It’s Good to be King

September 3, 2014

burgerking-304xx3148-2112-482-0Emon Reiser

© 2014 American City Business Journals, Inc. All rights reserved.

Burger King responded to the public outrage it inspired this week by saying its deal to merge with Tim Hortons was about global growth, not tax evasion.

“We don’t expect there to be meaningful tax savings,” Daniel Schwartz, the 34-year-old CEO of Miami-based Burger King Worldwide, said during a conference call with media on Aug. 26.

The deal is more complicated than that. And the public isn’t buying Burger King’s characterizations. Sen. Sherrod Brown, D-Ohio, called for a Burger King boycott after the company announced the $11.4 billion deal to merge with the Canadian coffee and doughnut chain. So did MSNBC TV host Joe Scarborough.

Sen. Dick Durbin, D-Ill., emailed supporters, asking them to sign a petition to tell Burger King to stay put: “Burger King told us they were proud to be in America, but now we know that was a whopper.”

The deal will create a new holding company for Burger King and Tim Hortons that will be based in Oakville, Ontario. The move was immediately characterized as a tax-inversion acquisition that would allow Burger King to skirt millions of dollars in corporate income tax payments to the U.S. government.

Petitions cropped up on the Internet. Social media commenters flame-broiled Burger King on Twitter and the company’s own Facebook page.

Some of the less vulgar comments:

 

  • “Liars. Tax dodgers.”
  • “Kiss my business goodbye forever.”
  • “I’m not boycotting your product, I’m merely relocating my loyalties.”

 

 

 

Burger King issued a response on Facebook hours after the deal was confirmed, assuring angry customers that it will continue to pay its “federal, state and local U.S. taxes.” The deal, however, will most assuredly lower its tax burden, particularly on dollars it earns offshore.

“Our headquarters will remain in Miami, where we were founded more than 60 years ago, and business will continue as usual at our restaurants around the world,” the fast-food chain wrote. “It’s about global growth for both brands.”

Burger King and Tim Hortons executives reiterated that stance on their conference call. But Schwartz, Burger King Chairman Alex Behring and Tim Hortons CEO Mark Caira never denied that the deal was a tax inversion.

The company paid a 27.5 percent rate in the U.S. last year – about the same rate it will pay in Canada.

The real tax savings potential lies in the income Burger King has earned offshore. The company gets nearly half of its revenue from other countries, and currently has nearly $905 million in cash and cash equivalents on its balance sheet.

“Our consolidated cash and cash equivalents include balances held in foreign tax jurisdictions,” Burger King has disclosed in a regulatory filing.

Were the company to bring this cash to its headquarters to pay shareholder dividends or reinvest, it would have to pay perhaps one-third of it to the U.S. government in taxes.

In Canada, it would keep far more of this money – which could amount to hundreds of millions of dollars to help fund its “global growth.”

In addition to any tax savings, the merger of these two fast-food giants will lower the costs of goods for both companies, said Alex Macedo, Burger King’s president for North America.

“These two brands will have more purchasing power, which will reduce the costs for our franchisees,” he said. “The overall support has been very good.”

It also helps to have Warren Buffett on your team. America’s most popular billionaire is financing 25 percent of the deal. Buffett has crusaded for higher taxes on corporations and the wealthy, and has championed some of President Barack Obama’s ideas about tax policy. His involvement in this deal could be read as hypocritical, or as a sign that he doesn’t see it as driven by tax savings, either.

Local business leaders are pleased Burger King’s Miami headquarters would remain intact, along with its staff.

If anyone will feel the pain of this deal, it’s Burger King’s independent franchisees. Only 52 of its 13,667 restaurants are corporate-owned. In 2013, franchise restaurant revenues were four times that of company restaurant revenues, at $923.6 million and $222.7 million, respectively. So if customers stop eating Whoppers because they’re not American, it will hit the store sales of franchisees first. So far, they don’t seem concerned.

Guillermo Perales, who owns 191 Burger Kings in Florida and Texas, said that, if anything, sales are rising because of the backlash: “Besides the comeback of chicken fries, this is one of the best promotions we’ve had this year.”

