According to CNNMoney.com, the “loan data is from the Small Business Administration, covering loans made from October 2000 through September 2009. The failure rate represents the number of loans in liquidation or charged off, divided by the number of loans disbursed.”

The Matco Tools was deemed the riskiest franchise with a 36% franchise loan default rate.

Cold Stone Creamery franchise was listed as 2nd worst with a 31% failure rate.

The much maligned (& litigated) Quiznos franchise was 3rd worst with a 25% default rate.

The Curves franchise was the 4th worst, with a 16% SBA loan default rate (no surprise to readers of this site or to those who left 600+ comments on our Curves franchise discussion)

Also posting a double-digit default rate is heavily promoted The UPS Store franchise with a 12% SBA franchise loan default rate.

The winners include Super 8 and Days Inn motel franchises with 4% and 6% respectively, Subway with a 7% default rate and Dairy Queen & Dunkin’ Donuts franchises with 8% default rates.

Franchises with the Highest Failure Rates:

Here are comments from the CNN writer, from worst to best:

Matco Tools franchise – 36%: “Tool manufacturer and distributor Matco is the riskiest investment on the top-10 “most popular” list, with more than one third of its SBA-backed loans going bad.”

Cold Stone Creamery franchise – 31%: “The product is sweet, but the financials can be bitter. In the last 10 years almost one in three SBA-backed franchisees defaulted on their loan.”

Quiznos franchise – 25%: “One in four franchise owners was unable to make good on their SBA-backed loan. Quiznos recently settled four class-action suits brought by its franchisees, agreeing to pay as much as $100 million to end years of wrangling over its pricing, royalties and fees.”

Curves franchise – 16%: “The overhead costs are pretty low, but the investment can be risky. Curves’ fast expansion goes hand in hand with a relatively high churn rate, and almost 16% of its SBA-backed franchise loans this decade failed.”

The UPS Store franchise – 12%: “Seven years ago, they [MBE franchisees who converted] filed suit against UPS, and will finally take their case to trial later this month in Los Angeles. Meanwhile, UPS rolls on, adding new franchisees to its network for an initial fee just shy of $30,000.”

Franchises with the Lowest Failure Rates:

Super 8 franchise – 4%: “Getting into the motel industry is pricey… but it’s also a pretty safe bet. Among the handful of franchise brands… a notable number are hotels and motels. Super 8 has the lowest default rate on this top-10 list, hovering just under 4%.”

Days Inn franchise – 6%: “Days Inn is another member of the Wyndham Hotel Group’s franchise family. Launched in 1970, the chain currently boasts 1,900 hotels throughout 15 countries.”

Subway franchise – 7%: “With fewer than 8% of SBA-backed borrowers defaulting on their loans, Subway has a better track record than similar brands — rival sub shop Blimpie has a 46% loan failure rate, and Quiznos is also well into the double digits.”

Dairy Queen franchise – 8%: “Today, it boasts 5,700 locations around the globe and a single-digit failure rate for its SBA-backed franchise loans, making it one of the safer investments in the food franchise market.”

Dunkin’ Donuts franchise – 8%: “Dunkin’ Donuts’ modest default rate is matched by its corporate sibling, Baskin-Robbins, which had a 10% failure rate for its SBA-backed loans.”

ARE YOU FAMILIAR WITH THESE FRANCHISE OPPORTUNITIES?  WHAT DO YOU THINK?  SHARE A COMMENT BELOW.

Source: CNNMoney.com

It depends on whom you ask.

Taco Del Mar: “great franchise partnerships create great successes.”

The Taco Del Mar franchise website states:

“Taco Del Mar believes that great franchise partnerships create great successes. We have built our organization in order to develop positive and profitable relationships with our franchisees… We begin each day focused on franchise profitability… We developed our system to return the highest ROI to the franchisee in the shortest time… We believe in you.”

Taco Del Mar:  A franchise “disaster.”

Former Maryland Taco Del Mar franchise owner Suzanne Todd has a different opinion, calling her experience with the company a “disaster.”

According to a Wall Street Journal story, Todd claims she was recruited as a franchise owner by Master Developer and franchisee Thomas Murphy, who told her Taco Del Mar was the “next Subway.”  She claims Taco Del Mar executives “lured her to join the team by predicting future positive financial returns,” and “‘placed a great deal of pressure” on her to sign a franchise agreement before the prices increased.”

