Wiggin and Dana's Franchise Law Blog

While Denny's Unloads 66 Franchisee-Operated Restaurants to Ease its Debt

Denny's Corp. has agreed to sell 66 more of its company-owned and franchisee-operated restaurants to a real estate investment trust for $67 million, to reduce its debt, this article reports, bringing the total number of formerly-company-owned locations it has sold this year to 80. The franchisor plans to sell the remaining 13 such properties as well.

Drop-off in e-Bay Drop-off Franchises

Check out this article for an interesting look at the history of eBay drop-off store franchising, from its humble beginnings in 2003, to apparently raging success in 2005 with approximately 7,000 locations across the country, to today, when, according to the author, serious questions are arising as to the strength of the concept, which is plagued by low profit margins, high operating costs, and weak inventory flow, among other issues. The author offers the example of iSoldit, the largest U.S. and Canadian franchisor, which claims to have over 900 stores "under contract" and to project expansion to 3,000 stores in 50 states. In fact, the system has only 182 stores currently operating, and acknowledges that it is still "conducting studies" to determine the feasibility of expanding to even a 1,000-store range. The author concludes that "Not all is gloom and doom. Many eBay drop-off stores continue to prosper. But given the initial outlay, the tight profit margins and overhead in the brick-and-mortar model, the drop-off store business is not for eBay or business neophytes. ... Those inexperienced on eBay who plop down a pile of money and think they will live off the eBay name-sizzle are in for a disappointment."

Krispy Kreme – the Great Circle Shrinks

According to this article, in what Krispy Kreme Doughnuts Inc.’s CEO called “another step in the turn around of Krispy Kreme,” Krispy Kreme settled litigation with its largest franchisee in Southern California, Great Circle Family Foods LLC. Great Circle sued Krispy Kreme, alleging that Krispy Kreme tried to force Great Circle into bankruptcy. Under the settlement, Krispy Kreme subsidiary Southern Doughnuts LLC will buy three Krispy Kreme franchises from Great Circle for $2.9 million, leaving Great Circle with 17 franchises. Earlier this year, Krispy Kreme revoked Great Circle’s license for failure to pay royalties and fees, but that aspect of the parties’ dispute settled quickly when Great Circle agreed to resume payment. Over the past year, Krispy Kreme has been reducing its number of stores in an effort to improve its performance.

Howdy, Partner

J.P. Morgan Partners, a private equity affiliate of J.P. Morgan Chase, announced earlier this week that it will become an ownership partner in Quiznos. The sandwich chain has been on the auction block since December. In February, we reported that two private equity firms decided to pass on making an offer for Quiznos. Interestingly, J.P. Morgan will have an interest stake but is not buying out the chain. Terms of the agreement, however, were not disclosed. Quiznos Chairman and CEO Rick Schaden believes that J.P. Morgan “... is the ideal partner ...” and will help Quiznos “ ... leverage the strong and unique platform that Quiznos has put in place...”

The Home Depot Acquires Chem-Dry

The Home Depot announced on Monday in this press release that it has acquired Chem-Dry. Chem-Dry is the franchisor for the world’s largest carpet and upholstery cleaning provider and has nearly 4,000 franchises worldwide, including 2,500 in the United States. Chem-Dry will be part of The Home Depot’s At-Home Services division, which provides various installations services to customers including flooring. The Home Depot expects that Chem-Dry will now have the opportunity to leverage The Home Depot’s 11,000 daily At-Home Services appointments. Terms of the acquisition were not disclosed.

Look Who's Talking Now

As reported in the December 16 blog entry, Quiznos is for sale and could fetch as much as $2 billion. Quiznos’ former public shareholders, whose shares were acquired when management took the company private in 2001, want to know how the company’s value changed so quickly. In this article from the Rocky Mountain News, these former shareholders state that the current potential price is further evidence that the 2001 buy-out price was not fair.

In 2001, Dick and Rick Schaden, the father and son owners of the company, announced a going-private transaction at $8.50 a share. A number of shareholders sued, protesting the low valuation. Quiznos argued that the company’s profits were falling below expectations because of increased expenses due to competitive threats from Subway, McDonald’s and Arby’s. Quiznos also argued that its future growth prospects at the time of the going-private deal should not be considered. In January 2004, Denver District Judge Robert McGahey held that the company’s fair value was $32.50 a share and that Quiznos acted in “bad faith” when it offered shareholders only $8.50. In a separate class-action suit by shareholders who failed to dissent properly to the going-private transaction, plaintiffs were to receive $12.90 a share in settlement. That settlement was ratified over the objection of some shareholders by Denver District Judge Morris Hoffman, and some of the shareholders are appealing. They say that plaintiffs’ lawyers provided inadequate counsel.

Ed Sebesta, the lead plaintiff in the separate class-action suit, referring to the current sales price stated, “It validates what we were always saying.” In 2001, Sebesta got around $100,000 for his shares at $8.50 per. Sebesta says that at today’s valuation, his shares would be worth between $5.8 million and $9 million. Sebesta contends that the 2001 price was artificially controlled by management and just too cheap.

. . . When You Baby Talk

Quiznos, a purveyor of toasted submarine sandwiches, is apparently on the auction block. The Denver-based sandwich chain is said to have hired Goldman Sachs Group Inc. to find buyers and could sell for as much as $2 billion. Private equity firms are expected to be the most active bidders because, according to this New York Times article , franchising companies typically have high overhead costs that can be cut, and they have a steady cash flow. Quiznos is the fastest-growing sandwich chain in the country and is second only to Subway in number of sandwich restaurants.

Quiznos has had its share of legal battles. Over the last several years the former wives of Dick and Rick Schaden, the father and son owners of the company, have sued them over valuation issues. Quiznos has also been hit with a number of franchisee lawsuits, alleging encroachment and that Quiznos overcharged for food and materials. Quiznos described the franchisee lawsuits as meritless.

Do What Works Right

Billionaire Nelson Peltz (of Snapple and Arby’s fame), has decided he doesn’t like the way Wendy’s is run and he wants to change it. Through his new private investment fund Trian, Peltz has acquired about 5.5 percent of Wendy’s. According to this New York Times article, Trian styles itself as an “operational activist,” one which becomes very involved with operational details of its investments. Trian has written a detailed white paper picking apart Wendy’s operations and has made a list of ways to revive the lagging business, including slashing about $200 million from corporate overhead.

In response to similar criticisms, Wendy’s announced plans in July to spin off 15 to 18 percent of Tim Hortons, its Canadian coffee and baked goods chain, in an initial public offering. Trian estimates that Wendy’s shares could be worth $77 to $89 each if its suggestions were followed; Wendy’s shares closed Tuesday at $51.37. Not stopping at its proposal on the Wendy’s operations, Trian is also expected to seek a complete spin off of Tim Hortons and the sale of Wendy’s Baja Fresh, Café Express and Pasta Pomodoro chains.

