

It may be a move in the right direction, though I am always concerned when a franchisor introduces a whole new program before the program has received proper testing. I think the move is indicative of the fact that the industry is failing to provide an ROI to franchisees, and is scrambling to come up with a new business model that can deliver profits.

The challenge with this approach is that it may require additional investments by the franchisees to implement. You wonder if that is just like putting more “good money, after bad money”.

Cross Posted at: Let’s Talk Franchising

This Plato’s Closet franchisee in Colorado found an often overlooked solution to a common problem – give outstanding employees equity ownership in stores (more precisely, stock in the franchisee entity or management company of the franchisee that owns the stores).

What if the franchisee is not willing to accept new owners?

Offering a “phantom stock” or “stock appreciation rights” may be an attractive alternative for franchisees in granting stock to employees. A corporate attorney with experience in this area should be able to set this up for you….I have set these compensation plans in my legal practice.

A “stock appreciation right” is granted to employees and enables the employees to profit from the appreciation in value of a set number of shares of company stock over a set period of time. The valuation of a stock appreciation right operates exactly like a stock option in that the employee benefits from any increases in stock price above the price set in the award. The stock price for private companies is determined by a set valuation formula or outside firm selected by the company’s management. However, unlike an option, the employee is not required to pay an exercise price to exercise them, but simply receives the net amount of the increase in the stock price in either cash or shares of company stock, depending on plan rules. If the employee’s employment is terminated, the stock appreciation rights are revoked.

From the Phoenix Business Journal:

Fifteen of the fast-casual [Corner Bakery Cafe] restaurants are planned in the state under an agreement between franchisee Roland Spongberg and WKS Bakery Cafe Inc. The chain, which serves breakfast items, salads, sandwiches and desserts, has more than 100 locations in nine cities across the country.

Spongberg’s WKS Restaurant Group expects to open its first restaurant in late 2008 near Arrowhead Towne Center in Peoria. He also operates 50 El Pollo Loco and Denny’s restaurants in Southern California and Phoenix.

Corner Bakery is scattered throughout Chicago where I live and is a staple for many urban lunch-goers. It’s strategy of blanketing select cities and building local brand recognition and leveraging marketing dollars is an efficient brand-building strategy. A primary reason to become a franchisee is to leverage existing brand recognition and pool marketing resources with other franchisees, which Corner Bakery seems to have incorporated into their expansion strategy.

Franchisors must keep their UFOC’s up-to-date, and at a minimum, must be updated when:

1. The information contained in the UFOC document must be current as of the close of the franchisor’s most recent fiscal year. After the close of the year, the franchisor must prepare a revised disclosure document within 90 days.
   
2. The franchisor must update its disclosures to reflect any material changes within a reasonable time after the close of each fiscal year quarter. A material change is generally “any fact, circumstance, or set of conditions which has a substantial likelihood of influencing a reasonable franchisee or a reasonable prospective franchisee in the making of a significant decision relating to a named franchised business or which has any significant financial impact on a franchisee or prospective franchisee.”  Examples of a “material change” include:
   • changes in the franchisor’s management, corporate structure, address or interim financial statements;
   • changes to the offer itself;
   • closing or failing to renew a significant number of franchisees; and
   • the filing of material litigation or administrative proceedings.
3. Third, the FTC Rule contains specific updating requirements if a franchisor makes earnings representations. A franchisor must notify prospective franchisees of any material changes in the information contained in its attached earnings claim document prior to entering into the franchise relationship.

U.S. Veteran and Little Caesars franchisee Patricia Evans celebrates the opening for her new Little Caesars Pizza Restaurant in Valdosta, Georgia. Evans is the fifth veteran to open a store under the Little Caesars Veterans Program which offers honorably discharged, service-disabled veterans who qualify as Little Caesars franchisees a benefit of up to $68,000. Honorably discharged, non-service-disabled veterans who qualify as Little Caesars franchisees are eligible for a benefit of $10,000.

http://news.yahoo.com/nphotos/slideshow/photo//080130/480/60cbb1da1d1f490eb8e41cb12271e710/