She signed in April 2007, paid a $20,000 franchise fee and opened her Frostburg, MD restaurant in December 2007.

Claims her Master Developer “doomed her… restaurant to failure.”

Todd claims her own Master Developer Murphy doomed her restaurant to failure by his alleged “ineptitude” and non-compliance with the system he was representing:

She blamed Murphy’s “ineptitude” as a master developer, deeming his flagship restaurant a failure that then doomed her own restaurant to failure. Why’s that? Well, Todd said Murphy’s branch had food that “was not up to standard” because it didn’t rely on the chain’s recipes. The branch used supplies from the wrong brands, handing out Cinnabon cups, Subway paper products, and – gasp – Wal-Mart-brand tortilla chips. And customers had even filed health safety complaints regarding food poisoning alleged to have resulted from eating there.

Franchisee Todd contends that the franchisor provided inadequate sources for food and supplies, and poor support especially in advertising.  The Maryland Attorney General’s office accused Taco Del Mar of violating Maryland law with regard to the offer and sale of the franchises.  The state and the franchisor struck a deal in February 2009 that gave Todd the option of rescinding her franchise agreement.  She jumped at the chance and her branch closed that same month.

Taco Del Mar bankruptcy halts arbitration proceeding.

Suzanne Todd initiated an arbitration proceeding against Taco Del Mar for $500,000.  The proceeding was halted, along with all other “creditor actions,” when Taco Del Mar Franchising Corp. sought Chapter 11 protection in January, 2010.

According to the WSJ article, Taco Del Mar blamed its bankruptcy on “ several years of financial losses it experienced on poor expense management, lawsuit expenses and its selection of ‘poor franchisees and poor sites’ for its new restaurants.”

Despite its troubled past, Taco Del Mar and its Master Developers continue to promote the Taco Del Mar franchise opportunity on its franchise website.

WHAT DO YOU THINK?  IS TACO DEL MAR A GREAT FRANCHISE OPPORTUNITY DESIGNED FOR FRANCHISEE PROFITABILITY?  OR IT A FRANCHISE “DISASTER”?

logo:  Taco Del Mar

Marketing strategy and use of advertising funds has always been an area of heated debate between franchisors and franchisees, especially in the foodservice segment of franchising.  The recession, declining sales and a trend toward deep price discounting and product giveaways has heated the debate past the boiling point for many franchise organizations.  Some franchisees are banding together and publicly voicing their discontent, while others filing lawsuits against their own franchisors to protect their interests.

The structure of the franchisor-franchisee relationship makes conflict nearly inevitable.  Franchisors generally receive their income in the form of royalties paid as a percentage of their franchisee’s gross sales… regardless of whether those sales are generating a profit for the franchisee or not.  Franchisors can make money on a promotion that drives top-line sales even if the franchisee is losing money on every sale.  Additionally, franchisors that are publicly traded are under constant pressure to increase their revenue, not the franchisee’s profitability.

Franchisees, whose advertising contributions fuel much of the systems advertising, are constantly questioning the franchisor’s motives.  Lately, many have joined with their fellow franchisees to make their displeasure heard and to put pressure on their franchisor by any means possible.

Burger King

BURGER KING: Is BK Punishing Franchisees With Lawsuits?

BURGER KING Franchisees Sue Over $1 Cheeseburgers

Quiznos

QUIZNOS: Franchisees Lost $2.25 per Sub on Giveaway

QUIZNOS OVERVIEW & DISCUSSION

QUIZNOS Franchisee Blasts HQ’s Coupons and Discounts

Franchise Owner Claims It’s “Impossible to Make Money” With Quiznos

McDonald’s

McDONALD’S: What Franchisees Make on a $1 Burger

SUBWAY: What Do Franchisees Make on $5 Footlongs?

LITTLE CAESARS: What Franchisees Make on a $5 Pizza

Last November, Burger King’s National Franchise Association, a group that claims to represent more than 80 percent of Burger King’s U.S. franchise owners, sued the parent company, alleging that Burger King Corporation was forcing them to price products below their cost.  (Read:  BURGER KING Franchisees Sue Over $1 Cheeseburgers)

The dispute arose specifically over Burger King’s promotion of $1 cheeseburgers that, franchisees allege, cost owners $1.10 each.  In the bitter dispute, franchisees argue that Burger King does not have the right to set maximum menu prices.  The franchisor alleges it has the right to require participation in mandatory promotions.

