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.
In Pictures: A Look At The Meal-Assembly Players
In Pictures: Seven Tips For Fledgling Franchisees
In Pictures: Six Franchise-Contract Time Bombs
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."

Franchise News

News shorts
By StaffAs published in: Franchise Times - August 2008
CORRECTIONA news brief in the April edition of Franchise Times contained an error. Precision Tune did not go private. It ceased filing financial reports with the SEC. The public can still purchase its shares through Pink Sheets. Mrs. Fields in danger of crumbling
Mrs. Fields Brands will file for bankruptcy this month if it can't reach a restructuring deal with its creditors. The Utah-based company has stopped selling new franchises and won't release a new franchise disclosure document until it can fix its problems.
Mrs. Fields, which franchises Mrs. Field's Cookies and TCBY Frozen Yogurt, is deep in debt in the midst of a slowing economy. The company's problems have been exacerbated by a growing number of store closures - it lost 51 stores to closure in just the first three months of the year, according to a company financial filing. The system overall has 1,279 units.
The franchisor has said it's working to identify troubled franchisees and help fix their problems. It also released a new store design to help freshen its brands.
But Mrs. Fields has to fix its own problems first. Same-store sales fell for both of the company's brands and, despite an increase in revenues in the first quarter its operating income was deep in the red due to a faster increase in expenses.
The company is weighed down by nearly $200 million in long-term debt. In May Mrs. Fields warned that it was in danger of being unable to make a semi-annual interest payment on the debt. It also noted that there was "substantial doubt" about its "ability to continue as a going concern." In simpler terms that means the company is in danger of folding.
The company later announced, however, that it might have dodged that bullet. It announced a deal to reduce its debt to $50 million in exchange for a combination of cash and company stock. But Mrs. Fields must convince 98 percent of its debt holders to agree to the deal for it to be finalized.
If successful, the company would be able to focus on its plans to grow. If not, Mrs. Fields would declare bankruptcy by mid-August.
Franchise Brands acquires HomeVestors
Connecticut-based Franchise Brands LLC is now the majority owner of HomeVestors of America, Inc. - a company that buys, remodels and resells houses. Despite the change in ownership, HomeVestor's expects no change to its management team.
HomeVestors CEO John P. Hayes acknowledged that the past year has been tough on his company, but he said those issues were not the factors that prompted the sale.
"In order for us to continue to develop our model, we needed to have additional capital," said Hayes. "We had several options available to us, and the Franchise Brands acquisition was the best and the most timely."Hayes is confident in Franchise Brands' ability to help the company grow and play an active role in the real estate business. "When the real estate market completes its correction and begins to expand again, HomeVestors will be perfectly situated to continue expanding, too."
Hayes said Franchise Brands' continued investment would also allow HomeVestors to better support and train its franchisees through the creation of new services. "It gives them that peace of mind that their investment as a franchisee is protected."
Franchising since 1996, the Dallas-based HomeVestors has more than 230 franchised offices in 35 states, with the company's franchisees selling most of the refurbished houses to other investors and first-time homebuyers. Franchise Brands had been investing money into the company since 2007.
Macaluso to retire from MFV Expositions
After 15 years, Richard Macaluso will wave goodbye to MFV Expositions, a company that produces trade shows for the franchise industry. He last worked as the show director for the International Franchise Expo, held this past April.
"I felt I covered as much of the bases of the franchise-side of the business," said Macaluso. "I am very happy that it's worked so well." Macaluso said he was pleased by the abilities of groups like franchisors and franchisees to work towards common goals for the betterment of the business. "Everybody wants to come forward and do the right thing."
After leaving CBS Radio, where he spent the first half of his career working as that organization's vice president of sales, Macaluso met Tom Portesy - president of MFV Expositions.
"We were in the process of trying to launch an advertising expo in New York City and though that particular event was shelved, we realized what a find we had in Richard," said Portesy. "He was way too valuable to leave us, so we offered him a place at our company."
Portesy said Macaluso was instrumental in helping the company transition into the digital age. "New Media and the Internet were just emerging, and franchising was handled very differently. You can see Richard's fingerprints all over our events."
He hopes that future MFV projects will entice Macaluso enough to make him come back to work with the company from time to time. "We miss him already."
NexCen Brands stumbles
NexCen Brands may have bought one cookie too many.
The burgeoning player in the franchise world is suddenly struggling and so, too, is its complex business structure. The New York-based company announced in May that it failed to disclose a required $21 million payment on debt from its January purchase of Great American Cookie Co., and that its business was teetering on the edge of bankruptcy.
The situation forced CEO Bob D'Loren to utter the infamous phrase, "there is substantial doubt about the company's ability to continue as a going concern." Not surprisingly, numerous law firms have announced plans to file class-action shareholder suits against the company, which has seen its stock plummet to 35 cents a share at one point - far off its 52-week high of $11.50 a share.
The company also delayed filing its quarterly report and since then has cut 10 percent of its work force, including 25 percent of its headquarters staff. It also was able to restructure its debt to provide some short-term financial relief. But any long-term solution would seemingly derail NexCen's grand vision of a vertically integrated company that combined product and retail brand management.
The company will likely sell its two consumer brands: Bill Blass, the line of clothing, and the home fabric brand Waverly. NexCen disclosed that it had several offers for the brands and reports said the company was close to a sale of Waverly for more than $30 million.
NexCen was created when D'Loren merged his UCC Capital Corp. with a defunct wireless company, Aether Holdings, and began buying up brands, including several franchises such as The Athlete's Foot, Marble Slab Creamery, Maggie Moo's, Pretzeltime and Pretzel Maker. The idea was to leverage the different brands' assets to improve the others.
For instance, it might sell Bill Blass-branded clothes in The Athlete's Foot stores. Or it might use the Bill Blass name with Waverly products, or franchise stores under the Bill Blass or Waverly names. Losing those two brands threatens that vertical structure, making it seem likely that NexCen will concentrate largely on franchising.
NexCen last year reported $34.3 million in revenues but a $4.6 million loss.
Snap Fitness to work alongside Summit Partners
Minnesota-based Snap Fitness Inc., a franchisor of compact, 24-hour fitness clubs, received a minority equity investment from Summit Partners, a private equity and venture capital firm. Terms of the deal were not disclosed.
"Our relationship with Summit Partners will allow us to fuel our international expansion operations, fortify our brand and lay the ground-work for long-term growth," said Peter Taunton, Snap Fitness' founder and CEO.
Likewise, Summit Partners expressed their confidence in Snap Fitness. "The company provides a platform, a brand and a support infrastructure that enables franchisees to offer a product and service second-to-none in their market space," said Sonya Brown, a principal with Summit Partners. Brown and Summit Partners Vice President Peter Rottier will join Snap Fitness' board of directors.
Snap Fitness has more than 1,500 units.
Moran Industries launches SmartView brand
Moran Industries, a franchisor in the automotive aftermarket industry, is revving up for the home improvement industry with its new concept, SmartView Window Solutions. The new brand is a mobile and home-based franchise specializing in residential and commercial flat-glass window tinting.
The franchisor plans to promote the "economical and environmental benefits" window filming might have in residential and commercial buildings; thus putting an end to what Moran CEO Barb Moran called the "dark ages" of window tinting.
SmartView will demonstrate the industry's new technological advances and provide an assortment of hues and advantages to consumers, Moran said.
Moran Industries franchises six brands, including Transmission USA service centers, Alta Mere Window Tinting & Auto Alarms, and Milex Complete Auto Care.
IHOP gets a name change
Now that it's the franchisor of two large restaurant brands, IHOP has decided to go with a new corporate moniker - DineEquity Inc. The California-based company, which recently purchased the much larger Applebee's chain, changed the name in June.
Julia Stewart, DineEquity's chief executive, said the name change was necessary to reflect the company's ownership of multiple brands. DineEquity also has a tagline, "Great franchisees, great brands." The company has promised to refranchise many of the corporate-owned Applebee's units.
IHOP bought the much larger Applebee's last year for $1.9 billion.
MMI buys Inner Circle
MMI Peer Advisory Services, a subsidiary of Cleveland-based franchise development firm Merrymeeting, has acquired the assets of the 10-unit Inner Circle International.
Inner Circle was founded in 1985 and began franchising in 1997. The company is a peer advisory franchise in which small and mid-sized business owners meet monthly to exchange ideas and solve problems on a variety of topics. The company has "circles" in Maryland, Tennessee, California, Minnesota, Wisconsin and Maine. MMI's even brands have more than 1,700 franchise locations worldwide.

