Trench warfare in the franchise field
Tish Reisman has sunk $300,000 into her Rita's Italian ice franchise -- with no profit so far.
Eilene Zimmerman writes at CNNMoney.com that even in good times, the relationship between franchisors and their franchisees tends to be fraught. Toss in an economic downturn and things get downright nasty. Iconic brands are facing revolts in the trenches from owners fed up with their corporate parent.
Later this month, a Los Angeles jury trial will begin on a seven-years-old and still festering fight between UPS (UPS, Fortune 500) and a group of disgruntled franchisees of Mailboxes Etc., which UPS acquired in 2001. Quiznos recently settled a class-action lawsuit with its franchisees, while Burger King remains mired in a court battle with store owners over a $1 promotion for double cheeseburgers that cost more than a buck to produce.
Garth Snider, president of FranchiseOpportunities.com, a site that advertises franchises for sale, says the level of complaints by franchisees and franchisors alike “is commensurate with the hard economic times we’re experiencing. This wasn’t an issue three or four years ago, when there was plenty of money to go around, because franchisors weren’t looking to be as aggressive with their pricing.”
When margins are razor-thin and sales slip, disputes are more likely to blow up into major skirmishes. The Quiznos fight featured complaints that Quiznos forced franchisees to buy food and supplies at inflated prices while setting retail prices so low that store owners couldn’t make a profit. Discounts — like those Burger King offered on its double cheeseburgers — are another flashpoint. T.G.I. Friday’s had a small war with its franchisees last year over a two-month promotion that slashed sandwich prices to a money-losing $5 each.
“It’s the divergence between generating volume by forcing your franchisees to charge lower prices and the net effect of that on the actual business owner, who still has to pay the same royalty and the same price for goods,” says Justin Klein, a partner in Marks & Klein in Red Bank, N.J., and lead attorney for the Quiznos plaintiffs. “Essentially, it still costs you $5 to make the sandwich but you’re forced to sell it at $3.95.”
The pressures come on all sides. One of Klein’s current franchisee clients is being forced by its parent company to extend operating hours — even if those extra hours aren’t profitable. “Forcing them to stay open longer means they have more employees there,” he says.
Life in the trenches
Tish Reisman, owner of a Rita’s Italian ice outpost in Tampa, Fla., is facing many of the typical franchisee frustrations. She signed with the Trevose, Pa.-based parent company in June 2007, paying $65,000 for a two-store agreement. Reisman grew up in Philadelphia and had a fondness for Rita’s. She believed that in Florida “Italian ice would be a no-brainer.”
The first store opened in March 2008. The problems began just six months later.
A competing Rita’s opened five miles away. A corporate marketing campaign required her to stand in front of Wal-Mart and Kmart stores handing out coupons, sucking up time and resources she couldn’t spare. Rita’s requires her to sell every new flavor it introduces for 24 days — even if it tanks.
“In November, I had to sell caramel apple, which I was throwing away every two days,” she recalls. Rita’s projected waste from introducing new flavors is 7% and Reisman was given credit for that, but her actual waste was closer to 22%. “It would have been better if I could have decided what flavors would sell, rather than being forced to sell all of them.”
Reisman lost $86,000 the first year she was in business and hasn’t been able to afford to open her planned second store. She’s sunk more $300,000 into the franchise. A single mother with four children, Reisman is worried about bankruptcy.
Read more at: CNN Money
ICE CREAM FRANCHISEE’S CLAIMS AGAINST FRANCHISOR BARRED BY ONE-YEAR CONTRACTUAL STATUTE OF LIMITATIONS PERIOD IN FRANCHISE AGREEMENT
Scott Krumholz v. AJA, LLC and Emack & Bolio (January 13, 2010)
All of the claims brought by the Emack & Bolio’s ice cream franchisees against a franchisor were time-barred by the one-year contractual limitations clause in the parties’ franchise agreement. The franchisees filed their complaint against the franchisor on December 24, 2007. The franchisees alleged that the franchisor had fraudulently induced them to invest significant financial resources in their franchise. The alleged misrepresentations occurred during a meeting between the parties on December 14, 2002. The franchise opened for business in May, 2003, and by the end of 2004 it was clear to the franchisees that the costs of construction, equipment, and inventory were significantly higher than the amounts quoted to them by the franchisor and that their earnings had fallen far short of the franchisor’s projections. In light of those facts, it could not be reasonably contended that, at least by December 2006, after closing the store due to $800,000 in losses, the franchisee did not have notice of the alleged cause of the harm-the franchisor’s alleged gross misrepresentations.
