How Franchisors Should – And Shouldn’t – Respond to Internet Criticism
May 10, 2013
How Franchisors Should – And Shouldn’t – Respond to Internet Criticism by Sean Kelly, UnhappyFranchisee.Com
No company offering franchise opportunities enjoys having to publicly defend the image that they’ve carefully crafted through their marketing and public relations efforts.
No franchise company wants to air or discuss its dirty laundry in plain sight of customers, employees, shareholders, franchisees and prospective franchisees.
But now, thanks to the Internet, blogs like UnhappyFranchisee.Com and BlueMauMau.com, and social media sites like Facebook and Twitter, public discussion and scrutiny of franchise opportunities is a fact of life… and it’s not going away.
Here’s the story of two franchisors of fast-casual cafes that reacted very differently to similar complaints against them.
The first company reacted with anger, threats and legal action.
The second company reacted by taking the complaints seriously, by publicly addressing factual errors, and by acknowledging and taking steps to correct its shortcomings.
In the end, the way the franchisors chose to react to criticism will have a greater impact on their public images and ability to grow than either the original criticism or their well-crafted marketing/PR personas.
Guess which company is posting steady improvements and growth, and which is stalled out and attracting increasingly bad press?
Camille’s Sidewalk Café: Old School Bullying Backfires
In July, 2012 UnhappyFranchisee.Com posted that, according to a Small Business Administration report, Beautiful Brands International (BBI)’s Camille’s Sidewalk Café had a 58% SBA franchise loan default rate.
In the post CAMILLE’S SIDEWALK CAFE Franchise Complaints, we also published that, according to the company’s own disclosure document, the Camille’s U.S. franchise network has shrunk 60% since 2008.
The post attracted an outpouring of comments from a number of former Camille’s franchisees, who claimed that Camille’s and BBI CEO David Rutkauskas had misrepresented the opportunity, had failed to provide the necessary franchisee support, and was indifferent to whether they succeeded or failed once the initial check cleared.
Camille’s franchisees reported having lost as much as a million dollars, and many recounted the personal financial struggles, including bankruptcy, they endured as a result of investing in the Camille’s franchise.
UnhappyFranchisee.Com contacted David Rutkauskas, CEO of Beautiful Brands International, and offered to publish his response, clarification, or rebuttal to the allegations. We told Mr. Rutkauskas that if there were merit to some of criticism, that we would be happy to report what steps he and Beautiful Brands have taken or were taking to address and correct these problems.
Instead of responding to numerous offers to join the conversation, David Rutkauskas had his attorney send threatening letters to the former franchisees who had shared their experiences and posted comments under their real names.
UnhappyFranchisee.Com did not take down the comments. We once again offered Mr. Rutkauskas a chance to address the criticism.
Beautiful Brands then filed a lawsuit against me (then later dismissed it) for expressing my opinion on another website.
In subsequent interviews, David Rutkauskas tried to maintain the success-story façade he had created for his chain, and, when confronted with the unavoidable facts, he blamed the franchisees themselves, he blamed the economy, he blamed partners for backing out of deals, he blamed misrepresentations on writers printing “off-the-record” comments, and he blamed UnhappyFranchisee.Com for focusing on the 70+ Camille’s franchisees that failed instead of the 28 or so that have survived.
In frustration at not being able to control the story, David Rutkauskas posted dozens of fiery personal Twitter attacks on me that included vulgarities, profanity, threats, homophobic (though I’m not gay) and anti-semitic (though I’m not Jewish) insults and invitations to come to Tulsa to fight him (“settle this like men”).
Instead of expressing concern for the plight of the franchisees who failed, instead of taking some responsibility or at least addressing the concerns that were raised, Beautiful Brands and David Rutkauskas’ responded in such a way that reinforced the franchisees’ claims that BBI is indifferent to their struggles, and will use bullying, threats and intimidation to hide their shortcomings.
Tropical Smoothie Café: Transparency, Concern & Action
Also in July, 2012 UnhappyFranchisee.Com posted that, according to a Small Business Administration report, Tropical Smoothie Cafe had a 23.58% SBA franchise loan default rate.
In the post TROPICAL SMOOTHIE CAFE Franchise Complaints, we also that the 300+ unit chain appeared to have a termination/reaquisition rate of about 18%.
While the Tropical Smoothie Café numbers were not nearly as disturbing as those of Camille’s Sidewalk Café, and while their post did not attract negative comments from franchisees, TSC did not attack us, sue us, or insult us on Twitter.
