SUBWAY – A Bite Of The Sandwich From Both Ends?

According to a NY Times interview with Ms. Husler, she said her boss tasked her with specific instructions to find things wrong. “I was kind of his hit man,” she said. Ms. Husler went on to say that Mr. Patel considered his own interests when determining which stores were to be sent into arbitration.

A Bite Of The Sandwich From Both Ends?
By Gary Occhiogrosso – As seen in Forbes.com

Like a “Player/Manager” of a baseball team, there are often conflicts that never seem to settle and resolve. The recent news that Subway, and it’s “Development Agents” are allegedly “pushing out” other smaller Subway operators is not unlike the player/manager deciding to bench a good teammate so he can get more playing time. As a 35-year veteran of the franchised restaurant industry, I know I am not alone in my opinion. You can’t play both sides of the fence then expect not to run up against motives that may sometimes appear to be questionable.
Subway has grown to its behemoth size by employing a program whereby some franchisees are also sales agents and operational support personnel for the parent company. They are titled “Development Agents.” On the surface, it seems like a good idea. It seems to make sense to appoint brethren franchisees to help build out territory by recruiting new owners and then assist them in setting up their shops and growing their business.

Cutting the Sandwich Business Into Pieces
Subway divides its roster of sandwich shops into more than 100 regional territories. These territories are controlled in part by a development agent. The development agents are responsible for recruiting new franchisees and finding & approving buyers for existing shops. As compensation for this sales effort, they receive a portion of the upfront franchise fee for a new shop or transfer fee if it’s the sale of a current location.

Also, for a share of the company’s royalty fee, they are obligated to visit shops and conduct shop audits focused on operational compliance. This inspection task is carried out through the use of inspectors — known as field consultants. The question of conflict comes up when you consider that many of the development agents are also franchisees themselves. As this is the case, it’s hard to separate the idea of running their own shops, and be responsible for inspecting shops which directly compete with them. The question of motive grows more plausible when you add in the fact that these development agent’s shops are self-inspected by their own paid staff members.

Is Rapid Growth Always a Good Thing?
Consider the history of Subway’s voracious appetite for growth and the lack of exclusive territories granted to their franchisees. In my opinion, all franchised units regardless of the brand, should have a protected territory. These protections help prevent the parent company from encroaching on the trade area of an existing operator and hurting their sales. This protection is not the case with many Subway franchises. There is not exclusive territory protection. The location of a new shop is at the discretion of the company. So it should come as no surprise that the brand has overdeveloped in certain territories. These saturated markets are at a point of sales cannibalization. Mr. Deluaca’s dream of 50,000 Subways has now left some franchisees feeling like their local development agents are pushing them out of business to gain market share for themselves.

Case in point, as reported in the NY Times, Subway franchisee Manoj Tripathi felt that someone had a vendetta against him. The 20-year franchisee noted that each time the inspector arrived, she would find more and more minor infractions. Things like fingerprints on the doors or vegetables cut incorrectly or the wrong soap in the restrooms. On one visit, Rebecca Husler, the Subway inspector who worked for Chirayu Patel, a Development Agent in the Northern California region, noticed that a single light fixture needed a new bulb. Mr. Tripathi replaced the bulb before she left; nonetheless, it was a violation. Mr. Tripathi wasn’t overreacting to his feeling of being set up to fail, as it turns out within a year he was terminated, and he lost his shop.

According to a NY Times interview with Ms. Husler, she said her boss tasked her with specific instructions to find things wrong. “I was kind of his hit man,” she said. Ms. Husler went on to say that Mr. Patel considered his own interests when determining which stores were to be sent into arbitration. Mr. Patel made it “very clear that his stores were to pass” and that “the people he wanted out of the system were to fail out of the system.” she said in the interview. The light bulb incident gave her pause to say, “We’re ruining these people.”

Systemic or Isolated?
One of the people on the company side of this debate is Don Fertman. Mr. Fertman is Subway’s chief development officer and a veteran of the company for 38 years. He claims development agents owning restaurants helps give them “a better understanding of all aspects of owning a small business.” He went on to explain that the company reviews the agents’ work and expects them to uphold ethical standards, dealing with violations “on a case-by-case basis.” He continued by saying, “Our business development agents are well-respected members of our business community,” he said. “And when we hear these allegations, I would say that they are false.”