A Tale of Two Bakeries: Why Panera Rose While Cosi Fell
Carol Tice at BNET Insight does a detailed comparison of each franchise and offers some insight into some reasons Panera had success and why Cosi seemingly struggled:
Two bakery-cafe chains have been in the news recently — Richmond, Mo.-based Panera Bread (PNRA) announced growing sales despite the downturn, while Cosi (COSI) of Deerfield, Ill., said its sinking sales have led to a delisting warning notice from the Nasdaq. Both chains began around the same time, and Cosi certainly got as much positive initial press and consumer raves. Some of the key differences that made Panera the winner:
Management strength and consistency. Panera was the second chain idea from seasoned Au Bon Pain visionary Ron Shaich, who’s been actively involved until just the past few months. By contrast, Cosi founders Jay and Shep Wainwright were fresh out of college when they brought back Cosi’s concept from a bistro they saw in Paris. Cosi’s ownership has been a revolving door — it merged in 1999 with Xando, another small chain that later busted. Efforts to sell it again last spring failed. Shep left after the 2002 IPO, and Jay was forced out in a 2005 management shuffle, so founders have been out of the loop for years.
A concept that franchise owners wanted. Panera was able to attract investors willing to open more than 500 franchised units. Though Cosi made many announcements over the years of big expansion plans and hundreds of planned units, growth was slow. A restaurant can have the best food in the world, but if its business model doesn’t make sense for franchisees, they won’t buy restaurants.
An emphasis on more experienced, wealthier franchise owners. Panera sets a higher bar for its franchise owners, requiring previous multi-unit restaurant experience. Though it only sold multi-unit franchises, Cosi just asked for previous restaurant experience. Panera also recruited franchisees with at least $7.5 million in net worth and $3 million in liquid assets, while Cosi requires only $900,000 in net worth and $400,000 liquid. Translation: If stores need investment to improve results, Panera’s franchisees have more resources to make it happen.
Read more at: BNET Insight
Want to Buy a Top Franchise?
NY Times shops Red Sox stake as revenue falls.
The Boston Business Journal reports that the New York Times Co. has retained an investment bank to explore the possible sale of its stake in the Boston Red Sox on the heels of a dismal year that saw advertising revenue for it New England Media Group, which includes The Boston Globe and Worcester Telegram & Gazette, fall by 18 percent.
In a separate report by media researcher The Nielsen Co., The Times last year saw a 6 percent drop in unique visitors to its Boston.com Web site, the online home for the Boston Globe. Boston.com was the only Web site among the country’s top 10 newspaper sites, ranked by traffic, to see a fall in unique visitors in 2008, Nielsen said.
The Times (NYSE: NYT) said it has retained Goldman, Sachs & Co. (NYSE: GS) to potentially sell the company’s interest in New England Sports Ventures, which includes equity stakes in the Sox as well as Fenway Park, real estate adjacent to the park and approximately 80 percent of sports broadcaster New England Sports Network.
The Times invested in New England Sports Ventures in 2002.
The Times said its New England Media Group posted $319.1 million in ad revenue in 2008, an 18 percent slide from the $389.2 million posted a year earlier. For December, the group booked $23 million in ad revenue, off 18.2 percent from the $28.2 million booked in the 2007’s corresponding period.
Declines in ad revenue at the New York Times Co.’s major newspapers, including the Boston Globe, accelerated in January compared to December, company CEO Janet Robinson said in a conference call Wednesday.