In contrast to Rutkauskas and BBI, Tropical Smoothie Cafe, LLC VP, Franchise Development Charles L. Watson sent us a report that indicated that they were aware of the problems, and had taken serious steps to reduce their franchise failures.
TSC had already hired franchise research firm FranData to do an analysis of their SBA loan default rate, and to assess the effectiveness of measures they had previously taken to reduce their franchise failure rates.
FranData reported that the SBA had overstated the TSC default rate, which is actually 15.54% (not 23.58%, as previously reported).
Furthermore, FranData reported that measures taken by Tropical Smoothie Café, including the raising of franchisee net worth requirements and adjustments in site selection criteria, had resulted in a reduction of franchise failures every year since 2007.
Even though the SBA loan failure rate of Tropical Smoothie Café is lower than the average for similar franchises (according to FranData), Watson told us they consider it still too high, and that the company “is working hard to bring it down through continued focus on franchisee profitability and business practices.”
Additionally, Mr. Watson reported a number of systemwide improvements, including:
- The addition of protected territories for franchisees,
- A positive ownership change and improving financials,
- The hiring of additional experienced franchise professionals to help support franchisees and build the TSC brand,
- Steadily increasing Average Unit Volume (AUV) which is now over $500,000.
Rather than threatening us with lawsuits and insults, Tropical Smoothie’s Charles Watson wrote to UnhappyFranchisee.Com: “I thank you for your efforts on behalf of prospective franchisees, we use your site to help guide us on what we need to fix / alter / do better with our system – you are providing some great free consulting, for prospective franchisees and franchisors!”
Why Internet Criticism is Good for Good Franchisors… And Franchising
Here’s the difference between good franchisors and bad franchisors when it comes to franchise marketing and franchisee recruitment:
Bad franchisors are on a hunt for the naïve, the trusting, and the inexperienced.
Bad franchisors want prospective franchisees who believe that franchising will give them unlimited freedom and the chance to be their own boss, to call their own shots, to control their destiny.
Bad franchisors want prospective franchisees who believe the bogus statistics that 95% of all franchises are successful, and that the few who failed did so because they didn’t follow the system, or they killed the Success Fairy by asking too many questions and thinking negative thoughts.
Good franchisors want smarter franchisees who have done their homework and have realistic expectations.
Good franchisors want franchisees who understand that every new business venture comes with risk, whether its franchised or independent.
Good franchisors want franchisees who understand that their franchise is not a magic, guaranteed money-machine, and that they will provide the tools but the franchisee must build the business, that the franchisee’s success will depend not only on the brand, the system, and the franchisee’s hard work, but also external factors, such as location, market and competition, that may be out of their control.
Most of all, good franchisors want franchisees who aren’t looking for some mythical perfect franchise system or “hot new concept,” but are looking for an organization that is dedicated to supporting its franchisees, and growing through mutual success with their franchisees.
The truth is there ARE no perfect, complaint-free franchise companies and there ARE no magical short-cuts to small-business success.
Good franchise companies shouldn’t fear online criticism.
As long as they are earnestly working to improve their franchise system and support their franchisees, they should be transparent about the challenges they are facing, and share the steps they are taking to overcome them.
They might lose some franchise prospects who are searching for the magic carpet to guaranteed, effortless success, but they will gain those who have realistic expectations, who know what they are getting into and who are up for the fight.
WHAT DO YOU THINKS? SHARE A COMMENT BELOW.
TAGS: Beautiful Brands, Camille’s Sidewalk Cafe, Tropical Smoothie Cafe, David Rutkauskas, Internet criticism, online criticism, online attacks, franchise public relations, franchise criticism, franchise marketing
TROPICAL SMOOTHIE CAFÉ Franchise Loan Defaults Overstated, Says Report
May 8, 2013
Tropical Smoothie Café franchise loans guaranteed by the Small Business Administration have a 23.58% failure rate, according to an SBA report released September 30, 2011.
UnhappyFranchisee.Com included those initial results in two posts: WORST FRANCHISES IN AMERICA (by SBA loan defaults), and TROPICAL SMOOTHIE CAFE Franchise Complaints.
However, a report compiled by franchise research firm FranData for Tropical Smoothie Café concludes that the SBA report overstated TSC loan failures, with the actual rate being 15.54%.
