viernes, 19 de septiembre de 2014

The Government Keeps Helping People Buy Failing Cold Stone Creamerys (BusinessWeek)



Would you loan someone money to buy a Cold Stone Creamery franchise if you knew that more than a quarter of those loans default? If you’re the U.S. government, the answer is yes.
Over the last decade, franchisees in the Cold Stone Creamery ice cream chain defaulted on 29 percent of working-capital loans backed by the government, costing taxpayers tens of millions of dollars, according to an analysis of Small Business Administration data published by the Wall Street Journal last week. The default rate for Quiznos, the sandwich chain that filed for bankruptcy in March, was 30 percent.
The franchising model offers would-be entrepreneurs the promise of a business in a box. Pony up some cash and get an established brand. Follow the franchisor’s instructions for running the business and sales should blossom—except when they don’t.
Cold Stone and Quiznos didn’t account for the worst failure rates, but their franchisees left taxpayers holding the biggest bills, with more than $72 million in charged-off loans between the two chains. Both brands remain eligible for SBA-backed loans, according to the website Franchise Registry.
Michael Serruya, chief executive officer at Kahala Brands, which owns Cold Stone, says in an emailed statement that the chain’s default rate was caused by “extreme growth” in the years leading up to the recession.  Quiznos franchises failed due to “high rent, increased competition, and economic pressures,” among other reasons, according to an e-mailed statement from Elizabeth Sapp, vice president for communications.
Why does Uncle Sam keep guaranteeing loans for franchises that so often go bad? The agency’s inspector general found little attention paid to default rates in a report(PDF) last year: “The SBA continued to guarantee loans to high-risk franchises and industries without monitoring risks,” the watchdog reported. That lax oversight makes the government partly responsible for allowing people to invest in risky franchises, says Keith Miller, chairman of the Coalition of Franchise Associations, a franchisee group: “Banks wouldn’t have made the loans if it wasn’t for the guarantee.”
Franchise loans make up less than 10 percent of the SBA’s main program, known as 7(a), and overall they perform similarly to other loans, according to SBA press secretary Miguel Ayala. Private lenders that underwrite the loans appear to have factored in franchise chains’ high default rates, and “in many instances have stopped making loans to franchises beginning to lose their momentum even before the SBA loans started defaulting,” Ayala wrote in an email. The SBA backed 26 loans for Cold Stone Creamery and Quiznos franchises combined since the 2012 fiscal year, for a total of $2.3 million, according to Ayala.
It’s also true that no one forces franchisees to take out loans. Why would anyone buy into franchise systems with such high default rates?
Buyers may fail to do enough due diligence, and the law doesn’t require franchisors to share a lot of information that might help them. For example, franchisors don’t have to disclose default rates or average first-year store revenues with potential franchisees.
Nor does the SBA publicize the data. The Journal had to file a Freedom of Information Act request to get it. A handful of websites highlight chains with records for poor performance, but those watchdogs’ warnings can be hard to find.
Meanwhile, chains have a lot of incentives to sell new franchises. Franchisors themselves get upfront payments for selling new units, as well as a share of franchisees’ revenue. If a store goes bust, the franchisor can resell the license and collect a new fee. Beyond the franchisors themselves, there are a bevy of consultants and brokers who talk up the franchising model, for a price. Banks also profit from selling the franchising model—especially since the SBA limits lenders’ downside by guaranteeing as much as 85 percent of loans that go bad.

Clark is a reporter for Bloomberg Businessweek covering small business and entrepreneurship.

jueves, 18 de septiembre de 2014

September Is the Cruelest Month for Restaurants (BusinessWeek)



If you’ve been noticing a lot of restaurant promotional deals recently, you aren’t imagining things—it’s a real phenomenon. The restaurant business falls off a cliff when Labor Day hits, the summer ends, and kids go back to school. That’s why all those companies have to start offering deals to fill the gap. That all-you-can-eatNever Ending Pasta Pass from Olive Garden (DRI) isn’t a gimmick: It’s part of a real business strategy backed by hard data.
 
Look at the chart below: The amount the average customer spends at casual dining establishments is worse now than at any other time of the year.

Matt Drewes, ‎senior vice president for national restaurant partnerships atCardlytics, says that with the start of the school year, “families are dining at home more and not going out as much,” in part to save money for new clothes and school supplies. “Restaurants take the hit from everybody else who makes money in back-to-school [time],” he says.
In the past decade, Labor Day has signaled a significant drop in the frequency of visits to restaurants. On the whole, the bigger chains have been able to combat that by offering promotions aimed at luring customers back—even if that means lower average prices. Their deals are designed to last only through those few weeks of softness. Notice the Endless Shrimp deal at Red Lobster goes from Labor Day until Nov. 2. And that Never Ending Pasta Pass only lasts seven weeks—Sept. 22 through Nov. 9. You can expect to see all-you-can-eat ribs, all-you-can-eat pancakes, 2-for-$20 deals, and other fixed-price promotions. “The bigger chains want to advertise an attractive price point and highlight in their commercials how families and larger groups of people should come out,” Drewes says. “They have created promotional events to fill the gap of fewer customers.”
Drewes estimates that 20 percent to 30 percent of guests are taking advantage of promotions. Most retailers are OK with that, making the tradeoff for lower average sales figures in order to get higher traffic.
As public companies, the major restaurant chains need to consistently drive up third-quarter earnings every year. That’s why they keep testing and tweaking new strategies to get people in the door. It’s very possible the $100, seven-week Never Ending Pasta Pass promotion at Olive Garden is just a test to see how people behave. Will customers come to the restaurant more than 10 times in the seven weeks, turning the promotion into a loss for the company? Should it have been a seven-week deal, compared with six or eight? These are the questions management is constantly working through. “It can’t be a big national campaign until they figure it out,” says Drewes. “Are we going to make money on this? That’s the question they always want to know.”
In the chart, you’ll see the rest of the year highlighted by peaks—such as Thanksgiving and the Christmas holiday season. Valentine’s Day is big, too—but the whole week gets the benefit as some people go a few days before or after Feb. 14 to avoid the massive crowds. Mother’s Day Sunday is particularly huge, and June features the benefit of school graduations and Father’s Day. But the next few weeks are a dead zone for restaurants—no holidays or special occasions to eat out. Unless you really like pasta.

Chemi is head of research for Businessweek and Bloomberg TV.