This month, Burger King has fired off a number of lawsuits against some of its own franchisees for not complying with a mandatory cash register upgrade by the deadline of December 31, 2009.  Some named in the latest suits are outspoken critics of the franchisor and participants in the $1 Cheeseburger lawsuit.

According to a story on FOX Business, some franchisees claim that Burger King is targeting franchisee dissenters to punish them and send a message.  From the Fox story:

“This is about getting even because we did not roll over on the dollar double cheeseburger,” said one franchisee named in a suit who declined to be named for fear of further retaliation. “This is about showing who the big boss is.”

Is Burger King Out to Crush Franchisee Dissent?

Critics of the franchisor point out that the POS (point-of-sale) lawsuits are “particularly confrontational.”  Lawsuits of this kind are usually preceded by default notices issued by the franchisor that give the franchisees a time period (usually 30 days) to “cure” the default  before further legal remedies are sought.  With slumping sales and the country in a recession,  it seems a bit harsh for Burger King Corporation to go right to litigation over a required investment of $18,000 and $35,000 per store.  That certainly indicates that retaliation may be a motive for the hard line the franchisor is taking.

Burger King Corporation does not exactly have an pristine reputation when it comes to handling dissent.  Remember a couple of years ago when BK marketing and PR execs were exposed for planting spies and leaving slanderous shill comments against leaders of the Coalition of Immokalee Workers because they were demanding fair pay for tomato workers?  In an embarrassing incident, it was revealed that a Burger King VP had been using his young daughter’s AOL account to slander the group’s leaders in online forums, as I recall.  That revelation, and another involving BK infiltration into the non-profit group in order to undermine their protest, ended with Burger King publicly giving in to the non-profit groups demands – and the resignation of the VP.

Or are Uncooperative Franchisees to Hurting Themselves?

On the other hand… Burger King and its supporters contend that uncooperative franchise owners are undermining the franchisor’s efforts to upgrade and improve both the BK marketing program and store sales.  According to the Fox article,

The new system would let the company cull real-time sales data to help with marketing and pricing actions, a capability that has left Burger King at a disadvantage to chief rival McDonald’s Corp. and other restaurant chains. At stores that have already installed the new platforms, Burger King says the new platform has also helped schedule employee hours more efficiently, keep track of inventory and reduce theft.

So why would franchisees – who profess to be deeply concerned about managing costs and tracking profitability – drag their feet in adding tools their competitors already have?

Burger King also contends that franchisees are undermining the brand and hurting themselves with the $1 Cheeseburger lawsuit.  The $1 Cheeseburger, BK contends, is a loss leader item designed to drive traffic & raise customer counts.

Once the $1 Cheeseburger deal brings customers is in the door, they contend, the franchisee can upsell them higher margin products like soda and fries.  Unless, of course, the franchisee is too preoccupied suing its franchisor.

Can the Burger King-dom Become a Democracy? Should it?

Franchisees claim that Burger King Corporation is more concerned with putting on a show for Wall Street, and driving up its stock price, than the profitability of the franchisees whose investments built the chain and fund its massive advertising budget.  They are sending a message that they are not afraid to break ranks and go public with their unhappiness if the franchisor refuses to respect their concerns (they twice voted against the $1 Cheeseburger promotion).

Burger King Corporation, on the other hand, seemingly is trying to send a message to both its franchisees and investors that it will maintain a strong leadership role and do what it believes is necessary to compete in the marketplace.  The King-dom is not a democracy, so it seems, and franchisee refusal to make the changes necessary to effectively compete will not be tolerated.

Burger King seems to be engaged in a classic franchisee/franchisor stand-off that, if not resolved soon, could be threaten the investments of all involved.

WHAT DO YOU THINK?  SHARE A COMMENT BELOW.

Answer:  A little.  But they’ve got to make it up on higher profit items – like fries and soda – if they want to stay in business.

SmartMoney.com surveyed franchisees from different franchise chains regarding the cost to them of some current and recent promotions. The Smart Money article points out that franchisees generally bear the brunt of a promotions’s cost, including the food, labor, rent and utilities, among other things.

Here’s the Smart Money finding for the McDonald’s $1 burger on their dollar menu, which report a $.06 profit per sandwich:

McDonald’s

Promotion: Dollar Menu – McDonald’s customers may purchase a number of items, including French fries, an ice cream sundae, a four-piece chicken nuggets and a double cheeseburger for a dollar each.