In an email to UnhappyFranchisee.com, Tropical Smoothie VP Franchise Development Charles L. Watson wrote:
“FranData’s SBA Default report calculates a more realistic default rate for our brand. It is still high, but we are working hard to bring it down through continued focus on franchisee profitability and business practices…
“This report shows we are far from perfect, but not as bad as the SBA data is saying we are. Our SBA default rate is in reality lower than comparable franchise companies in our sector.”
Tropical Smoothie Café SBA Franchise Loan Default Rate Dropping
According to the Enhanced SBA Loan Loss Analysis for the years 2000 – 2011 on the Tropical Smoothie Franchise Brand prepared by FranData Lead Research Analyst Ritwik Donde:
Between 2000 and 2011, there was a significant increase of 600% in Tropical Smoothie’s SBA loan disbursements, from 3 to 193. The total disbursed was $33.2 million or an average disbursed amount per loan of $172,257.
Out of the 193 loans approved between July 2000 and November 2011.
57 were paid in full 23 were fully cancelled 6 loans were undisbursed 1 loan was closed 68 are open and under regular service 8 loans are open and under liquidation 30 loans failed
During these 11 years, 30 of the 193 loans (15.5%) failed; 68 or 35% are open and performing normally; 8 are open and being resolved. The rest were either paid in full or cancelled before any money was disbursed.
While Tropical Smoothie’s failure rate increased each year until 2007, it has since then declined every year, from 19.73% to 15.54%
According to FranData, the discrepency between the TSC failure rate in the FranData report (15.4%) and the TSC failure rate released by the SBA (23.58%) is the result of internal flaws and inconsistencies in SBA data collection procedures.
FranData claims that these widespread inconsistencies can affect the granting of SBA-guaranteed franchise loans, as “the lending community does rely on [the SBA-supplied] information to a considerable extent, sometimes deciding whether to lend at all to a brand and at other times incorporating it into loan policy decisions about specific brand and industry concentrations.”
Increasing Capitalization Requirements Lowered Failure Rate, Report States
According to the FranData analysis, Tropical Smoothie Café was able to reduce its SBA loan failure rate by increasing the capitalization requirements for prospective franchise owners.
Prior to 2008, Tropical Smoothie required prospective franchisees to have a minimum cash liquidity of $50,000. The franchisor increased this requirement in 2009 to range between $100,000 and $150,000.
Prior to 2008, many new franchisees were undercapitalized.
According to FranData:
… Tropical Smoothie’s number of real business failures steadily increased after 2000 peaking in 2007. The real business failures started declining from 2008 onwards. Tropical Smoothie’s franchised café real business failure rate peaked at 8% in 2007 and declined to 4% in 2010. Based on management provided information, between 2000 and 2011, a total of 105 cafés left the system. The closures peaked at 21 in 2007 and then declined to nine in 2011.
Similarly, the number of failed SBA loans also peaked in 2007, after which no more loans failed. Undercapitalization of franchisees for the period between 2000 and 2007 could be one of the reasons for such high loan failure rate. Management realized issues with franchisee performance and took counter measures.
FranData concluded: “Undercapitalization of franchisees led to high business failures for Tropical Smoothie franchisees, which in turn was one of the reasons for failure of SBA loans distributed to such franchisees.”
READ THE FULL REPORT (PDF): Tropical Smoothie Cafe SBA Loan Loss Analysis
Please share a comment (anonymous is fine) or Contact UnhappyFranchisee.com.
ARE YOU FAMILIAR WITH THE TROPICAL SMOOTHIE CAFE FRANCHISE OPPORTUNITY? ARE YOU A CURRENT OR TROPICAL SMOOTHIE CAFE FRANCHISE OWNER? PLEASE SHARE A COMMENT BELOW.
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TROPICAL SMOOTHIE CAFE Franchise Complaints
July 21, 2012
Tropical Smoothie Café franchise opportunity: Are you considering it?
You should be aware that data released by the Small Business Administration (SBA) indicates that Tropical Smoothie Café franchise owners who qualified for SBA-backed franchise loans have a high loan failure rate of 24%*.
[Editor's note: The SBA failure rate is disputed by the company. Read: TROPICAL SMOOTHIE CAFÉ Franchise Loan Defaults Overstated, Says Report]
That qualifies Tropical Smoothie Café for inclusion in UnhappyFranchisee.com’s list of WORST FRANCHISES IN AMERICA (by SBA loan defaults)
Are you familiar with the Tropical Smoothie Café franchise opportunity? If so, please share your experience, opinions or insights with a comment below.
If you are a Tropical Smoothie Café franchise representative or employee, please leave a comment or email us at UnhappyFranchisee[at]gmail.com.
