Taking on Restaurants and Grocers

Entrepreneurs

Taking On Restaurants And Grocers

Melanie Lindner, 05.08.08, 6:00 PM ET


The meal-assembly industry was born in early 2002 when Stephanie Allen and Tina Kuna opened their first Dream Dinners store in Snohomish, Wash. The concept: Customers prepare their own food in bulk using the restaurant's kitchen, ingredients and recipes--all for less money than buying and cooking food from the grocery store. And, of course, no dirty pots and pans.
Dream Dinners, now with 208 locations in 37 states throughout the U.S. (and another 29 under construction), is the largest of these chains. But with food prices soaring, angry franchisees snapping and its financials sagging, the company--and much of the meal-assembly industry--is feeling like it's on the chopping block.
On the surface, the value proposition sounds compelling: At Dream Dinners, busy parents who want their kids to eat right can crank out 12 meals, up to 72 servings, in less than two hours for just $250. The company insists (based on its own research) that preparing those same meals at home would require 18 to 20 hours of shopping and cooking and cost between $525 and $585.
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Smelling success early, Allen and Kuna began to franchise. And it caught on: Since Dream Dinners' conception, 13 similar chains with more than 20 stores each have sprouted up, plus at least 12 chains with fewer than 20 locations. Today there are 1,293 of these stores in 49 states (West Virginia lacks such a location), according to Andy Potter of the Meal Assembly Network, which tracks the industry.
But that bigger footprint hasn't translated into sizable riches. Even before food prices really started to spike (see: "What Grocers Teach Us About The U.S. Economy"), Dream Dinners was taking it on the chin, according to audited financial statements in the company's latest Franchise Disclosure Document, filed with the State of Washington Department of Financial Records.
As of Dec. 31, the company boasted $2.9 million in assets, against which it carried $3.4 million in liabilities. (Such negative book value implies that if Dream Dinners were unwound today, shareholders wouldn't get much.) That's a snapshot, but here's a trend: Last year, the company lost $628,000 on $7.5 million in sales; compare that to 2005, when it earned $928,000 on sales of $4.5 million.
"Quick growth does not equal profitability," says Richard Rosen, a Manhattan-based franchise lawyer who closely follows the meal-assembly industry but does not represent any specific franchise. "This is a fad industry that grew way too fast."
Typically, new business concepts need up to five years to season before they can be franchised successfully. Dream Dinners--along with its next largest competitor Super Suppers, now with 165 stores--both began franchising in less than two years.
Now more meal-assembly locations are closing than opening, says Potter. Since January, large chains (with more than 100 stores) have shuttered 11% of their stores; mid-sized chains (10 to 99 stores), 8%; and small chains (two to nine stores), a whopping 17%.
Franchisees are starting to bristle. In late April, 15 of them filed a lawsuit against Dream Dinners, claiming a host of transgressions, including violation of franchise laws, negligent fraud and breach of contract. "We were sold a proven concept," says Jennifer Garcia of Oxford, Conn., a plaintiff who closed her two Dream Dinners franchises in December. "This is an untested, unproven and flawed business model."
Michael Garner, a Minneapolis-based attorney representing the franchisees, says many others are dissatisfied and that he expects they too will soon come forward. In a joint e-mail response to Forbes.com, Allen and Kuna write: "The plaintiffs are a fraction of the more than 200 Dream Dinners franchisees, the vast majority of which refused to be involved in the lawsuit. Instead of working their businesses during these challenging economic times for the industry, [the] plaintiffs apparently chose to sue us."
A major point of contention has to do with rosy promises Dream Dinners seemed to have made to its franchisees. Under the Federal Trade Commission's franchise law, franchisers are not permitted to make "predictions" about franchisees' financial success--unless they do it in the Uniform Franchise Offering Document, which typically contains a host of disclaimers.
Dream Dinners "totally disregarded these regulations," says Garner. It not only posted financial projections on its company Web site, he says, it also put them in a Power Point presentation given to potential franchisees.
Jennifer Hemann, a former Dream Dinners franchisee in Maryland and one of the plaintiffs in the suit, alleges that she was shown that Power Point presentation--which included estimated profit margins for a given volume of customers--when interviewing with the founders. "They told us, 'Our lawyers said not to show this to you, but if you write fast, you can get it all down,'" she says.
After sinking hundreds of thousands of dollars into her stores, Hemann claims she never turned a profit: "In my two stores, I lost a combined $800,000 in my initial investments and operating costs." Garcia says she got the same routine from Allen and Kuna: "They offered financial information, but said their lawyers told them not to--then gave a wink-wink and a smile."
Allen and Kuna write that they are "unaware" that earnings projections were ever on their Web site. Of the Power Point presentation, they write that "projections were displayed that our lawyers previewed and approved."
The slides, provided by Garner, present some tantalizing figures: Allen and Kuna projected that, at 187 customers per month, a franchisee could expect to earn $75,400 in profit annually, or 18.9% of total revenue. On the high end, at a quoted 328 customers per month, net profits jumped to $163,300, or 23.3% of sales. The estimated distance customers would be expected to drive: two to five miles. Allen and Kuna insist that "the figures were realistic and based on the actual performance of stores."
If the U.S. economy doesn't perk up soon, things may get even worse for meal-assembly outfits. "It's a lot easier for some families to spend $30 to $50 on one meal at a casual dining restaurant like Applebee's than to drop $250 at one time at a meal assembly store," says Potter.
Bottom line, says Rosen: "The jury is still out on the meal assembly industry. But if someone approached me with one of these franchise contracts, I would advise them to take caution."