Looking Positive, Luther

As a follow-up to the October 11, 2005 blog entry, French beverage company Pernod Ricard SA has agreed to sell Dunkin’ Brands. A group of private equity firms, comprising of Thomas H. Lee Partners, the Carlyle Group and Bain Capital, agreed to pay $2.43 billion for Dunkin’ Brands, which includes Dunkin’ Donuts, Baskin-Robbins ice cream parlors and Togo’s sandwich stores. As reported here, other bidders reportedly included a syndicate led by Kohlberg Kravis Roberts & Co. and Trimaran Capital Partners, and a group led by Providence Equity Partners and J.P. Morgan Partners. The sale is expected to be completed early in 2006, subject to regulatory approval. The buyout group plans to continue expansion of Dunkin’ Donuts outside of the Northeastern United States. Dunkin’ Donuts has more than 6,000 stores in 30 countries and has a goal of 15,000 stores.

"I’m feeling very, very positive," said Dunkin’ Brands Chief Executive Officer Jon L. Luther.

7-Eleven Inc. Board of Directors Recommends Shareholders to Accept Tender Offer From Seven-Eleven Japan

7-Eleven Inc.'s Board of Directors recommended on Friday that its shareholders accept an offer from Tokyo-based Seven-Eleven Japan Co. Ltd. ("SEJ"), which already owns all but 27.3% of the Dallas-based convenience store conglomerate, to buy the remaining portion of 7-Eleven Inc. for $37.50 a share. According to one news source, the new offer came after 7-Eleven rejected SEJ's initial offer of $32.50 a share on September 22 as inadequate and "not in the best interest of shareholders." 7-Eleven operates or franchises approximately 5,800 convenience stores in the United States and Canada and licenses about 22,7000 stores worldwide.

Cendant Corporation to Split into Four Separate Public Companies

As reported by Forbes.com,Cendant Corporation announced today that it will split into four separate public companies next summer when the company spins off 100% of the equity of the three new companies to its shareholders. One of the new companies will take over Cendant's hospitality businesses, while the other three will focus on real estate, travel booking and car rentals. The company in charge of Cendant's real-estate services, which will include the Century 21 and Coldwell Banker brands, will take with it the largest share of the conglomerate's revenue — about 40%.

Cendant Completes Wyndam Acquisition

Cendant Corporation, a global provider of consumer and business services in the travel and real estate industries, completed the acquisition of the Wyndham brand and franchise system yesterday for $101 million. See September 19, 2005 blog entry. As reported by one news source, the newly renamed Wyndham Worldwide will operate as a separate entity within Cendant Hotel Group.

Franchisees Get Beat On Access to Products

Beat the Bookstore is a franchise chain of bookstores specializing in the sale of college textbooks. The company is apparently facing challenges among academic institutions resistant to losing their target market. Five months ago, Beat the Bookstore filed a lawsuit against Utah Valley State College (UVSC) for refusing to provide the franchise company's founder, David Monk, its list of required textbooks. Now, its Colorado franchisee is facing a similar problem. As reported by one local news source, Colorado University (CU) has placed a $3,000 to $3,500 price tag on the list of books its students are required to buy this fall. The franchisee claims that the hefty price tag is unreasonable and violates Colorado law prohibiting public institutions from charging more than the actual cost of copying public information (such as the list) under the Colorado Open Records Act. CU officials, on the other hand, argue that the franchisee is not being treated any differently from other vendors, such as a competing bookstore owned by Barnes & Noble that pays more than $3,500 each semester for copies of professors' book requests. Although the franchisee is unsure whether he will take the dispute to court, he may be hoping that the resulting publicity will encourage CU to cooperate, just as UVSC did five months ago. No word yet on whether Beat the Bookstore plans to intervene on its franchisee's behalf.

Bidder Interest in Dunkin' Brands

After acquiring Allied Domecq this year, Pernod Ricard, a French wine and spirits manufacturer, is looking to divest itself of the Dunkin' Brands segment of the Domecq empire. The sale has generated interest among potential bidders despite an estimated sales price of $2.5 billion. This article from MSNBC.com suggests that potential bidders may include some very powerful names, including Triarc (owner of the Arby's system), Doctor's Associates, Inc. (Subway franchisor), Texas Pacific Burger (owner of the Burger King system) and some private equity groups. Pernod expects bids by the end of October and hopes to complete the sale by year-end.

Cendant Corporation Buys Wyndham Brand

Cendant Corporation, one of the world's largest franchisor of hotels and residential real estate brokerage offices, announced last week that it has agreed to buy the Wyndham brand and franchise system for $100 million. The deal, which covers 100 hotels in the United States, Mexico and the Caribbean, will transform Cendant from a pure franchising entity into a diversified management and franchise company for the first time in its 15-year history. The deal also includes the worldwide rights to the Wyndham brand for time-share development and sales. As reported in its own press release, Cendant will acquire franchise agreements for 82 hotels and management contracts for 29 hotels from Wyndham International Inc., an affiliate of The Blackstone Group. The transaction is scheduled to close next month and is subject to the satisfaction of certain closing conditions, including regulatory approvals.

Franchisee Advocate Group Claims GNC Thwarted Prospective Members

As reported by a local Pittsburgh newspaper, a newly-formed General Nutrition Operators Association ("GNOA") claims that health food and supplement giant GNC has been undermining its efforts to form a franchisee association. The GNOA claims that vendors who agreed to contribute free products and offer discounts for new members were "warned off" by the company. GNC denies the claim. Although GNC has approximately 1,241 domestic franchised stores, the GNOA has signed only a small number of members, and GNC denied that it even knew of the new association's existence. While certain state laws prohibit a franchisor from preventing or interfering with a franchisee association, the franchisor is under no obligation to deal with the association, once formed. In a statement, GNC announced its policy that it does not endorse independent associations.

GNC has recently been working through litigation with 400 franchisees over the company's marketing practices. The case was scheduled for mediation on Friday. For more about franchisee associations generally, click here.

PepsiCo International Signs Franchise Agreement in South Africa

PepsiCo International announced today that it has entered into a franchise relationship with Pioneer Foods, a leading South African food and beverage company, as its franchisee in the Republic of South Africa. As reported in a PepsiCo press release, the franchise agreement grants Pioneer Foods' beverage subsidiary, Ceres Fruit Juices, the right to manufacture, bottle and distribute a range of PepsiCo soft drinks in South Africa. The agreement was signed by Pioneer Foods director and former South African ambassador to the United States Dr. Franklin Sonn.

Franchising for the Future

As discussed recently in a CNN article, changes in demographics can significantly impact the business strategies of franchise systems. For example, the aging baby boomer generation has triggered an increase in franchises specializing in household and healthcare services. According to one franchise business consultant, some of the most successful franchise businesses in the next few years will be those providing cost-efficient services, both medical and non-medical, for the aging population.

Investment Firm Purchases Wyndham International, Inc. for $3.2 Billion

An affiliate of Blackstone Group, a New York-based private investment firm, announced today that it has agreed to acquire Wyndham International, Inc. for $3.2 billion. As reported by an Ohio news source, Blackstone Group will pay $1.15 per share in cash for each share of Wyndham's common stock. Wyndham International, Inc. owns, leases, manages and franchises hotels and resorts through more than 20 hotel brands, including its own Wyndham Hotels & Resorts and Wyndham Garden Hotels, as well as Doubletree, Hilton, Holiday Inn, Hyatt, and Marriott.

