I’ve noticed several franchised “Urban Flats Flatbread & Wine Co.” closing this year in the southeast, such as Orlando FL, Winter Park FL, Lawrenceville GA,  and Atlanta GA (pictured to the right).  Something clearly isn’t resonating with potential and repeat customers.   Many franchises suffer from this ‘surprise’ problem leaving execs scratching their heads about what is going wrong.    I’ll put on my pundit hat and give you my opinion and recommendations.

HOW RESTAURANTS ARE JUDGED BY CUSTOMERS:

People will instinctively judge a restaurant on three elements, and to draw repeat business you need to excel in at least two of these (and be at least average in the third) in the eyes of your local customer base:

1. FOOD:  Is the food memorable and superb all around?
2. PRICING: Is the pricing at or below the competition; does it provide value?
3. AMBIANCE/EXPERIENCE:  Is the customer experience superb with a unique and comfortable interior design?

A restaurant could succeed by satisfying only two of three criteria.  For example, you could provide an excellent customer experience and have great food, but prices are too high.   Cheesecake Factory and J. Alexanders are examples of this but both still generate excellent sales.

HOW URBAN FLATS RATES:

According to most of the reviews I’ve read online, Urban Flats rates as follows:

1. FOOD: Average food, flats are minimalistic…not bad but not excellent either
2. PRICING: A bit high – $10 cheeseburger, $8.50 Loaded Potato appetizer, $10 “flats” pizza
3. AMBIANCE/EXPERIENCE: Average, some described it as trying too hard to be cool.   Music is too loud to talk.  If you have to describe your restaurant as hip in advertising, you probably are not.

Other repeat comments are that visitors expected a walk up ordering counter and self seating, but it’s a sit down wine bar.   The menu is surprisingly diverse for a “flats” restaurant.  It showcases very high end salads and entrées ranging from salmon and tandori chicken.  People understandably describe the “flats” as “pizza” even though there is no mention of pizza on the menu.

Also see: Urban Flats Menu

FIXING THE BUSINESS

I could see this concept get on the path to profitability by switching to a limited menu of “flats” priced at the fast casual norm of $6-$8.  And, only selling sides that support the “flats” sales such as  salads.  The service style should be fast (under 5 minutes to receive your order) and be located in storefronts where you’d find fast casual restaurants like Panera Bread, Go Roma, or Noodle & Company.

Ditch the waiters and table service, ditch trying to be a hip bar.  Ditch the menu items that do not support the “flats”, shrink your footprint to under 3,000 square feet. Make the seating comfortable to individuals and groups.  Try to infuse “authenticity” into your brand story, focus on the unique “flats”, don’t fight the pizza comparison.   Hire a new chef consultant (you need outside unbiased help right now) to restructure the menu, and rework foods to get the food costs well under 30%.   Hire an experienced research firm to test and improve the menu (email me if anyone wants research firm recommendations).  Let the chef consultant work closely with the research firm for best results.  Since stores already have bars and liquor licenses, have a couple of low-cost wines and decent draft beers with the pizza, but I’d drop the hard liquor permits if possible and just do beer and wine.  Flipper’s Pizzeria and Go Roma do this successfully while keeping it family friendly.  You may be tempted to go the sports bar route but I wouldn’t recommend it in this instance because you’ll get lost in the shuffle as most sit down pizza places already pseudo try that.

Currently, there is little unique about Urban Flats other than their “flats” pizza.  Luckily, there is a market void for quality under-5-minute pizza restaurants (Red Brick Pizza is currently trying to exploit this niche with high-temp stone hearth ovens that cooks pizza in 3-4 minutes…I’ll do a review of Red Brick Pizza soon because I think they’re screwing up too).   If I owned Urban Flats, I’d bet the farm on branding the restaurant entirely around the “flats”.   Try being more kid friendly with the menu and seating in your suburban locations and you’ll get many more of the coveted large family groups.   Gimme’ a combo that includes a flat, salad or side and drink for $10.