My takeaway is not this stunning revelation of alleged unfair business practices, but instead that it’s taken this many years to consider that Development Agents competing with other franchises might abuse their position when auditing competing shops in their region. As a former franchisor and development consultant, I do see merit for brands to use the development agent system. I believe there needs to be a robust system of oversight by the parent company to prevent abusive business practices by development agents. This is not to say that Subway corporate hasn’t developed a system of checks and balances, but the allegations from its franchise community leave one to wonder how vigorously it is employed.

Given the number of Subway units in the USA, this may only be the beginning from Subway franchisees who feel Subway is taking a bite out their business.

Franchise Marketing – Do’s & Don’ts

FRANCHISE MARKETING – DO’S & DON’TS…Today’s featured post is courtesy of Harold Kestenbaum. Harold is one of the Top Franchise Attorneys in the country. He works exclusively with franchisors and has been involved in some of the most important franchises ever launched such as Sbarro, Ranch *1 and Five Guys. In this “double article” Harold shares his insights on franchise marketing and recruiting new franchisees.

The Dos and Don’ts of Franchise Marketing Materials
By Harold Kestenbaum

As an entrepreneur, it can often be worth your while to consider franchising your business. When you have a great product or service, franchising is an excellent way to create a new revenue stream, while increasing brand awareness. As with any new venture, the key to successfully franchising your business is laying the groundwork for a thriving enterprise. This begins with your franchise marketing materials.

Your franchise marketing materials are the key to attracting like-minded individuals to work with your business and grow your brand. It is important to remember though, that you must be careful with what you do and don’t say in these documents, as you want to remain legally compliant and truthful in your endeavor.

DO explain your brand, mission, and infrastructure. In your franchise marketing materials, it is vital to explain who you are as a company, how you operate, and why someone should want to work with you.

DON’T promise your franchisees any specific profits or financial gain. Since every market is different, it is important to refrain from making promises about a franchisee’s total profit or financial gain from buying into your business.

DO set the right restrictions. Your marketing materials should establish policies you have on hiring, training, proprietary processes, etc. but it should also allow the franchisees some freedom to make the business their own.

DON’T neglect to screen franchisees. Just as you would interview potential new hires for your location, you will want to screen franchisees once they have inquired about this opportunity. You want to build a network of people dedicated to your brand and mission.
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Franchise Marketing Materials 101: Establishing Your Recruitment Website
By Harold Kestenbaum

When you have made the decision to franchise your business, you will want to put a lot of time and money into your franchise marketing materials, especially at first. In order to grow your brand and find potential franchisees, these marketing materials must be appealing, straightforward, but also compliant with the law. As you begin working on your marketing materials and franchise recruitment website, it is important to work with a seasoned franchise attorney and remember these key tips.

Register your franchise: Before advertising your franchise to a particular state, it is important to know that many states require a franchise to be registered prior to the sale of any franchise location, but also any offer of franchise. This means you must take care of all necessary registration before launching your website in a given state or sending out marketing materials.

Understand the laws of advertising: Not only do you have to account for the franchise laws that apply to your business, but you also have to consider the other laws which affect advertising. These can include intellectual property laws, unfair competition laws, and deceptive trade practice laws. Your franchise attorney can review all marketing materials to ensure that you are not infringing on any other company’s rights and that you are in full legal compliance.

Provide clear, accurate information: To successfully gain leads from your website and marketing materials, it is critical for franchisors to provide clear, accurate information which provides potential buyers with enough evidence to make a purchase decision. This information should outline the requirements for buying into the franchise, as well as the type of support franchisees will receive once they are a part of the program. You will want to avoid words and phrases such as success and profit, so as not to mislead buyers about their expectations of buying into your franchise. You want to give franchisees truthful information, without making any specific claims about financial earnings, especially since every market is different.

Stay consistent: In all your marketing materials, you want to stay consistent in the way you represent your brand. You will want to avoid making promises that you cannot fulfill once a buyer signs a contract and purchases a franchise under your name. By staying consistent in all your content, you can avoid potential legal roadblocks down the road.
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About the Author
HAROLD L. KESTENBAUM is a franchise attorney who has specialized in franchise law and other matters relating to franchising since 1977. From May 1982 until September 1986, Harold served as franchise and general counsel to Sbarro, Inc., the national franchisor of more than 1,000 family-style Italian restaurants and, was a director from March 1985 to December 2006. From September 1983 to October 1989, he served as president and chairman of the board of FranchiseIt Corporation, the first publicly traded company specializing in providing business franchise marketing and consulting services and equity financing to emerging franchise companies, which he co-founded. Harold has authored the first book dedicated to the entrepreneur who wants to franchise his/her business, called So You Want To Franchise Your Business. It is a step-by-step guide to what a businessperson needs to know and do to properly roll out a franchise program. Harold’s book is available at major book stores and on Amazon.com or you can click here for more info on his book So You Want to Franchise Your Business.