McDonald's to Expand in Russia

As reported by the St. Petersburg Times, McDonald's plans to spend up to $50 million to expand its presence in Russia by 20% this year, with plans to commence franchising operations within 3 years. Khamzat Khasbulatov, head of McDonald's operation in Russia, said that McDonald's will open 25 new restaurants in Russia this year to add to the 129 restaurants now operating throughout the country. According to Khasbulatov, McDonald's, which owns and operates all of its Russian restaurants, plans to improve its breakfast sales to offer its Russian customers a place to have breakfast outside of their homes.

Rockin' Franchises

Paul Green, founder of the Paul Green School of Rock Music, is the focus of this month's new release "Rock School," a nonfiction documentary about Green's Philadelphia-based rock music school. As reported by the New York Times and the Philadelphia Inquirer, Green, who started the after-school music program in 1998 in his own living room, owns 5 other schools and licenses 3 others. He hopes to have 50 to 100 Paul Green School of Rock schools nationwide - some company-owned and others as franchises - in the next two years. Green, who is still refining the franchise contract for those new schools, considered suing the filmmakers of the 2003 comedy "School of Rock" (starring Jack Black) for basing their movie on Green and his schools without permission. He never filed suit.

Arby's Parent Buys Mega-Franchisee for $306.9 Million

Triarc Cos. Inc., parent of Arby's fast-food chain, announced today that it will buy its biggest franchisee, RTM Restaurant Group, for approximately $306.9 million. Headquartered in Atlanta, Georgia, RTM operates 775 of the approximately 3500 restaurants in the Arby's franchise system. According to a press release issued by Triarc in January, the purchase, combined with a merger of Arby's entities and a public offering of Arby's stock to finance the deal, will make Triarc the majority owner of Arby's.

Chic Convenience

Convenience stores are not known for their design-savvy or aesthetically pleasing environments, but that is all about to change according to Convenience Store News. Recently, numerous convenience store chains have shelled out substantial sums to improve both the interior and exterior of their stores. For example, Toronto-based Suncor Energy Products, Inc. (a wholly owned subsidiary of Suncor Energy Inc.), with 74 franchised Sunoco locations in Canada, opted for a full-scale makeover in 2003. Inside the stores, Suncor added modern touches to the stores, refreshed the interior with bolder colors, architectural detail and bright color-coded merchandise zones with graphic lettering. On the outside, Suncor refaced each location with stucco for a unified look and added bright colors near the door. Suncor undoubtedly hopes that these aesthetic improvements will increase profits, just as they have done for Maine-based C.N. Brown Company, operators of 94 Big Apple Food Stores, which saw a 3 to 4 percent increase in store sales from the recent interior redesign and renovations at its stores.

Carl's Jr. Looks To Canada

As reported in The Globe and Mail, CKE Restaurants, Inc., parent company of fast-food chain Carl's Jr., announced recently that it is planning to enter the Canadian restaurant market. According to the company, it will focus on urban areas in British Columbia, Alberta and Ontario, and plans to open new franchises in those areas within the next 18 months. In 1997, the company paid Imasco Ltd. $457 million for the Hardee's burger chain, but hopes of expanding that chain in Canada were thwarted when patent infringement issues arose between Hardee's and Canada's Harvey's chain.

Yum! Buys Russian Rival Rostik's

Sources claim that Yum! Brands intends to buy Russian fast food giant Rostik's, KFC's key competitor of KFC's in Russia. Although both companies have declined to officially confirm this report, those close to the negotiations suggest that a $18 million to $30 million deal could be sealed as soon as this week. Yum!, already a global fast food giant and parent to more than 33,000 Pizza Hut, Taco Bell and KFC restaurants worldwide, is speculated to purchase a 40-45% stake in Rostik's with an option to buy out the chain by 2010. An acquisition of Rostik's is just part of Yum!'s plan for global expansion. In February, Yum!'s CEO stated that the company intends to further expand its restaurant chains in China, where volume sales for KFC have surpassed those in the U.S.

Burger King Stays Put

Burger King Corporation, the world's second largest fast food company, announced that it will keep its headquarters in South Florida, agreeing to a 15-year lease on a new, 250,000 square-foot building in Coral Gables. Burger King had considered moving its headquarters elsewhere because of Florida's high real estate costs, but the Miami-Dade County Commission awarded Burger King a financial incentive package worth more than $5 million to stay.

McDonald's Eyes are on China

McDonald's recently announced that it plans to open 100 new restaurants in China this year, including its first drive-through service in Shenzhen. McDonald's already has over 660 restaurants in China, and aims to have 1,000 restaurants there by the 2008 Olympics in Beijing.

Sweet Takeover (Part II)

Pernod SA, which recently purchased Allied Domecq PLC, the British parent of Dunkin' Donuts, Baskin Robbins and Togo's, announced on May 3, 2005 that it expects a quick sale of the restaurant chains. Pierre Pringuet, Pernod's joint managing director, said that the three restaurant chains, estimated to be worth nearly $2.3 billion, have attracted both private equity and strategic buyers.

And the Winning Bid Goes to...

Movie Gallery is making its way towards acquisition of Hollywood Entertainment after winning 88.5 percent of the shareholder vote for the $13.25 per share sale. The bidding saga, which lasted six months, ended not only with Blockbuster, Inc. losing the battle (March 17th blog entry details the bidding war), but also with Carl Icahn nominating himself to Blockbuster's board (see April 8th blog entry).

Under the current bid, Movie Gallery will pay $900 million for Hollywood Entertainment.

Soup For You!

The Seinfeld-inspired Soup Nazi will be selling "heat-n-serve" soups nationally, in grocery stores by September. CNN.com reports that there are plans to open 1,000 The Original SoupMan restaurants over the next seven years throughout the U.S. and Canada.

We Sell Time

This article profiles Jiffy Lube's anticipated entry into the Chinese franchise market. When comparing Jiffy Lube to the mom and pop auto shops in Shanghai, China, Mr. Burch acknowledged that some independent shops performed oil changes, but he argued that Jiffy Lube's main offering to the consumer is time and that business component distinguishes the American franchise company from its Chinese competitors. Jiffy Lube, parented by Royal Dutch/Shell Group, aims to open 600 stores in China by 2015, with more than half of them franchised. China's auto market significantly increased over the past three years and the demand for replacement parts and on-the-road services has encouraged Jiffy Lube to introduce its 10-minute oil change to the Chinese market.

The venture awaits government approval.

They May Take Our Lives, But They'll Never Take Our Pizza

Domino's Pizza plans to open more franchises in Scotland within the next two years. Although Scots deny that the country's fast food market is growing, the planned expansion will double Domino's reach well beyond the 2.1 million Scotish households it already serves.

Sweet Takeover

Allied Domecq PLC, which owns Baskin-Robbins, Dunkin’ Donuts and Togo's brands, has agreed to a friendly $14.2 billion takeover offer from Pernod Ricard SA and Fortune Brands, Inc. Allied Domecq has accepted the broad outline of the offer, but has not provided any details of the agreement. French beverage group Pernod has brands including Martell cognac and Jacob’s Creek wine, while Fortune Brands holds interest in and/or distributes U.S.-based liquor (Absolut Vodka and Jim Beam whiskey), sports equipment (e.g., Titleist, Cobra and Footjoy) and household products (Moen and Master Lock). News of the takeover by the liquor manufacturer has prompted rumors that a further sale of the franchise companies may lie ahead because the acquisition appears to be focused on improving Pernod's position in the liquor industry, particularly against British-based Diageo PLC (former owner of Burger King Corporation).