Credit crunch, declining profits make it harder for businesses to change hands
Skittish investors and a rapidly declining economy have stymied the once brisk buying and selling of small businesses in the region.
The small entrepreneur has been squeezed by Wall Street’s financial crisis, making it difficult for business owners to retire or simply swap businesses.
Business owners have found their companies are worth less because of slack sales due to the recession. And, since September, buyers have discovered it’s difficult to secure financing. Business brokers and industry watchers report that fewer deals are being done, they’re taking nearly twice as long to close and many are falling through.
Locally, the median asking price for a business in the Boston area was $199,000 during the fourth quarter of 2008, down about 9 percent from $219,000 during the same period in 2007, according to BizBuySell, an online small business marketplace in San Francisco.
Franchise Breeds Cautious Optimism
It’s 11:30 on a Monday morning, and Karim Menebhi is waiting for the first customer at his brand-new Ronzio Pizza & Subs franchise in Smithfield.
Menebhi has been busy — loading boxes of supplies onto shelves, talking on the phone to suppliers. Now he’s getting a little nervous. “I was feeling just normal until about 20 minutes ago,” he said. “Now I’m feeling that I need to see some people walk in and start serving them some food.”
Finally, about 11:40, the elusive first customer arrives. He’s Ryan West, who manages a karate school, Mastery Martial Arts, in the same shopping plaza as the new Ronzio. West orders a chicken sandwich. He also represents a potential source of future business, telling Menebhi that his martial arts school frequently hosts birthday parties for its young clients. Menebhi said he could provide discounts on pizza, and West took some Ronzio menus with him when he left.
Ronzio is a local chain, with 19 locations in Rhode Island and 1 in Massachusetts. Julian Angelone, chief operating officer for the company, said it’s opening a second Massachusetts location, in Worcester.
Read the whole story at Providence Journal
DDIFO Names Acting President
The DD Independent Franchise Owners Group, (DDIFO)which represents the largest association of Dunkin’ Donuts franchise owners in the U.S., has named Jim Coen, a member of the DDIFO Board of Directors, as its acting President and Chief Operating Officer. He takes over December 1, 2008 from Mark Dubinsky who has tendered his resignation after two yeas as DDIFO President.
Mr. Coen is Executive Director of the New England Franchise Association and founder of Franchise Perfection. He has been a director of and the Clerk for the DDIFO board since May, 2008.
In his interim role as acting president Coen will continue DDIFO efforts to support all franchisees. "I thank the board for the confidence they have placed in me, I look forward to working with the Board and the members. DDIFO has incredible opportunities to support existing members, implement it’s mission, grow membership and improve the organization’s capabilities,” said Coen.
“We are pleased to have Jim Coen assume the role of President of our organization,” says Kevin McCarthy, Chairman of the DDIFO board. “This is a critical time for franchisees because of the economic uncertainty. The DDIFO board is confident that Jim’s experience and skills will serve members well during this transitional period. We are also grateful to Mark Dubinsky for all he did on behalf of the DDIFO and wish him continued success in his business endeavors.”
Dubinsky says, "I have been honored to serve as DDIFO president and am gratified by the many successes we enjoyed over the past two years, including the passing of the Rhode Island Fair Dealership Act and the addition of new, valuable business services for our members.”
USA Today ranks Red Sox as the No. 1 franchise in baseball
Seth Livingstone of USA Today writes that the Boston Red Sox combine resilience in the field and a vision for excellence in the front office, have brought unbridled joy to the ever-growing population of Red Sox Nation in the past five seasons.
In 2004, there was literally dancing in the streets of Boston when the franchise stunned the New York Yankees by rallying from a 3-0 deficit in the American League Championship Series on the way to its first World Series title in 86 years. Three years later, a second generation of champions, led by high-stepping closer Jonathan Papelbon, danced in celebration on the Fenway green.
This year, after the Red Sox disposed of the Los Angeles Angels in the AL Division Series and the crowd had gone home, team owners John Henry and Tom Werner took a celebratory run around the basepaths.