Pre-promotion price: $1.50 (double cheeseburger)

Promotion Price: $1

Bottom line for restaurant: Profit of roughly 6 cents a burger

The McDonald’s Dollar Menu may be the best value in town, but some franchisees find the six-year-old promotion hard to stomach. While food and packaging costs just 45 cents for a double cheese burger, franchisees also have to pay for rent, labor and utilities. In total, a promotional price of just $1 leaves store operators with a measly 6 cents of profit, according to a franchisee in Florida. Of course the markup on fountain drinks and French fries is typically pretty high. However, many consumers these days are forgoing such add-ons. McDonald’s did not immediately return phone calls and emails seeking comment.

RELATED POSTS:

SUBWAY: What Do Franchisees Make on $5 Footlongs?

LITTLE CAESARS: What Franchisees Make on a $5 Pizza

McDONALD’S: What Franchisees Make on a $1 Burger

BASKIN ROBBINS: Franchisees Lose $1.45 per Scoop on Promo

QUIZNOS: Franchisees Lost $2.25 per Sub on Giveaway

BURGER KING Franchisees Sue Over $1 Cheeseburgers

WHAT DO YOU THINK OF McDONALD’S VALUE MENU PROMOTIONS?  SHARE A COMMENT BELOW.

Fresh City co-owner Larry Reinstein blamed the difficult economy on the closure, but said the rest of the area Fresh City locations were doing fine.

Comments left on the local news story indicated that a reputation for health code violations and lack of cleanliness my have been a factor in the restaurant’s demise. 

According to the story in the Eagle Tribune:

         The Fresh City chain closed its Turnpike Street restaurant yesterday after four years of serving burritos, stir frys, salads and sandwiches.

Fresh City co-owner Larry Reinstein said the North Andover franchise, located in the Eaglewood Shops mall, was a casualty of the difficult economy. He would not say when the decision was made to close the restaurant.

"We thank our many guests for their patronage," Reinstein said yesterday. "We appreciate it, but it became an unprofitable location."

* * * * *

Fresh City opened in the Eaglewood Shops in November 2005.

It was business as usual there on Thursday. But by yesterday afternoon, workers were removing tables, chairs and counters and the sign on the building had been taken down.

Reinstein, the president of Needham-based Fresh Concepts LLC, said there are 17 other Fresh City restaurants in Massachusetts, New Hampshire, Connecticut and Virginia.

"All other locations are doing just fine," he said.

Reinstein said he did not know how many Fresh City employees worked out of North Andover or when they were told about the plan to close the location.

"We’re trying to take care of as many employees as we can at other locations," said Reinstein. "Within reason, we’re going to try to transfer as many as we can."

Reader comments posted on the article were critical of the cleanliness of the North Andover Fresh City franchise:

It wasn’t the food; it was the way they disinfected the trays…still pretty gross.

this just in fresh city not very fresh. Ecoli salds and salmanila burrittos were the down fall of this joint

They were shut down multiple times by the board of health why exactly were they allowed to reopen at all?

I think the reason Fresh City failed is because, a couple of years ago the board of health closed them down for a few days because the restaurant was not clean – I know that’s why I never went back. I am usually a 3 strikes kinda gal…but not when it comes to cleanliness and where I eat.

ARE YOU FAMILIAR WITH FRESH CITY?  WHAT DO YOU THINK?  SHARE A COMMENT BELOW.

Last summer, Burger King franchisees twice voted against the $1 double cheeseburger promotion.  Despite clear objections, Burger King forced all franchisees to sell its double cheeseburger for $1, starting in October.

The suit was filed in U.S. District Court in Miami.  In it, the franchisees allege that the Burger King franchise agreement does not give BK the authority to “dictate maximum pricing.”

*  *  *  *  *

Burger King Franchisees Stand Up For Their Rights… & Profit Margins

Burger King’s National Franchisee Association represents more than 80 percent of U.S. Burger King franchisees.  They reportedly filed the lawsuit only after their attempts to negotiate with the franchisor were unsuccessful. They are asking the court to acknowledge that the right to set prices rests with BK franchisees, not Burger King corporate.

According to a story in the Miami Herald:

Franchisees argue that Burger King is using the promotion to boost sales to satisfy Wall Street investors at the expense of franchisees’ profits. The company’s most recent earnings report showed a 6 percent drop in profits, a 5 percent decline in revenue and a 4.6 percent fall in sales at stores open in North America more than a year.

