Walmart Trouble for Gaming Franchises like Play N’ Trade?

Walmart is now jumping into the used game trading industry with exchange kiosks.  How does this impact Play N’ Trade and Game Stop? I’m certain this is a smart venture for Walmart. A friend of mine interviewed at RedBox and told me the kiosk business model when scaled is tremendously profitable, and I’m sure Walmart has first hand knowledged of this model from having the RedBox DVD kiosks in their stores.  Additionally, attracting young teens into your brick-and-mortar stores undoubtedly is a strategic goal of Walmart.

How greatly this impacts Play N’ Trade and Gamestop is questionable. It is hard to spin this as “helping the industry” as surely Walmart will take more from competitors than it increases the

I contacted Larry Plotnick, CEO of Play N’ Trade for his reaction to the Walmart news.  In response, Larry noted:

  1. We have been aware of this test for some time, and have discussed the use of similar kiosks within our own stores; however it does not fit within our business model.
  2. The impact of Walmart is taken very seriously, considering the size and scope of their business and we will be watching and tracking their progress in detail.
  3. We believe there is positive implications to Walmart “legitimizing” used game and trading to a larger/broader demographic
  4. We strongly believe that our customer service, product offering and immediate customer gratification creates a better overall trading venue then does a kiosk type environment.
  5. Studies have shown that the significant majority of game trading is done by serious/hardcore gamers that prefer to trade in games for new gaming product (which is typically done in specialty retail not in big box stores)

Larry’s points are fair.  Walmart will never be able to create the gamer atmosphere of Play N’ Trade, and gaming is all about experience.  Nevertheless, I predict that Walmart will expand the market for used games and trading, but eventually will siphon sales from the established players Play N’ Trade and Game Stop…in any industry there will always be some customers that will chase the best price.

More to come….

(photos from NeoCrisis.com)

Houlihan’s Still Trying to Figure It Out

Looks like Houlihan’s still can’t find the right balance of seating capacity, location, and affordable rent.  Their Stamford franchisee was open 6 months and then closed after not paying for those 6 months.

"There’s a lot of competition, and 250 seats is a lot to fill and a lot of rent to pay," he said. "Sometimes, smaller is better."

Lending Franchise Review

The franchise Liquid Capital provides businesses with short-term financing that is secured by receivables.  Think payday loans for businesses, cash now secured by reliable future income.  A fictitious example of this works would be my law firm – clients typically pay their legal bills as late as possible, so if I needed a reliable inflow of cash each month, I could pay a fee to Liquid Capital to give me cash on a predictable timetable.  My responsibility would be to pay back Liquid Capital when the client pays their legal bill.

In theory, the business model works can work great.  Theoretically there are high margins on lent cash, long term working relationships, many customers that need this service, professional atmosphere, and you are providing a needed service to the business community.

BUT…..In real life, the business model struggles.  As this article states, one franchisee said it took him a year to land his first client!  In the past 4 years, 19 Liquid Capital franchisees have closed their doors.  The franchisor also requires a minimum volume of lending of each franchisee, and failure to achieve volume goals can be termination “for cause” according to the franchise agreement.  If you are desperate for clients, inevitably you will lend to riskier borrowers than you would like.  And, collections are a real pain nowadays in the United States with pdfall the laws protecting borrowers and limiting communication and other means to collect debts.  If you are extremely plugged into the community, then potentially this franchise will pay off.

I wouldn’t buy it.

Increasing Royalties Because of Economy

I received this email the other day from Goin’ Postal.  Goin’ Postal is rather unique in that it charges franchisees a flat monthly royalty payment of $315 for 2009, regardless of gross sales, and that rate increases annually at 5% per year.  

So in 2009, if you had gross annual sales of $250,000, your royalty converted to a percentage was effectively 1.5%.  In the email, it details plans to peg the royalty for new franchisees based upon a rate indexed to inflation even though it already increases the royalty 5% each year.  

This will add a few thousand dollars of additional expenses when other expenses are also increasing, but given the overall lower royalty system it shouldn’t be a deal killer.  

From a public relations perspective, I would have expected this email to include a plan to assist franchisees in harder economic times, rather only stating how we’re going to increase your costs when times are toughest.

——————————————————————— 

We would like to take this opportunity to let everyone know that sometime in the very near future our royalty system may be changing slightly for new franchisees. 

As the country starts to pull back out of the recession and the government implements its stimulus packages, we are almost guaranteed to see some major inflation which will seriously devalue the flat rate royalties that we charge our franchisees.

While we will keep our flat rate royalty system going forward, instead of increasing at a flat 5% per year, our royalties will increase at a rate indexed to inflation (or 5% if inflation is under control), then rounded to the nearest $5. 

Franchise Agreements that are already in place are not subject to change, but we are currently working on the new FDD/Franchise Agreement that will be uploaded to the site sometime as soon as we see inflation start to increase.

?While our royalties will still be the lowest in the franchise industry, this will make a difference to future franchisees that sign up after the change, so we wanted to let everyone for those that are close to signing up. 

Below is a table to show the small difference with some estimated annual inflation numbers.

 

Current Royalty Structure

 

 

Royalties w/ indexed increases

Calendar Year

Increase

 Monthly Royalties

 

Calendar Year

Increase

 Monthly Royalties

2009

5%

 $ 315.00

 

2009

5%

 $  315.00

2010

5%

 $ 330.00

 

2010

15%

 $ 360.00

2011

5%

 $ 345.00

 

2011

20%

 $ 430.00

2012

5%

 $ 360.00

 

2012

15%

 $ 495.00

2013

5%

 $ 380.00

 

2013

12%

 $ 555.00

2014

5%

 $ 400.00

 

2014

7%

 $ 595.00

2015

5%

 $ 420.00

 

2015

5%

 $ 625.00

2016

5%

 $ 440.00

 

2016

5%

 $ 656.00

2017

5%

 $ 460.00

 

2017

5%

 $ 690.00

2018

5%

 $ 480.00

 

2018

5%

 $ 725.00

2019

5%

 $ 500.00

 

2019

5%

 $ 760.00

2020

5%

 $ 525.00

 

2020

5%

 $ 800.00

2021

5%

 $ 550.00

 

2021

5%

 $ 840.00

2022

5%

 $ 575.00

 

2022

5%

 $ 880.00

2023

5%

 $ 600.00

 

2023

5%

 $ 925.00

2024

5%

 $ 630.00

 

2024

5%

 $ 970.00

 

Thank you

Marcus Price

 

CEO.  Goin’ Postal Franchise Corporation

4941 4th Street

Zephyrhills, FL 33542

Ph: 813-782-1500 x103

Fx: 813-782-1599

 

Krispy Kreme’s New Strategy

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.

Cost of Wings Up

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. 

Hold Off on Restraunt Franchises

dollarMost 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!

How Franchisors Communicate with Franchisees

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)

Church’s Chicken Lowers Building Costs

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.

Quiznos CEO Interview

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.

Pulling 401(k) Cash to Fund a Franchise

dimeThere 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.

Management Recruiters International – The Bad

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.

Free Lease Renegotiations From Quiznos Corporate

quiznos.jpgQuiznos 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 Growth Slows…For Now


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.