Financiers, not franchisees, call the shots at Burger King. A global investment fund, 3G Capital, owns 70 percent of Burger King. It’s a Brazilian firm that has offices in New York and is used to crossing borders with its investments.

It’s betting Burger King customers will have short memories, or that the gains it achieves with its controversial move will overcome any losses in sales.

Some observers say it’s a safe bet.

“I don’t think Americans are concerned with where a brand is based,” said Darren Tristano, executive VP of Chicago-based food industry research firm Technomic.

Being labeled a corporate turncoat on social media hasn’t stopped companies from inversions. And ultimately, it’s problems with U.S. tax codes that are forcing some of America’s household names to leave, many tax experts have said.

Armando Hernandez, head of Hernandez and Co. CPAs in Coral Gables, said the advantages of tax inversion transactions can’t be ignored. After all, a company that doesn’t do an inversion faces steep taxes in the U.S. on earnings achieved abroad.

“If the tax adviser would recommend that their headquarters stay in the U.S., they would be committing malpractice,” he said.

Senior reporter Brian Bandell contributed to this report.

THE EVER-INCREASING MOVE TO TAX INVERSIONS

What is a tax inversion? A tax inversion describes when a U.S. company buys a foreign business and then shifts its headquarters outside the country – as Miami-based Burger King Worldwide (NYSE: BKW) plans to do with Canada’s Tim Hortons. Such a move carries many tax benefits for the companies, even though it largely stiffs U.S. tax collectors.

Why are tax inversions becoming more common? Companies are facing increasing costs, including modest ticks in inflation, higher health care tabs and even the potential for a higher minimum wage. At the same time, Canada and many European countries have cut their corporate tax rates.

What is the U.S. government doing about it? Almost nothing. While President Barack Obama has spoken out against the practice, tax reform is stalled in Congress.

What does the American public think? A wide swath of business-minded people believe anything a company can legally do to reduce its tax bill is a wise course. Others believe corporations should pay their share of income taxes. It’s an easily politicized issue. Walgreen Co. backed away from an inversion after too much of a backlash from its customers. Other companies have accomplished inversions without any backlash at all.

What are the benefits for a corporation? While they must still pay some taxes on their U.S. operations, companies achieve lower corporate income tax bills. Additionally, they can bring the cash they’ve earned overseas into their headquarters without paying taxes. This allows them to pay more dividends or invest in their operations. U.S. companies have accumulated about $2 trillion in cash overseas.

Does a company actually have to move its operational headquarters? No. Under current tax laws, companies don’t have to shift offices or executives overseas to be considered foreign. In the case of Burger King, the company will actually remain in Miami, but it’s corporate parent will be located in Canada.


Wahoo’s Grows Up

August 26, 2014

Ray-wahoosgrowsup-OCBJ-599x1024Paul Hughes

Orange County Business Journal

© 2014 Orange County Business Journal. Provided by ProQuest Information and Learning. All Rights Reserved.

Chain Gets Past Downturn, Puts Corporate Vet in Kitchen

Wahoo’s Fish Taco wants to keep it casual for customers even as it tightens up the way the 61-restaurant chain goes about its business.

That’s a shift for a company with laid-back Orange County roots-its dining rooms are monuments to surf and skate culture, with stickers for various brands dominating the decor.

It also is a response to some bruises sustained during the recent recession.

“Like everyone else, we’ve had a rough couple years,” said Wing Lam, a cofounder who is the chain’s public face.

The recession left behind a new catch phrase for established restaurant chains, he said: “Flat is the new up.”

It’s been up and down for Wahoo’s, according to Lam, with a dip last year. The Santa Ana-based chain’s 61 restaurants-34 company-owned and 27 run by franchisees-accounted for sales of $52 million, a 4% drop.

The chain is back on a growth track this year, according to Lam.

“We’ve had growth every month through July compared to the last two years,” he said.

Most of the restaurants are seeing revenue growth between 2% to 8%, he said.

The aim now is to establish a new approach that provides more structure to a lot of the processes that go into getting food to customers.

Lam and his brothers Ed Lee and Mingo Lee cofounded Wahoo’s with Steve Karfaridis, the company’s chief operating officer, in 1988. It grew into a small roster of restaurants and began franchising in 1993, often to the founders’ friends.