Based on numbers Burger King provided to franchisees, the company projects that the double cheeseburger will lead to a 5 percent increase in restaurant sales. That will translate into an increased bottom line profit of $365 per restaurant based on $105,000 in sales, according to the analysis.

But financial models run by one Illinois franchisee… suggest that the bottom line impact for restaurants would be a loss of between $489 and $930 depending on the percentage of total sales generated by the value menu.

Stifel Nicolaus restaurant analyst Steve West agrees with franchisees that it is a dangerous move for Burger King.

“They’re going to pressure margins and lower their average check,” said West, who in September downgraded Burger King’s stock to a “hold” rating.  “If you don’t get enough sales, you’re shooting yourself in the foot. History has shown that this doesn’t work.”

Some argue that deep discounts like $1 Double Cheeseburgers are a necessary evil in the current economy.  However, McDonald’s stopped selling its double cheeseburger for $1 because of profit margin concerns at the end of last year.  And nothing irritates franchisees – who pay royalties on their gross sales, not their profit – than a franchisor who acts indifferently toward their bottom line.

RELATED POSTS:

SUBWAY: What Do Franchisees Make on $5 Footlongs?

LITTLE CAESARS: What Franchisees Make on a $5 Pizza

McDONALD’S: What Franchisees Make on a $1 Burger

BASKIN ROBBINS: Franchisees Lose $1.45 per Scoop on Promo

QUIZNOS: Franchisees Lost $2.25 per Sub on Giveaway

BURGER KING Franchisees Sue Over $1 Cheeseburgers

WHAT DO YOU THINK?  SHARE A COMMENT BELOW.

We recently posted the 15 Worst Franchises by SBA Loan Defaults which listed the franchise concepts with the highest rate of SBA loan defaults for 2008.

The Amazon Café franchise was listed as the worst.  According to Katie Adams of Investopedia:

6. Amazon Café

This franchiser offers smoothies, wraps, salads, soups, juices and more, but apparently not enough more to keep all operators in business.

Thirty per cent failed in 2008, and more than 52% have defaulted on their SBA loans since 2000.

According to its UFOC, a new franchise company named Mixsmoothies LLC, founded by Michael Greenberg, (who served as Master Developer of Amazon Systems LLC from April of 2005 until May of 2007) “purchased the franchise agreements of 17 franchisees from Amazon Systems LLC” and expected the franchisees “to convert to MixStirs franchises in the near future.”

According to an anonymous complaint on Ripoff Report:

Mike Greenberg used to work for Amazon Systems, trade-name Amazon Cafe until it went bankrupt. He got the health club Amazons and renamed them Mixstirs. His main purpose is to collect franchise fees and royalties. This is how it was with Amazon and this is how it will be with MixStirs. He will help you open but you won’t get much help after that. MixStirs is just Amazon in disguise…

There are many Amazons in Pennsylvania still operating but they pay no royalties for the same drinks and food. MixStirs food and drinks are Amazon menu with different names. You have been warned. Lots of Amazon owners lost a lot of money and the rest are hanging on but they have a lot of debt.

ARE YOU FAMILIAR WITH THE AMAZON CAFE OR MIXSTIRS FRANCHISES?  SHARE YOUR THOUGHTS BELOW.

Are McDonald’s franchise owners happy?  Why or why not?

Please share your thoughts and opinions below.

*     *     *    *    *

In the 30 years since it launched its much-hyped Franchise 500, Entrepreneur magazine has named McDonald’s the #1 franchise 8 times (only half as many times as Subway).

In recent years, Entrepreneur has ranked McDonald’s #2 (2009); #5 (2008); #9 (2007); #16 (2006); and #13 (2005).

There are more than 2400 McDonald’s franchise owners in the U.S., owning 13,000 franchised locations.  40% are women or minorities.

According to McDonald’s:

McDonald’s has always been a franchising company and has relied on its Owner/Operators to play a major role in the System’s success. McDonald’s remains committed to franchising as a predominant way of doing business…  McDonald’s continues to be recognized as a premier franchising company around the world. We believe a major component of this is the world class training you receive prior to becoming an Owner/Operator. McDonald’s provides hands on training and the materials you need to be a success in your restaurant business.

WHAT DO YOU THINK?  DO YOU OR HAVE YOU OWNED A McDONALD’S FRANCHISE?  ARE McDONALD’S FRANCHISEES HAPPY?  WHY OR WHY NOT?

logo:  McDonald’s Corporation