Tropical Smoothie Café franchise owners have a 24% SBA loan default rate.
The overall net growth of Tropical Smoothie Café franchises by 23% (from 244 in 2008 to 301 in 2011) might give the appearance of steady, failure-free growth. However, data from the Tropical Smoothie Cafe FDD (see 2nd chart below) indicates that within that same period, 67 franchises were terminated or reaquired.
When doing your due diligence, it pays to dig into the numbers of the Franchise Disclosure Document (FDD) rather than rely on the overall growth figures available online.
| Tropical Smoothie Café Franchise | |
| Tropical Smoothie U.S. franchises in 2008: | 244 |
| Tropical Smoothie U.S. franchises in 2011: | 301 |
| Growth in franchise units 2008 – 2011 (#) | 57 |
| Growth in franchise units 2008 – 2011 (%): | 23% |
| SBA loans granted since 2001: | 156 |
| SBA loan failure rate: | 24% |
| Sources: Tropical Smoothie Franchise Disclosure Documents (growth), Coleman report (SBA) |
The inability to repay an SBA-backed loan (or any franchise loan, for that matter) indicates a serious situation for the franchisee.
It’s likely that Tropical Smoothie Café franchise owners who received SBA loans may have collateralized their franchise loan with their homes or other personal assets, and many were unable to repay those franchise loans… despite the serious incentive to do so.
Tropical Smoothie Café terminated/reaquired 67 franchises (18%) between 2008-2011
The relatively high franchise termination rate of Tropical Smoothie Café is a franchise red flag.
| Tropical Smoothie Café Franchises 2008-2011 | |
| Franchises open January 2008: | 244 |
| Franchises added 2008-2011: | 124 |
| Franchises terminated/reaquired 2008-2011 | 67 |
| Franchises terminated/reaquired (%) | 18% |
| Sources: Tropical Smoothie Franchise Disclosure Documents (FDDs) |
At the start of 2008, there were 244 US Tropical Smoothie franchises. From 2008 through 2011, an additional 124 franchises opened for a total of 368 franchises. During the same time 67 franchises were either terminated or reacquired by the franchisor. At the beginning of 2012, there were 301 Tropical Smoothie franchises open in the U.S.
That would come out to a termination/reaquisition percentage of 18%, which (we believe) could reasonably be called a failure rate. (The 24% figure is a default on SBA loans since 2001, so it may be that the actual failure rate earlier in the decade was much higher than in recent years.) Perhaps the company can clarify.
How stable is Tropical Smoothie Franchise Development Corporation?
The FDDs raise a few additional red flags. The first is the financial stability of the franchisor, Tropical Smoothie Franchise Development Corporation. The 2011 Tropical Smoothie Cafe FDD states:
“December 2010 AUDITED FINANCIAL STATEMENTS SHOW THAT WE HAD A RETAINED EARNINGS DEFICIT OF $3,280,977 AND A DEFICIT IN SHAREHOLDERS’ EQUITY OF $3,097,524″
The 2012 Tropical Smoothie Cafe FDD states:
“OUR DECEMBER 31, 2011 AUDITED FINANCIAL STATEMENTS SHOW THAT WE HAD A RETAINED EARNINGS DEFICIT OF $4,702,096 AND A DEFICIT IN SHAREHOLDERS’ EQUITY OF $4,518,661″
Not only does that indicate that the franchisor appears to be in poor financial shape, but that it worsened by nearly $1.5M from 2010 to 2011. Minnesota requires the escrow of franchise fees due to the Franchisor’s financial condition.
The Tropical Smoothie franchise comes with no territorial protection
Another red flag is that the FDDs state that Tropical Smoothie Cafe franchisor does not grant an exclusive territory at all, and that another TSC can open up across the street and you’d have nothing to say about it.
What do you think?
Are you familiar with the Tropical Smoothie Café franchise opportunity?
What do you think accounts for the SBA loan failure rate of Tropical Smoothie Café franchise owners?
What steps should Tropical Smoothie Café be taking to stop further franchise failures?
Has Tropical Smoothie Café taken serious action to address the problems that led to these loan failures?
Please share a comment (anonymous is fine) or Contact UnhappyFranchisee.com.
ARE YOU FAMILIAR WITH THE TROPICAL SMOOTHIE CAFE FRANCHISE OPPORTUNITY? ARE YOU A CURRENT OR TROPICAL SMOOTHIE CAFE FRANCHISE OWNER? PLEASE SHARE A COMMENT BELOW.
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