By 2010, it had 54 locations, including 21 franchises in California, Hawaii, Colorado and Texas, and was aiming for 70 in early 2013.

The push for expansion through franchising led to the 2010 hire of Tom Orbe as a vice president, an early step toward a more formal approach for the chain. Orbe was a franchisee himself and still operates a Wahoo’s in Temecula and another in Huntington Beach.

Trying to grow through the economic downturn produced mixed results.

Wahoo’s didn’t make it to 70 restaurants it has closed three since 2012, including one in New York, its first on the East Coast.

Deals in Arizona and Rhode Island also haven’t panned out.

The chain is adjusting, with plans to open a restaurant in Philadelphia in November. It’s rethinking its bid in New York, where the initial location was in Manhattan. It’s now eyeing suburban Westchester and Long Island for another try.

Wahoo’s added a location in Japan last year, and the chain wants more overseas.

It also has a big project in the works in its backyard: a restaurant at the Honda Center.

“Good Hard Look”

The strong start this year hasn’t deterred Wahoo’s from longer-term strategies.

“We’re taking a good hard look at systems and putting most of our resources there,” said Karfaridis.

He said Wahoo’s will bring point-of-sale, labor management and accounting to cloud based hosting.

Wahoo’s also plans to add ordering to its smartphone app, he said.

Another big effort is focused on supplier relationships, a key to containing costs and saving time.

A roasted salsa, for example, is shipped almost ready to Wahoo’s restaurants by a supplier working from one of the chain’s proprietary recipes.

“They create the base, and we finish it,” Karfaridis said.

Another supplier starts the teriyaki sauce, but each location completes it. A meat vendor pre-slices came asada-something that used to be done by Wahoo’s staff in the restaurants.

“As you grow, you come to a decision point,” Karfaridis said. “How do you preserve the spirit of the food while growing? How do you scale Wahoo’s without compromising quality?”

Balancing Act

It’s a balancing act for a chain that’s facing new levels of competition, said Darren Tristano, executive vice president of Chicagobased restaurant industry researcher Technomic Inc.

“They have to build on the menu and flavors without straying too far from the core tastes,” Tristano said. “The fish taco made them popular, but fish tacos are everywhere now.”

Karfaridis said customers often guided menus at individual restaurants.

“They’d say, T want my Maui bowl in a burrito,’ so we created the Banzai Burrito,” he said.

That produced good relations but inconsistent results across the chain.

Karfaridis said Wahoo’s wants to keep the close-up feel of the chain but streamline the process.

Wahoo’s brought on Raymond Martin in January to work on the menu.

He had stints at Huntington Beach-based BJ’s Restaurants Inc. and Calabasas Hillsbased Cheesecake Factory Inc.

Less Complexity

His mandate is to reduce complexity and costs in food preparation and presentation while maintaining or improving taste and service.

“You don’t want to waste steps or product, and customers are looking for new flavors,” Martin said.

He said he got a better price and more consistent product on tortillas through a new deal with Irving, Texas-based Mission Foods, a major supplier.

He focused on fewer ingredients with strong flavors-ginger, garlic and onions for its teriyaki sauce.

Martin cut the cooking time on came asada to retain more meat and juice. The beef continues to cook as it comes hot off the grill, ensuring its still cooked properly when it reaches the customer.

“You keep more meat, use less sauce and get the same amount of product,” Martin said.

He added a table salsa by tweaking Wahoo’s legendary pico de gallo-which is also still available-and is testing a spicy ketchup, a southwestern ranch sauce, smashed beans and seasoned onion rings.

Don’t expect sweeping changes-Lam said fish is still king.

Nearly half of Wahoo’s customers are going to eat something with fish in it, he said.

“You can get a chicken burrito from anyone,” Lam said. “But there’s only so much fish out there, and we have a great relationship with our suppliers.”

Honda Center

Martin estimated 80% of the menu has been improved in some big or small way.

Tristano said Technomic’s research on Wahoo’s consistently reveals high levels of consumer loyalty.

That meets the benchmark set out by the chain’s owners.