Francorp Newsletter

April 2008

Congratulations from Francorp!

Pet Butler has announced they have acquired one of their competitors, GotPoop-AZ.

"The acquisition of GotPoop-AZ pet waste cleanup customers is part of our continuing effort to build the Pet Butler brand into a household name so that when people think of dog poop, they think Pet Butler," said CEO Matt Bowswell.

Matt approached Francorp in 2004 seeking a program to franchise his simple pet pooper scooper business. Today, Pet Butler proudly bills itself as the "#1 in the #2business" with 97 franchise operations in 27 states.

Pet Butler provides professional pet waste cleanup and removal services plus pet stations and supplies to individual yards, parks, and multi-family communities across North America.

Francorp Heading Towards DC !

Francorp is heading towards the 17th Annual International Franchise Expo (IFE) that will be held April 11-13, 2008 at the Washington Convention Center in Washington, DC this month.

Kicking off the event will be Francorp's Breakfast Briefing on April 11th that will cover pertinent topics on selling franchises at tradeshows including lead generation, lead follow-up, and much more. This briefing is the only one of its kind in the industry and it is available exclusively to Francorp clients and their guests.

Francorp will remain present throughout the duration of the IFE. Francorp will work the trade show floor, assist clients with their booths and represent clients who could not attend the show themselves.

The International Franchise Expo is one of the largest franchise shows in the United States, with nearly 300 exhibitors of varying concepts, investment levels, and geographic reach with over 10,000 prospective franchise buyers attending.


Don't Wait Until it's too Late!

Time is running out to register for Francorp's special Franchise Expo Briefing on April 11, 2008 at the Marriott at Metro Center in Washington, DC.

The purpsose of this Franchise Expo Briefing is to review and reinforce some of the important issues you need to emphasize in working a franchise sales booth for a show.

For those of you who are interested in attending this exclusive Franchise Expo Briefing, please contact a Franchise Analyst at
800-372-6244. Don't delay! Seats are limited!


Door-To-Door Opens Seminar Doors

Door-To-Door Dry Cleaning hosted their first "Own Your Own Business" Seminar in Chicago this past month. This was the first of many seminars they plan to hold across the nation.

After viewing a demonstration performed by Francorp's CEO Don Boroian, Door-To-Door Dry Cleaning acquired the necessary tools to execute their seminar. Francorp provided a professional presentation that incorporated print advertisements, detailed visuals and the flexibility for Door-To-Door Dry Cleaning to personalize their presentation.

For those of you who are interested in enhancing lead generation and the opportunity to sell franchises through hosting your own "Own Your Own Business" Seminar, please contact khofer@francorp.com to receive a free copy of the slide show presentation.



Francorp
800.372-6244
www.Francorp.com