Blockbuster Block

The Detroit Free Press reports that U.S. antitrust enforcers have been asked by Federal Trade Commission lawyers to intervene in Blockbuster's $833 million bid for rival Hollywood Entertainment Corp. The FTC believes that a merged Blockbuster/Hollywood would increase movie rental fees.

Blockbuster's bid, although higher than the recent $13.25 cash per share bid on the company placed by Movie Gallery, Inc., has been rejected by Hollywood.
Despite the rejection, Blockbuster has planned to formally place its bid on the company on March 24 unless the the bid is challenged in court.

Medical Devices, Burgers and More

Until last year, Sten Corp. from Minnesota only operated a medical device company. Last year, the company purchased the assets of a burger franchise, Burger Time out of North Dakota. It then sold off one of its medical device maufacturing units. Today, the company announced that it will purchase another burger franchise company called "Hot 'n' Now" out of a bankruptcy proceeding in Michigan. The terms were not announced. There are currently 15 Hot 'n' Now franchises all operating in Michigan. In addition to the burger division, Sten still operates a company that provides emergency oxygen services and equipment.

California Decorating

This article in the LA Times discusses the trend of California companies - restaurant franchise companies - to remodel and update their restaurant looks. While some franchisors buck the trend to maintain ties to the look that made their restaurants intiially successful, other find that updating helps to keep the restaurants fresh and relevant to customers.

They've Even Sold the Corporate Jet

In an apparent belt-tightening exercise, Krispy Kreme has sold its private jet to Pharmaceutical Product Development, Inc. Although the reasons for the sale were not stated -- and the sale was disclosed in the purchaser's (rather than Krispy Kreme's) regulatory documents -- Krispy Kreme's struggling financial picture seems to a possible basis for the sale. Who knows though - maybe they didn't like the gas mileage or maybe corporate jets are just so 20th century. Whatever the reason, Krispy Kreme received $30.5 million for Dassault Falcon 900EX.

An IPO for Arby's

The New York Post reports that Triarc Cos. is in negotiations to merge the Arby's chain with RTM Restaurant Group. RTM is Arby's largest franchisee, operating more than 700 Arby's restaurants. In the transaction, Arby's would acquire RTM for an expected $200 million in cash, but RTM would continue to own a 25% stake in the company. Though the parties are still in the beginning stages of negotiations, the expectation is that along with the finalization of the merger, Triarc will file registration papers for Arby's IPO as early as next month.

Do They Use the Metric System in China?

China Daily reports that McDonald's has been ramping up to expand in China. With KFC as its largest competitor (1,000 units), McDonald's intends to increase its presence in China by 400 units by 2008. McDonald's now has just over 600 units in China.

Because China recently made strides to open its borders to franchisors (without requiring corporate partnerships with Chinese companies), more franchise companies have focused their expansion plans on the Far East.

Hollywood Evades Blockbuster

According to this article from Reuters, Hollywood Video has accepted a purchase bid from a smaller video company, Movie Gallery, Inc., for $850 million. For weeks now, Hollywood has faced the threat of a hostile takeover bid from its rival Blockbuster if Hollywood accepted a lower bid for its assets. Movie Gallery, Inc.'s recent bid provides Hollywood shareholders $13.25 per share (1.5% over the NASDAQ price) and assumes $350 million in Hollywood debt. Blockbuster's threatened bid would only pay stockholders $11.50 per share.

We Can Do This the Easy Way or We Can Do It the Hard Way

Blockbuster Corp. isn't afraid to take it up a notch. The company announced that it would make a hostile takeover bid for Hollywood Entertainment, Inc. if its directors continued to refuse negotiations with Blockbuster. Blockbuster is prepared to offer Hollywood's shareholders $11.50 per share in cash, which would amount to $700 million, plus an assumption of $300 million in debt. The takeover bid is scheduled to occur in mid-January and continues the battle between Blockbuster and Mark Wattles, Hollywood's chairman, and a Los Angeles investment firm who offered $10.25 per share.

Despite the flurry of news last year about the demise of the video rental industry and Viacom's efforts to jetison Blockbuster from its holdings, Blockbuster believes that its acquisition of Hollywood can help it compete in the changing video marketplace -- including Blockbuster's new on-line movie rental service. If it acquires Hollywood, Blockbuster will control 50% of the country's video rental stores. Hollywood's shares closed at $13.16 today, while Blockbuster's shares were down at $9.33/share.

Death Becomes Them

Here's a concept that can't miss. There are companies whose principal business is to clean residences or lodging facilities that have been the site of a grisly death -- often by suicide or murder. Tragic Solutions and Aftermath, two companies that have pledged themselves to the cleanup of crime/death scenes, are profiled in this article from the Bucks County Courier Times in Pennsylvania. The owner of Tragic Solutions has even indicated that he plans to offer franchises in the next 6 to 8 months. Despite the gruesome nature of the work, there has been some interest in the field - at least by potential employees for the companies -- generated by the popularity of crime scene investigation shows.

Cendant Strikes Deal to Buy Gullivers Travel

Just weeks after announcing its decision to sell Wright Express for $1 billion, Cendant entered into a deal to buy the Gullivers Travel Associates and Octopus Travel Group Ltd., two U.K.- based travel companies, for $1.1 billion. This acquisition expands Cendant’s presence in the travel industries, adding Gullivers Travel to the stable of travel brands in the hotel, car rental and travel services business. Cendant is the parent company for such brands as Days Inn, Ramada, Howard Johnson, Super 8 and Travelodge. The company also bid $1.25 billion in September for the internet travel company, Orbitz Inc.

KFC Loses Co-Branding Rights

Although KFC led the effort to show that co-branding increased unit sales, Yum recently announced that its chicken concept would no longer be partnered with other brands until KFC's sales improved. According to this article from the Louisville Courier Journal, KFC has experienced same store sales declines for the last two years and expects another 1-2% drop for 2004. The company cited increased competition and what it called "self-inflicted wounds" as reasons for faltering sales. In revamping the system without the co-branding model, KFC plans to fashion its 2005 marketing after successful campaigns for its sister companies, Taco Bell and Pizza Hut, to achieve growth in same stores sales next year.

Finding the Silver Lining in Demolition

The owners of Shorty's, a Pittsburgh purveyor of hot dogs and hot dog-related offerings since the 1930s, have faced adversity before. Out of the ashes of their two downtown locations, which have fallen prey to reconstruction projects, may rise the Shorty's chain --a hot dog stand chain. The owners think complete annihilation of their hot dog empire may create an opportunity to rebuild and even expand the brand. Tim Murphy, an associate professor of entrepreneurship at Washington and Jefferson College, said that Shorty's expansion plan could be "almost a case study for a franchising class" -- testing the reasons for the popularity of the brand: location vs. food and service.

Experience versus speed -- the coffee question

Fast Company published this interesting article on Dunkin' Donuts' strategic pursuit of Starbucks. Although Dunkin' attracts new customers of specialty coffee beverages with lower prices and faster sevice, coffee experts contend that Starbucks customers come back for the Starbucks experience -- upholstered furniture, good music and clean environment. The article is a good review of how far value will go to win customers -- or conversely, how much customers will pay for a better experience.