Millennials Drive Menus In Fast Casual Restaurants

MILLENNIALS DRIVE MENUS IN FAST CASUAL RESTAURANTS…. These Newer Concepts must not only live up to the marketing message but also ensure that their operations can provide consistent, quality products in every location…. Their business models must be replicable and easily managed.

By FranchiseMoneyMaker Contributor

As recently as 15 years ago the idea that you could grab a nutritious, healthy and still tasty meal from a drive-thru or fast food restaurant was unheard of. It wasn’t until the post Y2K era that fast food consumers became concerned with what they ate. As the Millennial generation started spending money on food outside the home the industry has been “forced” to move toward healthier, high-quality menu alternatives. Once begun this movement toward fresher, greener menus has continued to accelerate at an ever increased pace.

Does Better for You equal Better for Business

Consumer attitudes regarding the link between diet and health have shifted. Data shows that Millennials and aging baby boomers are taking a more proactive approach to healthy eating. Many have adjusted their dietary choices to promote better health. The demographic with higher levels of education and more disposable income is at the forefront of this trend. These health-conscious consumers take the time to research before they dine out. In addition, they seem more willing to pay higher prices to ensure that what goes into their bodies is nutritious.
With this new consumer focus on nutrition, sustainability and ‘clean food’ comes a revolution in the Quick Service Restaurant (QSR) industry. According to a recent article in Business Leader, 83% of Americans believe that fast food from traditional Quick Service franchises is not healthy. This has created the rise of the ‘better for you’ brands that now compete with fast food giants such as McDonald’s, Burger King, and KFC. For example, healthy quick service brands such as Dig Inn, By Chloe, and Sweetgreen are creating their own niche by specializing in organic, locally sourced meal options that contain more vegetables and fewer calories than traditional burgers and fries.

Quality comes with a Cost

As enticing as these food offerings may be to our palate Consumers may find themselves paying almost double what they would at a traditional fast food location. Locally sourced, organic and sustainable food suppliers still see this segment as small compared to conventionally processed ingredients, so access and availability remain a challenge. As a result, many healthier focused chains are developing altogether new selling propositions by positioning “value with reasons” as a way to compete with the traditional fast food chains of the industry. These “better for you” concepts post nutritional information, health benefits as well as the sourcing and methods used in their products. The emphasis is on local, clean, humanely raised and organic.

One such concept is Salad and Go. Branded as a healthy drive-thru option, Salad and Go offers large salads, smoothies, soup and breakfast with an “Always Organic” list of ingredients. In addition, the brand highlights their competitive prices. Salad and Go currently has in 10 locations in the U.S. with plans to nearly double that number by the end of 2018.
Another U.S. chain, LocoL, offers food made only from local ingredients. Founders & Chefs Roy Choi and Daniel Patterson claim “We at LocoL want to live in a world where eating healthy doesn’t take a lot of money or time.”
New quick service food concepts like these are branding their menu items as healthy, high quality alternatives to the sugar, fat, and salt-heavy meals provided by traditional fast food franchises. Recently developed QSR concepts give consumers a choice. Whether it’s organic, farm to table, all natural, gluten free, vegan or humanely raised, the race to innovate and meet this rising consumer trend has never been more of a priority in the Quick Service Restaurant segment than it is today.

Forcing Innovation in Traditional Brands

As new brands continue to make their mark in the minds of U.S. consumers, established brands are attempting to keep up with changing demands. Fast food chains such as Taco Bell have promised to use cage-free eggs and reduce artificial ingredients, and McDonald’s has started selling antibiotic free chicken, and now cooks many of its items to order and offers more salads. It is yet to be seen if that alone will be enough to keep the long-standing leaders in the QSR industry on top.

Serving up Quality, Quickly and Consistently

These QSR pioneers are faced with the challenge of living up to the expectations of an informed, proactive consumer. These newer concepts must not only live up to the marketing message but also ensure that their operations can provide consistent, quality products in every location. Their business models must be replicable and easily managed. This may also prove to be a challenge when food is being prepared to order using fresh locally sourced ingredients instead of processed or precooked menu items. If they can accomplish these tasks, the potential for growth is unlimited.