“Nothing will be compromised,” Karfaridis said. “We’re adding scalability and leaving the core qualities intact.”

Back in 2010, when Wahoo’s brought Orbe to boost franchising, he said the chain could grow to 400 or 500 locations but didn’t want to do it in “cookie-cutter” style.

Lam used the same term last year to describe what he intends to guard against in the latest push for growth.

“While Chef Ray is working, I’m out there gallivanting in the Wahoo’s (food) truck testing the theories,” Lam said. “Then he and I compare notes.”

Lam said not all of his ideas translate into good-or cost-effective-products on the wider scale that Martin’s been hired to oversee.

“He’s about process and presentation, and I’m about convenience and flavor, and we meet in the middle,” Lam said.

The results of the collaboration will get a showcase when Wahoo’s opens in the Honda Center this fall.

Success there could lead to another growth push and more hires for Wahoo’s management team, Karfaridis said.

“We can bring in people to do that,” he said. “This has been four guys doing all of it on the run for a long time.”

Wahoo’s Fish Taco wants to keep it casual for customers even as it tightens up the way the 61-restaurant chain goes about its business. A roasted salsa, for example, is shipped almost ready to Wahoo’s restaurants by a supplier working from one of the chain’s proprietary recipes. How do you scale Wahoo’s without compromising quality?” Balancing Act It’s a balancing act for a chain that’s facing new levels of competition, said Darren Tristano, executive vice president of Chicagobased restaurant industry researcher Technomic Inc. “They have to build on the menu and flavors without straying too far from the core tastes,” Tristano said.


Call it What You Like, but Not a Chain

August 13, 2014

By ANDREW ADAM NEWMAN

The New York Times

Copyright 2014 The New York Times Company.

Adco-master675WHITE CASTLE claims with pride that it is the first fast-food hamburger chain, and for good reason. It opened in 1921, just 15 years after Upton Sinclair’s ”The Jungle” exposed horrific conditions in meat-processing plants. With its pure-sounding name, white interiors and fully viewable food preparation areas, White Castle helped restore America’s appetite for beef, promising consistency regardless of which location a customer visited.

But today chain ownership is sometimes viewed as a negative by food aficionados seeking one-of-a-kind food trucks and microbreweries, and locavores celebrating restaurants that use ingredients close to home.

 

Now Legal Sea Foods, which has about 35 locations, most in the Boston area, is railing against the term. Its chief executive, Roger Berkowitz, argues in a series of new commercials that its seafood restaurants should never be called a chain.

 

”While Legal Sea Foods has a number of locations, we’re not a chain,” says Mr. Berkowitz, seated at a restaurant table, in one of the new spots. ”Each of our restaurants is unique, not cookie-cutter, so you can call me stupid, an egomaniac, or even an” — the word is bleeped and his mouth pixelized in a scene. ”Just don’t call me a chain.”

 

In another spot, Mr. Berkowitz is hooked up to a lie detector, and his interrogator asks if he is the owner of Legal Sea Foods, to which he responds ”Yes.” He is asked if it is a chain, to which he responds ”No” as the needles etch straight lines on the scrolling paper. ”Is the person who called Legal Sea Foods a chain a complete moron?” asks the interrogator. Stone-faced, Mr. Berkowitz pauses a moment, then responds ”No,” sending the needles scribbling wildly up and down.

 

The spots close with a new tag line for the campaign, ”Where chain is a four-letter word.” The campaign, which also includes print advertising, is by DeVito/Verdi in New York. The company declined to provide estimated advertising expenditures for the campaign, which will be introduced Friday in the six states, and the District of Columbia, where restaurants are.

 

Mr. Berkowitz, who since 1992 has run the company that his father started — first as a Cambridge fish market in 1950, then a no-frills fish restaurant in 1968 — has long insisted on using the term ”family” or ”group” to refer to his restaurants.

 

”When anyone thinks of a chain, they think of cookie cutter, institutionalized, dummied down, and those aren’t the best adjectives,” Mr. Berkowitz said in an interview.

 

”There’s sort of a built-in prejudice about it that really doesn’t define who we are and what we do.”