It's also a commentary on the importance of one of the principal principles in franchising -- uniformity. The vast majority of Starbucks locations are corporately owned and operated; in contrast, Dunkin's units are franchised and according to the Fast Company piece, customers expressed frustration at the difference in coffee quality from location to location. The other critical variation in the Dunkin' brand, according to the article, is the cleanliness of the locations.

Dunkin' has crusaded for years now to improve quality assurance and get its franchisees to meet the franchisor's standards. It may still have a long way to go though. According to this article, if Dunkin' intends to catch Starbucks, it may not need Ray Charles' music and leather sofas, but it still has to convince its customers that its stores are clean.

Baja Fresh Stores Pulling Wendy's Down

CnnMoney.com reports that Wendy's will close 15 to 18 of its Baja Fresh Mexican restaurants. The burger company operates 300 fresh-Mex units and has enjoyed success in California and the eastern U.S. Baja Fresh sales have been sluggish, however, in some other markets like Chicago, Nashville and Columbus. These sluggish sales and losses resulted in lower than expected earnings for shareholders.

According to Wendy's, this announcement is only the first wave of initiatives to improve Baja Fresh's numbers. Wendy's stock rose 7% in trading this morning after announcement of the company's plans to address the Baja Fresh problems.

What Lies Ahead for Krispy Kreme

Aside from the trademark dispute discussed below, some analysts are speculating that the company may explore some sale options in the near future. The predictions follow Krispy Kreme's third quarter earnings statement that showed a $3 million loss for the quarter (or 5 cents per share). This time last year, Krispy Kreme reported a $14.5 million profit.

Although the fragile numbers cause rumors to stir, this article in the Charlotte Observer suggests that the market has not yet given up on Krispy Kreme. It is, after all, a 60+ year-old company with a history of comebacks. For the moment, however, the company's plummeting stock price is on everybody's mind -- it has dropped more than 75% from its 52-week high of $41.73 last December. After the announcement of third quarter earnings, the price dropped to $9.30.

Say Goodbye to Hollywood

The fourth competitor for Oregon-based Hollywood Video, billionaire Carl Icahn, recently bought 5.1 million shares, an 8.4% stake in the chain. Among the other companies bidding to take over the chain are Blockbuster Video -- recently spun-off from Viacom after much lamenting over stagnating sales and competition from on-demand cable and pay per-view -- and Movie Gallery, Inc. As each new bid comes in, Hollywood's stock price rises. It closed on Friday at $12.88, up from $9.80 before the Blockbuster bid on November 11.

Blockbuster Offers $700M for Hollywood

Despite the rumors of its demise, Blockbuster Inc. is willing to put more money into the video rental enterprise. Blockbuster said on November 11 that it expressed its interest in the number 2 rental chain, Hollywood Video. The deal was worth about $700 million. There have been no talks yet, however, because Hollywood is currently involved in a deal to let its chairman and CEO take the company private.

Blockbuster considered buying Hollywood Video in 1999, but the FTC would not allow the name change of the Hollywood Video stores to Blockbuster. Because the video rental business has expanded into DVD and game rentals and sales, some say the conversion of Hollywood's 1,920 movie rental stores and 600 Game Crazy shops may be better received this time around. Blockbuster currently has approximately 9,000 stores operating in the worldwide.

Coffee and a Bun

Roark Capital announced Thursday that its subsidiary, Focus Brands Inc., completed its acquisition Cinnabon and Seattle's Best Coffee International from AFC Enterprises, Inc. for $21 million in cash. These brands now combine with Carvel Corporation to form Focus Brands, Inc., which will hold Roark's franchise brands.

This transaction is a key part of the AFC strategy to reduce its focus to one brand. Late in 2003, Starbucks purchased Seattle's Best Coffee's U.S. franchise rights for $70 million, and AFC recently announced the sale of Church's Chicken to Crescent Capital Investments, Inc. for $383 million in cash and $7 million on a promissory note. After these divestitures, AFC will be left with only one franchise brand -- Popeye's Chicken & Biscuits.

Burger King's New Boss Looks for a New, New Way

Following in the footsteps of many others, Burger King's new CEO is looking for new ways to turn the chain around. After years of declining sales, Burger King has introduced menu items like the veggie burger and salads to compete in a marketplace of would-be healthy eaters. This article in Businessweek Online details Gregory Brenneman's efforts to increase sales, as well as employee and franchisee morale.

McDonald’s Healthy Vision

According to this article in the Media Bulletin of Brand Republic, McDonald’s continues to revamp its menu to include more healthy eating options. Charlie Bell, the company’s new chief executive, has announced that McDonald’s is prepared to modify certain elements within its system to appeal to a wide array of customers. Bell wants to “transform the restaurant chain from a burger joint into a combination of Pret A Manger and Starbucks.” According to the Brand Republic article, the company’s share of the fast-food market fell by 3% between 1997 and 2003.

No Child Left Behind

This article on Yahoo! News spotlights the growth of the Goddard School franchise system in suburban Chicago. Named by Entrepreneur Magazine as the No. 1 childcare franchise for the past three years, Goddard is regarded as having “one of the best curricula and the best marketing procedures.” The company targets high-traffic, high-density locations in towns with median incomes above $60,000. Goddard Systems, Inc. has opened 170 schools in 22 states.

Adios

In an anticipated move, Outback Steakhouse, which purchased 76 Chi-Chi's locations out of bankruptcy last month, is closing the restaurants. Outback paid $42 million for 76 locations and has begun padlocking the units to prepare for their conversion to another brand.

Franchising the Farm

Oberweis Dairy, a well-known dairy chain in parts of the Midwest, has plans to expand through franchising. The 77-year-old company currently operates 33 dairy stores, which it will continue to operate, but it has formed a subsidiary, Oberweis Franchise Systems LLC, to handle the growth through franchised operators. The company plans to open 300 and have 500 units sold by 2009, and it has already received a large number of inquiries from potential franchisees.

McDonald’s Breaks Franchising Barrier In China.

After years of waiting for China to allow direct franchising, it appears that McDonald’s has received approval from the China Commerce Ministry to start franchising. Currently, McDonald’s owns and operates all of its 595 restaurants in China. According to the head of McDonald’s China divisions, the company plans to add as many as 120 units per year in China through franchising.

System Growth -- New and Old

Nation's Restaurant News reports on the growth of two systems. Gimme Sum is a fairly new Japanese cuisine chain founded by John DeVries from Henderson, NV. The chain hopes to rise above the new wave of fast casual Asian restaurants and has initiated "Operation 100" to support the opening of 100 restaurants by 2006. In further support of growth, Gimme Sum is utilizing a development partner program to grow by granting certain territory development rights to partners for 20 years.

Even for more experienced franchisors, growth can help settle new frontiers. For The Krystal Co., the 72-year-old hamburger franchise chain, three new development agreements to open 18 restaurants in Texas marks the farthest west the Chattanooga, Tennessee company has dared to franchise since its opening. The agreements contemplate the opening of 18 units in four years and grant exclusive territorial rights to the franchisee/developers.