Regardless of the challenges facing these new “better for you brands”, the move away from traditional fast food to healthier quick service food options is unstoppable. As a means to address consumer concerns, in late 2017, the FDA announced new regulations requiring large restaurant chains to add calorie counts to their menus by 2018. This, combined with health-conscious consumers, will continue to push these new QSR chains to sharpen their competitive edge by offering a wider variety of great tasting, healthier options. As I see it, the success of the “better for you” fast casual concepts will depend on their adaptability to trends, consistency in product, as well as the price point and expense management.

A Roger Lipton Update – Chicken Salad Chix

A Roger Lipton Update – Roger is an investment professional with decades of experience specializing in chain restaurants and retailers, as well as macro-economic monetary developments. He turns his background, as restaurant operator and board member of growing brands, into strategic counsel for operators and perspective for investors.

By Roger Lipton -with Permission
An archive of his past articles can be found at RogerLipton.com.

Chicken Salad Chick, based in Auburn, Alabama, was formed in 2008, by Stacy Brown. Stacy was a stay-at-home mom and self-proclaimed connoisseur of chicken salad who began the business by selling chicken salad made from her home kitchen. She was eventually shuttered by the local health department for selling food from an un-approved facility. She then joined her future husband, Kevin, who left a career in software sales, to help build the foundation for multiple corporate locations and future franchise growth.

In terms of equity ownership, in early 2015, Eagle Merchant Partners (“EMP”), an Atlanta, GA based private equity firm, purchased the majority ownership of the company. Kevin Brown, tragically, succumbed to colon cancer in 2015 at the age of 40. Before his death however, Kevin was instrumental in negotiation of the PE transaction, and he also helped establish the Chicken Salad Chick Foundation, which raises funds for cancer research and feeding the hungry.

In conjunction with that transaction, Russ Umphenour and Scott Deviney become chairman and President/CEO, respectively. Both are highly respected industry veterans. Mr. Umphenour was the CEO of Focus Brands (parent of Moe’s, Auntie Anne’s Pretzels, and others), and before that ran RTM Restaurant Group, the Arby’s franchisee that he founded.

Mr. Deviney was CEO of SDZ (a multi-unit Wendy’s franchisee) and SVP with SunTrust Bank, specializing in the restaurant industry. Over the last several years, the management team has obviously been broadened further to support the ongoing rapid growth. Stacy Brown, the cultural creator of Chicken Salad Chick remains a prominent spokesperson and brand voice, as well as a shareholder.

Originally a drive-thru and takeout only operation, the menu was expanded and sit-down facilities were added as additional stores opened. With franchise operations beginning in 2012, 29 units were open by the end of 2014, with contracts for an additional 114 locations.

The comfortable family oriented decor is combined with a creative and modestly priced menu, featuring over a dozen varieties of made from scratch chicken salad plus pimento cheese and egg salad, as well as fresh sides, salads, soups and sandwiches.

The primary meal special called The Chick includes a scoop of sandwich of chicken salad with a choice of a fresh side, salad, soup or another scoop of chicken salad, egg salad or pimento cheese. All meals are accompanied by a pickle spear, wheat crackers, a selection of breads for sandwiches and a small cookie. The menu also offers chicken salad BLT and turkey club sandwiches, though over 85% of sales come from chicken salad, which is also sold in large and small grab’n go containers called Quick Chick. Upwards of 70 percent of guests are women and the chain prides itself on being “chick friendly.”

Chicken Salad Chick ended calendar 2018 with 104 locations operating—74 franchised and 30 company operated. There were 21 franchised locations and five company stores opened in 2018. When EMP purchased the business in May 201, there were 32 stores in the system, so growth has been dramatic over the last four years.

The 104 locations are now located within twelve states—ALA, GA, FLA, NC, SC, TN, MS, LA, TX, KY, AK, OK. It is expected that 45 locations will have opened in 2019, 13 of them being company operated. It has so far not been necessary to advertise for franchisees, as the curb appeal of the physical unit combined with the menu and employee culture, as well as attractive unit level economics have generated more than adequate franchise interest.

According to the most recen Franchise Disclosure Document: The stores are about 2750 square feet in size, generally located in strip malls, costing an average of about $450,000 in total to establish, including up front franchise fees.

Much of the franchise appeal is the operational simplicity, which in turn generates attractive unit level economics. The equipment package is basic, with a steamer to cook the chicken (everything is prepared daily in the restaurant), food processors, refrigerated sandwich tables, a walk-in cooler, reach-in freezer, water filtration system, toaster and Quick Chick refrigerated case.