 

Unlike many chains, Mr. Berkowitz said, Legal is privately held, and its restaurants are all company-owned rather than franchised. Menus vary among locations, and the company has several iterations, like restaurants called Legal C Bar, which are more bar-focused, Legal Test Kitchen, which are faster and more focused on to-go offerings, and Legal Oysteria, which has a Northern Italian menu.

 

”People never associate chains with the kind of passion or quality that we put into our food,” Mr. Berkowitz said. ”So if we’re referred to in a review or something like that and ‘chain’ is used, whether inadvertent or not, there’s almost just a dismissive aspect to it that I find objectionable.”

 

The term can even give compliments a backhanded flavor, like a New Jersey food blogger who put this headline on a glowing review: ”Legal Sea Foods is a chain, it’s in a mall: and it does not suck.”

 

In the industry, however, others disagree on how to define ”chain.”

 

Technomic, a restaurant consulting and market research firm, considers a company with 10 or more restaurants to be a chain, said Darren Tristano, its executive vice president. He had no recollection of any of the top 500 restaurant brands that Technomic tracks proclaiming in advertising that they were not chains. (Legal, based on estimated revenue of $186.2 million in 2013, is ranked at 167 on that list).

 

Mr. Tristano lauded Legal as ”a brand that’s been around a while and knows its customer.” He added that he could understand why Mr. Berkowitz might feel ”pigeonholed” by some of the negative connotations. But he found something particularly ironic about the mere existence of the new advertising campaign.

 

”The single mom-and-pop type of restaurant does not have an advertising budget,” Mr. Tristano said. ”And it doesn’t have the economies of scale for purchasing that a 30-plus unit chain has,” he continued, ”so if you’re in the industry and you run a restaurant group that’s large, you’re a chain whether you like it or not.”

 

DeVito/Verdi has taken a provocative approach in much of its Legal work over the last seven years. For its first campaign, it promoted freshness in print ads with copy like: ”If our fisherman comes back with fish we don’t like, we throw the fisherman back,” and, ”Fish so fresh one time the main course took a bite out of the appetizer.”

 

In 2013, promoting the notion that omega-3 fatty acids found in fish promote brain function, the brand introduced a series of commercials and print ads that featured people doing stupid things. The ads included a man sawing off a branch as he sat on it, another man stopping a ceiling fan with his head, and a women shutting herself in a Laundromat dryer. The tag line: ”Fish is brain food. We have a fish.”

 

Ellis Verdi, president of DeVito/Verdi, said that the campaign about chains was unlikely to cause a drastic change — for now.

 

”My expectation is not to change the vocabulary necessarily, because that takes a while,” Mr. Verdi said. ”But we want to at least put it in their minds that this isn’t something that we like to be called or it makes sense to call us.”

 

In new commercials, Roger Berkowitz, chief executive of Legal Sea Foods, stresses the singularity of each of its outlets.


Juice Craze May Be Next to Tank, Analyst Says

July 22, 2014

As the demise of Crumbs Bake Shop, and its cupcake kingdom, roils the food industry, one analyst is already predicting the next hot trend that is likely to cool off: Juices.

That’s the word from Darren Tristano, executive vice president of restaurant research company Technomic.

In a blog this week, food guru Tristano wrote that juice concepts, while “all the rage today,” are at risk of over-saturation and too much competition. The Westfield Garden State Plaza in Paramus is now home to Jamba Juice and Freshu Grill and Juice Bar.

“With health and wellness getting more play from affluent and millennial consumers, it’s clear the cold-pressed juice concepts will be pushing hard to expand,” Tristano wrote.

“Even though these concepts have price points over $10 in major markets like Los Angeles and New York, it’s clear that Hollywood-starlet impact on our country with juice cleanses is evident. Juice specialists will likely expand quickly as the fad continues but the trend will settle into concepts that represent reasonable prices for the mainstream consumer.”

He predicted that big brands such as Starbucks’ Evolution Juice and Juice It Up will have an edge in this competition.

“But ultimately, the ‘craze’ will settle down and many restaurants will likely see declines in sales that make it difficult to continue their operations,” Tristano wrote.