Cendant Agrees to Buy Ramada International

In a move that will give the company ownership of all Ramada brands, Cendant has entered into a letter of intent to purchase Ramada International Hotels & Resorts from Marriott International. Marriott acquired the rights to Ramada in a larger transaction in 1997, and it has licensed the rights to Cendant in the U.S. According to Forbes Magazine, the companies did not disclose the terms of the purchase but Cendant indicated that it did not expect the purchase to have a material financial impact on the company.

Clash of the Titans.

According to this article from the Courier Journal in Louisville, Kentucky, McDonald’s has set its sights on the sandwich market, currently dominated by franchise giant Subway Restaurants. In Louisville, McDonald’s is testing a line of five higher-priced sandwiches including the turkey BLT, Buffalo chicken, beef and provolone and a three-meat Italian sub, all served on French rolls. The new sandwiches, called Oven Selects, break with traditional McDonald’s strategy by bearing a $4.00 price point. The market testing of these sandwiches will occur for a year in Louisville, KY, Columbus, OH, Richmond, VA and San Antonio, TX.

Out of the Bankruptcy onto the Grill.

Emerging from bankruptcy in Colorado, the Off The Grill restaurant chain has been purchased by a group of franchisees who operate mostly Yum! Brands, Inc. restaurants. Off The Grill is a restaurant and home delivery concept that offers customers steak, potatoes and grilled vegetables. The company has 17 franchise outlets and the new owner, Off The Grill Franchising, Inc., intends to expand the chain from its new home base in Nashville, Tennessee. The new franchisor, however, will have to deal with some bad feelings from franchisees who believe they’ve been abandoned or completely forgotten as the franchise company dealt with its own financial problems, according to this article in The Tennessean. Notwithstanding these issues, the new owner has ambitious expansion plans and hopes to have 100 locations opened in the next three to five years.

Nashville Skyline

After 50 years of putt-putt golf and 107 franchised locations, Putt-Putt Golf Courses of America, Inc. has announced its plans to expand through franchising in Nashville or other markets, according to this article in the Nashville Business Journal. The company recently rolled out a new look for its Centers and is working franchisees to convert existing Centers to the upgraded format.

The franchisees, however, have expressed some concerns about their franchisor's communication and its marketing efforts. Recently, the franchisees formed a franchisee association to provide a forum to discuss issues and ideas with the franchisor. For more on effective franchisee relationships, click here for a presentation on franchisee associations and here for an article on franchise relationships.

CKE Sells Timber Lodge Steakhouse

The Business Journal reports that the parent of Hardee's, Carl's Jr.'s, LaSalsa and Green Burrito franchise chains has sold its interest in the Timber Lodge Steakhouse chain for $8.8 million. CKE Enterprises claims that the steakhouse chain did not fit its business model and sold the chain to some investors from Minnesota, where Timber Lodge had its start. Timber Lodge has 24 restaurants in seven states.

The Krispy and the Kreme

More on the Krispy Kreme slide from The New York Times -- The company intends to shift its focus from revenues to profits after its net income plummeted from $13 million last year to $5.3 milion this year. The company's stock has lost two-thirds of its value since its peak last year -- although in a nice reverse Enron gesture, several Krispy Kreme executives began buying public stock as it declined. The company's chief executive, Scott Livengood, bought 24,000 shares at $20.77 -- for a total investment of about $500,000. The Times article estimates the current value of his investment at $330,000.

Meanwhile, Krispy Kreme management continues to try to return its salad days -- or its doughnut days. The company recently announced a new strategy in the rollout of a sugar-free doughnut and the development of smaller stores where the economics will produce a profit on far less revenue.

New Direction for Blimpie

Nation's Restaurant News reports that the sub sandwich franchisor out of New York, Blimpie Subs and Salads, has begun repositioning itself to fit in a sandwich niche. The company's plans include an upgraded look in new restaurants, remodeling of existing restaurants and a rollout of new menu items. The company hopes to position itself as a lower cost alternative to the fast-casual dining leaders, Atlanta Bread and Panera, and as an upscale alternative to sandwich leader Subway. Blimpie currently has 1,730 restaurants operating and is negotiationg a deal to put Blimpie units in hundreds of Wal-Marts across the country.

Roasters Prepares to Move Out of Georgia

Adding a fourth location in Atlanta to their 14-year old restaurant concept, the owners of Roasters, Inc. are considering a future in franchising. Roasters restaurants offer rotisserie chicken, barbecued ribs and other comfort food. Based on the success of the restaurants in the Atlanta area, the owners believe that the concept may work well in other parts of the country and are developing a plan to franchise the company outside Georgia.

McDonald's Gives a Lesson in Uniformity with Flexibility

This article from the Chicago Tribune discusses some of the adjustments that McDonald's is making to its design plans. In the Village of Oak Brook, McDonald's has planned to build a restaurant with a stone or terra cotta brick facade, an outdoor dining area and a McCafe. The restaurant will be more than twice as large as a standard McDonald's and is one of only a few units that will combine the McCafe concept with a traditional McDonald's menu. McDonald's is increasingly incorporating different design touches in its restaurants. A McDonald's spokesman suggested that "We've always tried to include local elements--unique elements--that make them a part of the community, and that has accelerated in the last few years." For more stories on McDonald's experiments with different design (or menu) concepts, click here.

A Dog's Life

With Americans spending $34 billion this year on their pets, it's no wonder that franchisor Pet Supplies "Plus", a company based in Livonia, Michigan, sees great potential for growth. In the past, grocery stores accounted for 90% of consumer spending on pets but pet specialty stores have taken a larger share of the pet market in recent years, leaving supermarkets with only 60% now. Looking to carve out more of the market for its franchisees, Pet Supplies "Plus" plans to open 30 stores in 2004 to build its total number to more than 200 stores. Only the Petco and Petsmart chains, which are publicly traded, have more stores. Many of Pet Supplies "Plus" franchisees are multi-unit owners.

Can the Soup Nazi Be Duplicated?

That's the question raised in a New York Post article about the soup purveyor who was the inspiration for the Seinfeld character, the Soup Nazi. Al Yeganeh has announced plans to franchise his Soup Kitchen International. He will also partner with International Gourmet Soups to market canned soups. Yeganeh has never capitalized on his fame from the Seinfeld portayal and has even said that he was furious about the show. According the United States Patent and Trademark Office, however, in November 1997, Yegan Foods filed a trademark application for "No Soup for You," which was later abandoned. The Soup Kitchen International trademark also appears to have been abandoned, leaving "The Soup Man" as the only live trademark under Yegan's ownership. Yeganeh has not announced how much his soup franchises will cost.

The New Coffee on the Block

Another hopeful coffee purveyor looks to make a dent in the Starbucks monopoly on coffee. Moxie Java, out of Boise, Idaho, hopes to expand its chain from 70 licensed locations to more than 370 by 2008. With more than 8,000 Starbucks units (and Starbucks' ambitious plans to expand to 25,000 units worldwide), Moxie Java relies on both its quirky name and its distinctions from Starbucks to battle the coffee giant. While the company looks to provide a nice environment (like Starbucks), Moxie Java's owners say that their coffee is less acidic than Starbucks because they use a lighter bean from White Cloud Coffee. Moving from a licensing model into franchising this fall, the company intends to increase company support of the stores for an increased royalty, but its current license holders will not be required to convert to franchises.