The foundation and sole goal for this turnaround is getting people in the door, returning every week, and encouraging their friends to check it out.  Once customers consistently fill the seats and gross sales are high enough to at least reduce prime costs under 60% and rent under 10%, then owners/managers can pontificate on increasing profitability by increasing average liquor sales, optimizing labor schedules, table turnover times, and getting their friends posh jobs at the bar.

As I write this I’m reminded of the reality show “Kitchen Nightmares” starring Chef Gordon Ramsey.  Ramsay doesn’t come out and say it but his formula for saving restaurants from bankruptcy hinges on fixing the three criteria above.  He (1) reduces the complexity and size of the menu, (2) reduces the prices to encourage repeat business and match competition, and (3) remodels the interior design and employee’s attitudes.

Hopefully the promotion of Michael Roeper to COO of Quiznos will help the franchisee’s profitability. Roeper owned several Quiznos units in Chicago from 2000-2006.

SOURCE

An Indianapolis, IN area Dominos pizza franchisee had sales of $6 million across three units but kept the 7% sales tax for himself. Eventually the state of Indiana found out about it and shut him down. I know it’s tempting to keep the sales tax, but how could you expect not to get caught?

Leveraging people and assets across multiple operating businesses is what enables most companies to make money, including franchisees.    The leveraging action turns what would otherwise be an individual, high-overhead and high-risk investment into a portfolio of lower-overhead and risk-managed investments.

In a previous job I worked for a commercial real estate investment and management company.   The company made money because they were able to use the same employees to manage dozens of leased properties, and leveraging one employee across dozens of properties increased the profit margins.

In franchising, a multi-unit operator can leverage skilled managers across multiple units.  And, the $25,000 saved across 50 restaurants adds up quickly to a nice income.

A great example of leverage in franchising is Frank Heath and David Paradise of Mississippi-based Mid River Restaurants.   Between them they own:

• 12 Applebee’s in Louisiana,
• 26 Hardee’s in West Virginia, North Carolina and Kentucky,
• 10 Taco Bell restaurants in Louisiana and Mississippi, and
• 12 IHOP restaurants in Ohio, Indiana, and Kentucky.

And, they are in the process of acquiring 33 St. Louis area Applebee’s for the rock-bottom price of $25 million ($757k each, below build out cost).  The seller is DineEquity Inc., the parent company of Applebee’s Neighborhood Bar & Grill and IHOP restaurants.

Mid River Restaurants has several advantages over other small and individual franchisees:

• profit per restaurant is higher than most because of their controllable costs are lower with centralized management, accounting and service teams
• cash flow is large enough to finance large, well priced acquisitions
• the greater cash flow also enables them to hire and retain smarter employees who are likely to further enhance the profitability
• the whole enterprise learns from four very well developed franchise systems, exposing employees to “best of breed” methods

Individual franchisees as a group tend to be lower skilled, lower financed, micro-managers, unleveraged and over worked, which is why franchisors prefer experience multi-unit operators.

DineEquity, owner of Applebees and IHOP brands, is trying smartly trying to avoid discounting their menu like the rest of industry. Their strategy to get customers in the door focus on appealing healthy “skillets” price at $9+ which currently make up about 10% of sales.

The “2 for $20” deal of an appetizer and two entrees now makes up 18% of Applebee’s sales mix, down from around 20% in previous quarters, Stewart said. Applebee’s promoted that offer through most of last year but has since made it a mainstay on the menu that’s not supported prominently by ads.Applebee’s margins rose slightly last quarter, to 14.1% to 14%, helped by lower food costs, although that was offset partly by more marketing to try to bring in guests.

Same-store sales were down 1.6% at Applebee’s systemwide, an improvement from prior quarters, while guest counts continued to decline on year.

You’re a franchisee and your financial and operational problems are snowballing out of control.  The result is you’re not operating in compliance and you’re late on payments to the franchisor, and the franchisor decides that you need to stop operating.   How does the franchisor shut down your store using the courts?