Crumbs Bakery Chain Closes Up Shop

July 21, 2014

When Crumbs, the New York City-based chain that built its business around cupcakes, shuttered several dozen of its remaining locations on Monday, it seemed like an abrupt ending for a company that opened a decade ago to ride the wave of popularity of the sugary treat sparked by the TV series Sex and The City.

But Crumbs’ rise and fall isn’t surprising when considering the company’s dependence on a fad. In fact, it’s the latest cautionary tale for one-item restaurants and other chains that devote their entire menus to variations of a single product.

- Krispy Kreme, for instance, expanded rapidly in large part on the cult-like following of its doughnuts. But sales started declining and the company ended up closing locations. Last year, restaurant industry researcher Technomic said Krispy Kreme had 249 locations, down from 338 a decade ago. The chain has broadened its menu more recently.

- A similar fate befell Mrs. Fields, which is known for its cookies. The chain has suffered in part because of the ubiquity of places that sell cookies, and it was down to 230 stores last year, from 438 a decade ago.

- TCBY had 355 stores last year, down from 1,413 a decade ago. Part of the chain’s problem is the competition, given the proliferation of frozen yogurt places.

Companies that only offer one item can fall victim to a number of risks. For one, trendy products tend to attract competition from big and small players that want to jump on the bandwagon. For instance, Starbucks and Cold Stone Creamery have been trying to capitalize on the cupcake trend with cake pops and ice cream cupcakes, respectively.

Being beholden to a single item also makes companies more susceptible to customers’ whims and changing tastes. There’s always a new fad. Frozen yogurt. Chopped salads. Freshly squeezed juices. Entrepreneurs may be eager to open stores selling these products, but there’s always the danger that fickle customers will move on to the next thing.

“A cupcake shop today can’t survive on just cupcakes,” said Darren Tristano, a Technomic analyst.

To combat the risks, many chains diversify their menus. And several have prospered by moving beyond their flagship products.

Dunkin’ Donuts, for instance, has been pushing aggressively into specialty drinks and sandwiches, with a focus on boosting sales after its morning rush hour. And Starbucks has introduced a range of new foods and drinks in its cafes, including premium bottled juices and salad boxes. The coffee chain even plans to expand wine and beer offering in evenings to as many as 1,000 locations over the next several years.

Magnolia, another popular New York City cupcake shop, is credited for sparking the cupcake craze after it was featured in Sex and the City.

The chain, which opened in 1996, has endured while many of the cupcake shops that opened up in its wake – including Crumbs – focused on just cupcakes. That’s in part because Magnolia, which now has 7 locations, offers a variety of desserts, including cakes, pies, cookies, brownies and banana pudding.

Sara Gramling, Magnolia’s spokeswoman, said the company is learning about the dangers of focusing too heavily on one product, as well as expanding too quickly.

“We’ll be mindful of those lessons,” she said.

Still, some chains manage to persevere by carving out a niche where there aren’t many competitors; Auntie Anne’s and Cinnabon have expanded locations over the years.

As for Crumbs, the company noted in a statement late Monday that it was evaluating its “limited remaining options.” That will include a Chapter 7 bankruptcy filing.


How Does the Cupcake CRUMB-le

July 9, 2014

pictureWas anyone surprised by the recent demise of the Crumbs Bake Shop? For those who read the Wall Street Journal article about the gourmet-cupcake crash in April 2013, or those that had invested in the publicly traded company, it should not have been unexpected.

Last April, it was clear that the “cupcake fad” was crumbling right at the time Crumbs Bake Shop was expanding locations and working hard to be the category leader in the high-growth cupcake snack segment.

So what went wrong?

With Crumbs following in the footsteps of high-flying brands like Mrs. Fields, TCBY, Cold Stone Creamery and Krispy Kreme, consumers have proven that they are very fickle about where they shop for indulgence. As more independent and regional chains of cupcakeries grew nationally, the strong demand and growth provided short-term evidence that the trend was hot and would continue. But supermarkets jumped in with significantly lower price points, and consumers began baking cupcakes at home for even less. Kids’ lemonade stands across America began offering cupcakes for 50 cents, and the obsession with this traditional classic fell flat.