7-Eleven Gets into the ATM Business

The Dallas Morning News reports that 7-Eleven recently purchased an automated teller machine network from American Express for $44 million. The network includes the ATM machines from over 5,000 franchised and company-owned 7-Eleven convenience stores.

Oh Fatburger!

Did You Return the Movie?

The Dallas Business Journal reports that Blockbuster plans to start offering its video rental services online. With the traditional video rental business slowing down in the past few years, Blockbuster decided that it was time it took their rental operations online. The company will offer a deal to subscribers of its online program where they will not be subjected to late fees or shipping costs when renting a movie. The deal also provides renters with in-store coupons and 25,000 movies titles to choose from.

The Growth of Two Displaced Chains

Gandolfo's, a New York Delicatessen concept out of Salt Lake City, more than doubled the size of its chain last year through franchising. According to this press release, Gandolfo's moved from a 9-store chain in 2002 to 22 stores in 2003. The chain's plans for future growth far exceed its 2003 mark. It currently has 45 locations operating with another 298 units sold; it intends to open 61 in 2004 and have 400 units sold in that time.

Meanwhile out of Atlanta, Moe's Southwest Grill continues to expand. According to this story from ContraCostaTimes.com, the company, which was started in 2000 by Martin Sprock, has 135 locations and 700 under contract. The story details the franchise company's efforts to control costs, including a $50,000 salary cap on all employees (including Sprock himself) and using executives' cars as advertising. The owner of Moe's is Raving Brands, Inc., the parent company of five different franchise concepts, including Mama Fu's Noodle House, Planet Smoothie, Doc Green's Gourmet Salads, and PJ's Coffee. See June 23, 2004 blog entry for another story about Moe's growth.

It's Australian for Real Estate

Outback Steakhouse, Inc. announced last week that it acquired the designation rights for 76 properties formerly owned by Prandium, Inc.'s Mexican chain, Chi-Chi's. The deal will include 23 fee properties, 23 ground leases, 15 lease-backs and 15 leases, as well as liquor licenses, furniture, fixtures and equipment. Outback received bankruptcy court approval last week for its offer of $42.5 million for the property.

Franchising the Law

This New York Times article (registration required) reports on a California lawyer's efforts to move attorneys out of their offices and into franchised coffee shops. Banking on franchising's success, Jeffrey Hughes offers customers at the Legal Grind, two coffee shops in California, legal advice from practicing lawyers. The lawyers agree to consult with patrons for 15 minutes for a $25 fee; one lawyer said that at least 15% of his business was attributable to clients he met at the Legal Grind. Hughes now looks to franchise the concept to other lawyers and paralegals. The article, however, explores the panoply of issues that face a franchisor who seeks to franchise a profession -- including legal restrictions on referral fees and resolving conflicts of interest.

Feeling Good in Small Neighborhoods

The Wall Street Journal (subscription required) had an interesting piece on August 2 about an innovative business and development strategy at Applebee's. The casual restaurant chain now targets smaller rural towns where its restaurant is frequently the only one available to the residents and where its casual restaurant environment passes for upscale eating. Leaving the struggle over strip and shopping mall development space, Applebee's has outpaced its nearest competitor in the casual dining segment by having more than 1,600 restaurants (over Chili's 877 restaurants) operating in the U.S., with 138 units operating in counties with 50,000 households or less. Turning the demographic/traffic study model on its head, the strategy appears to be paying off, with the population of these rural towns flooding the restaurants. The strategy also provides potential for massive growth with more than 2,000 of the country's 3,100 counties having less than 50,000 households.

Wendy's Having Trouble with Baja

Wendy's announced that it would close several Baja Fresh restaurants Charlotte, Atlanta and Tucson, trying to stem losses the company faced in the second quarter. This article in the Wall Street Journal (subscription required) reports that Baja is expected to lose between $5 million and $6 million this year.

Culligan Sale Goes Through

As discussed in the blog entry of July 2, the buyout firm of Clayton, Dubilier and Rice has agreed to pay Veolia Environnement $610 million for Culligan International, one of the leading U.S. suppliers of bottled water and water filters. According to this article from Reuters on MSN Money and CNBC, CD&R plans to build on Culligan's existing dealer network and its brand name.

Co-Branding Pushes Pizza Hut Sales

In a shareholder call on Wednesday, Yum! executives announced same store growth of 6% for its Pizza Hut restaurants. Yum! also owns the Taco Bell, KFC, Long John Silver's and A&W brands and has been co-branding the Pizza Hut brand with Taco Bell and KFC. The multi-branding experiment has been so successful that Yum! intends to move the concept into its Canadian restaurants. While Pizza Hut's second quarter success was celebrated at the company, its Chief Financial Officer, Dave Deno, cautiously noted that the restaurants will likely be affected in the third quarter by rising commodities costs -- particularly the increased costs of meat and cheese.

Impressive Growth for Assist-2-Sell

In just six months from January 2004 through June 2004, Assist-2-Sell added 70 franchises to its chain. The Reno, Nevada-based franchisor of discount real estate services now has 368 franchises in the U.S. and Canada.

More on the Ground Round Sale

The Herald Tribune reports that a Massachusetts bankruptcy judge has awarded the franchise rights for the Ground Round chain to a group of its franchisees. Although a Dallas real estate company submitted a higher bid (by $2 million) for the debtor's assets, the judge accepted the lower bid of $4.5 million based on the debtor franchisor's recommendation. The acceptance of the lower bid avoids more than $40 million in potential claims filed by Ground Round's franchisees against the bankrupt franchisor.

Resistant to Change

After converting more than 3,000 Mail Boxes Etc. stores in the United States to UPS Stores, UPS is now facing a lawsuit from 150 franchisees that refused to change. In early 2003, UPS launched the UPS Store program and in mid-2003, 150 franchisees filed a lawsuit alleging damage from the chain's conversion. While UPS says that franchisees' sales have increased under the UPS brand, those franchisees who refused to convert to the UPS brand have said that UPS now only advertises UPS stores and this marketing strategy has cost them business.

Shakey's Sale Ends Class Action

Last week, Inno-Pacific Holdings, the Singapore-based franchisor of Shakey's Pizza, announced that it was selling the franchise company to one of its franchisees. Jacmar, Inc., the owner of 19 Shakey's Pizza restaurants and a large shareholder in Chicago Pizza & Brewery, Inc., will pay $4.5 million for the company and has negotiated with the plaintiff class of franchisees to end the litigation against Inno-Pacific. The details of the negotiation were not disclosed but at least part of the deal requires that Inno-Pacific and its chairman no longer have any stake in Shakey's. Based on the reaction of the class leader, the franchisees appear to be optimistic about the company's new ownership and the direction of the chain. The sale should be official in a week.

Shakey's Sale Ends Class Action

Last week, Inno-Pacific Holdings, the Singapore-based franchisor of Shakey's Pizza, announced that it was selling the franchise company to one of its franchisees. Jacmar, Inc., the owner of 19 Shakey's Pizza restaurants and a large shareholder in Chicago Pizza & Brewery, Inc., will pay $4.5 million for the company and has negotiated with the plaintiff class of franchisees to end the litigation against Inno-Pacific. The details of the negotiation were not disclosed but at least part of the deal requires that Inno-Pacific and its chairman no longer have any stake in Shakey's. Based on the reaction of the class leader, the franchisees appear to be optimistic about the company's new ownership and the direction of the chain. The sale should be official in a week.