See Krispy Kreme v Satellite Donuts (franchisee)

Nick Lanni, the founder of Great Steak & Potato Co. (founded in 1982, sold in 2004 with 260 locations), is starting a new sandwich concept at my alma mater, Miami University in Oxford, OH. The concept is called “SoHi Grilled Sandwiches” and is supposed to be a fresh grilled build-your-own cheese steak and burger place.

Coincidentally, his sons started the 25 locations Currito: Burritos Without Borders.

Average unit sales were $1.4 million per company-owned Jack in the Box location and $900,000 per Qdoba system location in fiscal 2009.

source: Morningstar

This relates to the previous blog post as it illustrates another great company selling its corporate owned stores. Donatos, who happens to make my favorite pizza, announced it sold 39 locations to a franchisee, Titan.  Titan now owns all 23 Donatos stores in Indianapolis and 16 of the 22 in Cincinnati. The other Cincinnati locations are owned by other franchisees.

The focus on franchising was originally announced in 2007 by the Columbus-based pizza chain. At that time, about three-quarters of Donatos’ locations were owned by the company. That has changed. Including the Titan deal, Donatos has 179 restaurants in six states, and 63percent are owned by franchisees.

A stock research company called Trefis who is blogging at Forbes.com noted that McDonald’s company owned stores had a combined EBITDA margin of 24%, while franchised stores provide McDonald’s corporate with an 88% EBITDA margin.  Trefis doesn’t detail how they sourced information to arrive at these margin calculations, but there point was McDonald’s earns 4x as much by franchising a store rather than owning it directly.

McDonald’s owns about 6,200 (20%) of its 30,000 restaurants.

I love comparables.   The average unit sales were higher than I expected:

source: Chicago Business

Wingstop has 465 restaurants around the country, with most in Texas, California, Florida and Louisiana. The chain does about 80% of its business in takeout orders and averages $770,000 in annual sales per restaurant, Mr. Evans said.

The chain sells 10 wings for around $6.30 in the Chicago area. Popular flavors include original hot, lemon pepper and hickory barbecue.

There has been an uptick in self serve frozen yogurt, and I think that is a smart move.  Why pay employees to do a task that customers would get the pleasure of doing, and they’ll pay for whatever they use?  You can run a busy store with two employees, one at the cash register and another cleaning up and refilling toppings.

The self service works like this – the customer fills their cup with as much frozen yogurt as they like and put on their own topping, and then proceed to the checkout where the yogurt is weighed and priced at $.30/ounce.  I’ve seen cookie shops in London, UK sell cookies by weight, and it works as people typically will make things a little bigger and end up paying a little more.

One player that “looks” good is the almost 100 location Yogurt-land (and it should with a $350k build out cost – see pic ).  They like to move into former Cold Stone Creamery locations, another smart move.  Others are Fiji Yogurt (5 locations), Yogurtini (1 open, 8 about to open). They have a new location in Weston, FL which I saw and it looks great.

See my previous post about rolling your own frozen yogurt shop if this concept interests you.

This was satisfying to read:
Hardy’s Franchisee pitches menu item and wins.

I am always surprised that Franchisors do not leverage their franchisees more in soliciting innovations.

Forums were down for about a week. They are now back up!

I spoke with a former franchisee of Nrgize, a smoothie bar by Kahala Corp of Stone Cold Creamery fame.  Nrgize has very good tasting healthy smoothies and complementary healthy foods.

The franchisee was open for about a year before closing its doors.  The location was in a popular suburban fitness center.  At first, the thought of exposure to all the healthy clientèle sounded like a sure win.  However, sales were lower than expected from gym members and public walkins from non-members to buy smoothies was extremely rare.

It’s a good lesson on understanding visit rates from a given population and repeat visits.  I’ve heard this rule of thumb and it seems to makes sense —– If you have a great food product and are the only provider, you will likely get close to 20% of the population to visit you twice a month.  With competition and a less than unique food offering, you should figure less than 12% will visit you twice a month.  You will quickly see that a 5k regular visiting member gym would yield at best 66 transactions per day.  If your average ticket is $5 at a 12% capture rate, your sales will be $118,800/year which is probably nowhere near profitable territory.