Brands that rely on a narrowly focused product will have greater risk. Although In-N-Out Burger has fewer than 10 items including burgers, fries, soda and shakes, it continues to do well by expanding slowly and cautiously and staying in tune with its customer. Overall, a bakery positioning with a broader offering and strong beverage platform could have strengthened the Crumbs business model with a bigger play at lunch to complement their breakfast and snacking occasions.

How have other brands fared with more narrowly focused offerings?

Mrs. Fields brought fresh baked cookies to America and by 1993 had nearly 600 stores open in malls around the country. At a time when malls were very popular, many consumers couldn’t get enough of those chocolate chip cookies. Today, there are less than 230 locations open and some have paired up with frozen yogurt brand TCBY to provide more variety in the co-branded location.

TCBY was the original leader in fro-yo until gourmet ice cream stole the show, forcing many stores to close. TCBY peaked in 1997 with more than 2,800 locations in the U.S. Americans’ willingness to pay more for what they considered “better ice cream” was evident as many brands emerged in the premium ice cream category including Ben & Jerry’s, Cold Stone Creamery, Marble Slab and Maggie Moo’s.

Krispy Kreme’s exceptionally craveable glazed donuts became President Clinton’s favorite and soon worked their way into regular consumption across the country. Peaking in 2004 with nearly 400 units, the donut company had sales in the U.S. of over $1 billion. Then came Atkins and low-carb diet trend. Krispy Kreme’s narrow focus on donuts paired with aggressive expansion put it at risk and caused it to shutter nearly half its restaurants by 2010. Today, Krispy Kreme has continued to expand globally and has started to open new stores in the U.S., posting a year-end 2013 total unit count of 249.

Cold Stone Creamery captured the hearts and wallets of many American consumers by introducing gourmet ice cream, customized on a cold slab with mix-ins. Although the chain continues to provide frozen desserts to many Americans, it does so with far fewer locations since its peak in 2007 at around 1,400 locations. Cold Stone Creamery ended 2013 with 990 stores in the U.S.

So what are the early warning signs for when a brand or category may be at risk?

Early warning signs appear as the category becomes more competitive. Category leaders begin to slow unit expansion, and same-store sales level out. As many brand leaders push expansion nationally, they begin to see greater competition from regional chains and independents that are in tune with the local consumer base. As more regional chains expand nationally and begin to battle for share in larger markets, new locations result in cannibalization and often consumers trying new brands just to see if they are different.

Strong blocking and tackling efforts are necessary to maintain differentiation and loyalty. Customers can be easily lost if franchise and company stores don’t deliver high levels of service and quality standards.

When does a segment become mature?

Many up-and-coming categories show high growth in unit expansion that drives sales volume growth. When longer-term sales growth shifts from high growth (above 5 percent) to lower growth (below 5 percent) you can usually see that the consumer interest is plateauing or that supply has caught up with demand.

In some cases, older legacy brands may be on the decline, offsetting growth from more contemporary concepts. Or menu-category products have been introduced into other segments, such as flatbread pizza in casual dining competing with limited-service pizza or more seafood options in the steakhouse segment competing with seafood-focused restaurants. In any event, declining growth rates generally show the state of the category and where it is headed.

Which segment is hot today but at risk in the short-term?

Juice concepts appear to be all the rage today. With health and wellness getting more play from affluent and Millennial consumers, it’s clear the cold-pressed juice concepts will be pushing hard to expand. Even though these concepts have price points over $10 in major markets like Los Angeles and New York, it’s clear that Hollywood starlet impact on our country with juice cleanses is evident. Juice specialists will likely expand quickly as the fad continues but the trend will settle into concepts that represent reasonable prices for the mainstream consumer.

Expect major brands like Starbucks’ Evolution Juice and Juice It Up to have a leg up on the competition, but ultimately, the “craze” will settle down and many restaurants will likely see declines in sales that make it difficult to continue their operations.

For cutting edge trend research and results, always keep Technomic in mind!


Quiznos Moves Toward Bankruptcy Filing

February 28, 2014

Sandwich chain Quiznos is preparing to file for bankruptcy-court protection within weeks as it contends with unhappy franchisees and a $570 million debt load, according to people with direct knowledge of the matter.