The Red Sox have become winners on the field and in the community, and they’ve had a measure of fun doing it.
And when USA TODAY Sports Weekly ranked the performance of 30 Major League Baseball franchises in nine categories during the past five years, the Red Sox, who reached Game 7 of the ALCS this year, came out No. 1 overall.
A Bad Economy May Benefit Franchises
Mark C. Siebert for Entrepreneur.com writes that with all the negativity making headlines these days, it’s difficult sometimes to maintain perspective.
Foreclosures at record highs. Nearly a trillion dollars in bailouts. The Dow with record declines. Mass layoffs and unemployment at five-year highs. Reading Dickens–it was the best of times, it was the worst of timesthe period was so far like the present period–it seems that perhaps he only got it half right.
But for franchisors, truer words were never spoken. Yes, there are some short-term difficulties that will take time to flush through the system. At the same time, however, there are a number of reasons to anticipate that the best of times are right around the corner.
Perhaps the best place to gain this perspective is by understanding what drives franchise sales.
There are, of course, thousands of factors that drive franchise sales at the micro level. A bad day at the office. An overbearing boss. A neighbor’s franchise success story–and perhaps his new Mercedes. A cancelled flight that leads to the missed soccer game.
But at a macro level, there are three predictable factors that can lead to a surge in franchise sales activity–and many of them are pointing to a franchise boom on the horizon.
The first and foremost factor affecting franchise sales is a rising unemployment rate and the fear of losing one’s job. At 6.1 percent, the unemployment rate has increased by 1.4 percent in the last 12 months alone–adding 2.2 million people to the ranks of the unemployed. And some economists are predicting that it will hit 7 percent before it turns around.
While that news is terrible for the economy, and it sounds callous to even mention it, what this means for franchisors is a larger pool of franchise candidates.
Brueggers continues to expand despite weak economy
Bruegger’s the Burlington, VT franchisor announced that it will continue to add bakeries in spite of the weak economy. In 2008, the company is ahead of plan inking development agreements totaling 46 new bakery commitments. Since 2005, when Bruegger’s significantly modified its franchising program, the company has reached development agreements for 153 new bakeries.
This year, Bruegger’s also signed multi-unit deals in two of the largest and most competitive retail markets in the country. In August, the company closed a deal with Hart Street, LLC to open 20 bakeries in New York City over an eight year period. Earlier in the year, franchise rights for 15 bakeries in Chicago were awarded to Windy City Bagels. The company has also reached multi-unit agreements with franchisees in Ohio and Florida this year.
This announcement comes on the heels of a September Wall Street Journal article citing a Franchise Update Media Group survey in which 150 franchise companies, respondents said their franchise sales were about 72% below their 2008 goals, with inquiries from prospective franchisees down about 48 percent1.
“We look for people who love and understand the business and have the resources to build a successful franchise,” said Bruegger’s Vice President of Franchising Chris Cheek. “Our goal is to grow the right way. Choosing the right franchisees and pairing them up with the right locations is key to making that happen.”
Bruegger’s has also seen 18 consecutive quarters of comp sales growth. This month, the company announced third quarter system-wide gross sales of $45.13 million; a 8.7 percent rise over $41.52 million for the same period in 2007. Revenue for comparable sales grew 1.7 percent at company locations and 1.7 percent system-wide for the third quarter ending October 30, 2008.
“Over the last five years we have successfully restructured our business model and we’re seeing the pay off through consistent sales increases and new development deals,” said Bruegger’s CEO Jim Greco. “We’re looking to do even better in 2009.”
Jim Coen, Mr. Franchise
I have learned franchising from the ground up. I’ve been a franchisee for a bad franchisor. I’ve worked for good franchisors and I’ve worked for marginal franchisors. I’ve helped many franchisees succeed.
I provide a consulting process that saves you time and money in your franchise search and provides you with the tools to make the right choice for you and your family.
Call: 617-469-3002
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