The absence of fryers (which must be vented) reduces construction costs, creates site flexibility as well as relative desirability as a tenant. The entire package of furniture and fixtures cost around $120,000. The up front franchise fee is $50,000 per unit, the ongoing royalty is 5% of sales with an additional national advertising contribution of 1.5%.

Last twelve months’ AUV was $1.2M in 2018, growing by about 9% in 2016, 13% in 2017 and 11.2% in 2018. Same store sales were up 15% in 2016, 8% in 2017 and 4% in 2018. Traffic has also been up consistently, most recently up 2.9% in 2018. The sales improvement is especially impressive within a restaurant industry that has been challenged in this regard.

Cost of Goods Sold has averaged about 30.5% with fully loaded labor at roughly 25.0%. Stores are open from 10am to 6-8pm (depending on the market) and closed on Sundays, taking a page out of Chick fil-A’s playbook, and allowing operating management to “have a day for family life.”

It is noteworthy that only about 45% of sales are dine-in, the balance being takeout (25%) and catering. Dine-in and takeout sales combine to provide a ticket average of $14.82. Also important: Drive through locations generate 27% more sales than without. 31% of the current system has drive through windows, and 40% of the planned locations will have them.

While the company makes no unit level profitability claims, our analysis indicates that franchises are likely earning at least 15% EBITDA (after royalties) at the store level. With sales now running at about $1.2M per unit, that would generate a “cash on cash” return of $180,000, or 40% on the $450,000 investment including franchisee fee, among the best returns in the franchised food industry. We emphasize: this is our analysis, not their claim.

Chicken Salad Chick continues its smart and rapid growth with no obvious impediments. While still relatively small, with only 104 units system-wide, franchisees are “voting with their pocketbooks,” and opening stores at a rapid rate. The concept seems “defensible” in terms of product line differentiation, combined with an employee “culture” reflecting the “chick” founder, but an operational simplicity that allows for fairly rapid growth. We look forward to following this company’s future development.

Why “Franchisee Validation” Is So Necessary When Buying a Franchise

WHY “FRANCHISEE VALIDATION” IS SO NECESSARY WHEN BUYING A FRANCHISE
By Gary Occhiogrosso – Founder of Franchise Growth Solutions, LLC

The process of buying a franchise can be confusing, complicated and often stressful. Once you’ve decided to purchase a franchise, the search begins for the right type of business, the correct investment level and the desire to find a brand that you can stand behind and work to a successful operation.

The process usually starts with an email or a phone call to a representative of the Franchisor followed by an application. These initial steps are usually completed before the franchisor meets with you. Next, there is the franchisor’s interview process, your discovery day at the franchisor’s headquarters and reading and seeking legal counsel on the Franchise Disclosure Document (FDD). These are all necessary and customary steps when exploring and buying a franchise.

Not Done Yet
Once you completed the above process, there is one more step to be taken. In my opinion, it is the most critical step, “Validation.” Franchisee Validation is the act of the prospective franchisee (you) calling and or visiting as many existing franchisees as possible. This is not only insightful but in my opinion a necessary step. Speaking with the brand’s franchisees can give you inside information regarding the operational issues that face a franchisee daily. For example, the support the franchise gives its franchise community and the acceptance of the product or service to general public.
Most importantly you’ll want to find out about financial performance.

Franchisors Cannot Answer All Your Questions
The franchisor cannot answer many of the financial performance questions you have because of Federal Trade Commission and State Franchise Regulations. Unless the FDD includes full financial information, franchisors are prohibited from making any earnings claims that would be considered an “inducement to buy” their franchise. Many Franchisors do not publish the performance results of their franchised units because the information is not verified or audited and therefore may be incomplete or inaccurate. You will be frustrated if you attempt to get information about profitability, cost of goods or labor from the Franchisor. That’s why you must speak with operating franchisees. They can, and many will be willing to have a conversation about their operating performance.

Their Results May Not Be Your Results
Of course, it’s no guarantee you’ll do the same amount of business, or be as profitable as some franchisees. However, speaking with operating franchisees can give you a “Thin Slice Evaluation” and perhaps create some comfort level in with your decision to purchase the franchise. Remember, you’re not buying an existing business with a track record of the operation results, so you can not quantify how well you will do in the business. You need to conduct your due diligence on the concept, the management team and the support given by the franchisor. It would be best if you felt confident with the concept, the product and your ability to perform like a successful franchise. The information you gather from the franchisor, the existing base of franchisees and a good dose of faith and passion will help you achieve success.
For more information