Quiznos has been negotiating with creditors for weeks on a restructuring plan that would streamline its trip through bankruptcy court, these people said, but a deal hasn’t yet been reached.

The chain’s move toward bankruptcy comes two years into a major turnaround effort that included an out-of-court debt restructuring and a management shake-up. While a Chapter 11 filing would give the company much-needed flexibility on leases and unattractive contracts, the company must repair its damaged relationship with franchise owners who say they’re being squeezed out of business by the high cost of operating a Quiznos outlet.

“If a brand wants to succeed, its franchisees have to succeed,” said Darren Tristano, executive vice president at restaurant consulting firm Technomic Inc.

Thousands of Quiznos locations have shut down in recent years as the company’s competitors have opened new locations at a rapid pace. Quiznos’s world-wide store count now stands at about 2,100, while its chief rival, Subway, has 41,000.

Founded in 1981, Quiznos was considered innovative at the time with its toasted subs. But its sales have suffered as Subway offered a $5 foot-long sandwich starting in 2008 and new competitors such as Potbelly Corp. PBPB -0.84% and Jimmy John’s Franchise LLC moved into the crowded sandwich market.

In its heyday in the mid-2000s, Quiznos stores, on average, rang up $425,000 in annual sales; since then, that figure has dropped to around $300,000 for the top-performing stores and to far less at the weakest stores, according to people familiar with the matter.

Quiznos franchisees say they’re struggling to stay in business. In addition to the fees the company charges them to use its name, store operators must also buy most of their supplies and ingredients from Quiznos’s distribution business.

Franchisees long have complained that the subsidiary charges more than what they would pay to purchase those goods elsewhere.

Mr. Tristano said the fees Quiznos collects from franchisees—7% in royalty fees and another 4% for advertising—is higher than the industry average of 6% in royalty fees and 2% for marketing.

Fabian Andino opened a Quiznos franchise in 2006 in Port St. Lucie, Fla. It wasn’t long before he realized that he was paying higher prices for items like tomatoes through Quiznos’s distribution business. To save money, he bought produce from local farms but said the company charged him weekly penalty fees for not placing minimum food orders.

A person close to the company said it didn’t assess such penalty fees, but that franchisees who wanted to receive rebates for food costs were required to place minimum orders.

When Quiznos decided to offer delivery service in 2008, he recalled, franchisees were told to pay $10,000 to the company in return for signs and decals for their delivery cars and in-store inserts.

“They marketed it as though it would be the magic wand that would save the operation, but I knew it was another ploy Quiznos was using to raise more funds for them,” Mr. Andino said. “I refused.”

Mr. Andino said the company withdrew the payment request and supplied him with the materials free of charge. He said he couldn’t make his Quiznos business work and closed his store in late 2009.

“Quiznos did not have the proper name recognition or great marketing,” said John Medici, a 71-year-old retired warehouse manager in Longwood, Fla., and onetime Quiznos customer. “You have to give people the impression that your food is better than the food down the street.”

Steven Raposo said he spent a total of $350,000 to open a Quiznos franchise in Norton, Mass., in 2005. He said he and his family soon realized they wouldn’t be able to bring in enough money to cover expenses and put the franchise up for sale. They sold the business less than a year later for about half the price.

Mr. Raposo said his annual sales would have been about $600,000, but he was still facing monthly losses of between $3,000 and $5,000.

“It sounds like we were doing a lot [of business] but there was actually no profit because of food costs and labor,” said Mr. Raposo, a practicing chiropractor.

To address franchisees’ concerns, Quiznos management cut food and supply prices last summer, a person close to the company said in December. The company has also tried to improve store operations in the U.S. by making sure restaurants were clean, adding new menu items and removing slow-selling ones.

But so far, Quiznos’s turnaround efforts haven’t met expectations and the company has missed key performance targets, according to people familiar with the matter. The company also has a high debt load for its size, in part the legacy of a 2006 leveraged buyout.

Quiznos missed a loan payment at the end of 2013 and has been operating under a forbearance agreement with its lenders, which delays a potential default, as it negotiates with creditors including Fortress Investment Group FIG +1.87% LLC, Oaktree Capital Management and Avenue Capital Group, which is also its majority owner.


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