$600 Million for Bottled Water

The New York Post reports that a deal may be close for the purchase of Culligan International Co., the water filter and bottled water distributor. The French company that owns Culligan, Veolia Environnement, is talking with Clayton, Dubilier and Rice, a New York buyout firm about a reported $600 to $700 million purchase price. Interestingly, many companies looking at Culligan were uneasy about the purchase because of the complexities of the heavily franchised business and the complexities of dealing with disgruntled Culligan franchisees, who have long complained about the lack support they received from the franchisor.

Ground Round Franchisees Bid on Franchisor

The Wall Street Journal (subscription required) reports that the Ground Round Franchisee Council, which comprises owners of 73 Ground Round Restaurants, has submitted a bid of $4.85 million cash to the bankruptcy court in Boston to buy the chain's franchise rights. The bid, which competes with US Restaurant Properties Inc.'s bid of $6.5 million, includes a waiver of $40 million in claims against the franchisor.

Why I oughta...-- Moe's Grows Across 15 States

A Southwest grill franchise system named for one of the Three Stooges that uses Seinfeld and movie references in its menu is spreading across 15 states. Martin Sprock started Moe's in December 2000 and has already grown the system to 135 locations, with only one unit owned by the franchisor. Moe's sells hand-rolled burritos, tacos and fajitas and currently plans to open 1,000 units in 45 states by 2008. Sprock's company, Raving Brands, also owns Planet Smoothie, Mama Fu's Noodle House and PJ's Coffee. Moe's was recently named by Nation's Restaurant News "Hot Concept of the Year."

IHOP Carries Franchise Expansion into the Northeast

IHOP Carries Franchise Expansion into the Northeast. Last summer, IHOP Corp., based in Glendale, California announced a shift in its corporate focus from restaurant development to franchise sales. See blog entry July 25, 2003. On June 10, the Boston Business Journal reported that IHOP plans to develop 28 new restaurants in four states over the next two to ten years -- including Massachusetts and Rhode Island. Rick Celio, vice president of franchise and development for IHOP, said that since the 2003 announcement of IHOP's shift to franchisee-financed development, the company has signed agreements for the development of 233 new IHOP restaurants.

A Convenience Store Shift

In the June 1, 2004 Wall Street Journal (subscription required), an interesting article outlined the new trend in convenience stores to move to smaller locations within airports, office buildings, universities and hospitals. Retailers, like 7-Eleven, Inc., report that these locations which are frequented by the employees and residents of the area sell a high number of impulse items that typically carry a higher profit margin. The article also reports that the advantage of the small location is that it can adapt its merchandise to fit its typical consumer -- for example, a location that caters to business commuters carries a different selection of items from one that serves university students. Given the competition in the convenience store market at gas stations and other outlets, retailers views this type of non-traditional development as a good way to take advantage of niche markets.

Jim Amos and Carousel Capital Buys Laser Skin Treatment Center Franchisor

The former CEO of Mailboxes Etc., Jim Amos, in conjunction with Carousel Capital, has acquired Sona International, the franchisor of 21 laser skin treatment centers across the U.S. Carousel Capital is an investment firm that last year partnered with the Halifax Group to fund a management-led buyout of Meineke Car Care Centers (see blog entry July 11, 2003). Amos sits on Meineke's board and will serve as Sona International's chairman and CEO. Sona expects to open 55 more locations this year.

Ultimate Franchise Systems Adds Obee's Subs to Portfolio

In a deal announced on Friday, Ultimate Franchise Systems will acquire Obee's Franchise Systems, the owner and franchisor of Obee's Subs. Obee's Subs is a South Florida restaurant chain with 65 existing units and 70 in development. Ultimate Franchise Systems owns a stake in ten other restaurant chains (totaling approximately 524 restaurants) and is an investor in a 40-unit chain of wellness clinics. The terms of the deal for Obee's were not disclosed.

Dunkin' Donuts' Non-Compete on Trial in Massachusetts

Ind US Business Journal reports that a Dunkin' Donuts case pending in an appeals court in Massachusetts may substantially affect a franchisor's rights to enforce post-term covenants not to compete. The case involves a former Dunkin' franchisee who sold his Dunkin' shops in Syracuse, NY and wanted to open an independent shop 300 miles away. Because the Dunkin' franchise agreements restricted the franchisee for two years from operating a doughnut shop within 5 miles of his former shops or any existing Dunkin' shops, the franchisee's proposed operation would violate his franchise agreement obligations. When the franchisee sought Dunkin's waiver of the restrictive covenant, Dunkin' refused. The franchisee then filed a declaratory judgment action seeking a ruling that the covenant was unenforceable. The trial court entered judgment in Dunin's favor, but the Massachusetts Supreme Judicial Court allowed the franchisee's appeal. In its appeal, the franchisee claims that "until now no Massachusetts court has ruled on the reasonableness of a geographic restriction, which extends beyond the surrounding area of a former business in the franchise context." The franchisee argued that because Dunkin' has almost 1,000 units in Massachusetts and New Hampshire, the covenant virtually forecloses a former franchisee from operating a competing business in those states. Dunkin' argues that the franchisee signed the covenant as part of his purchase of the business to acquire Dunkin' proprietary and confidential information. The necessary protection of this information justifies the use of restrictive covenants in franchise agreements. Both IFA and the AAFD submitted amicus curiae briefs in the appeal. A copy of the IFA brief can be found here.

What a Clever Name! A Tale of Two Papas

Pizzamarketplace.com reports that a former Papa John's franchisee in Chicago has recently changed the name of his 30 units to "Papa Tony's." The franchisee claimed that the franchise relationship was not working out. Papa John's, which apparently terminates franchise contracts on rare occasions, would not comment on the pending litigation between the parties. At least part of the claim appears to focus on Papa Tony's new name -- the Northern District of Illinois granted a temporary restraining order against the defendant yesterday.

Blockbuster Acquires Video Game Retail Chain.

Blockbuster announced yesterday that it acquired American Satellite and Video, Inc., the owner and operator of the Rhino Games retain chain out of Gainesville, Florida. Despite several newstories speculating on Viacom's interest in selling or spinning off its Blockbuster subsidiary (see blog entries 2/11/2004 and 1/28/2004), Blockbuster announced that this purchase would help it to build important business areas. Viacom appears to be prepared to spin-off the movie rental giant this summer. The terms of Blockbuster's acquisition of American Satellite were not disclosed.

New McDonald’s CEO Says Turnaround Is Working

McDonald’s brand new CEO, Charlie Bell, who recently replaced the deceased Jim Catalupo, said that McDonald’s strategy to continue to deliver significant and growing cash flow is working. Bell said that “things have bounced back” across much of Europe after a sales slump in March.

Cottman Acquired by American Capital Strategies, Ltd.

In a deal announced today, American Capital Strategies, Ltd. will pay $46.2 million to acquire Cottman Transmissions, the second-largest franchisor of transmission service centers in North America. Cottman is located in Fort Washington, PA and has about 380 franchises. After the closing, American Capital will own 78% of Cottman on a fully-diluted basis.

Buffalo Wild Wings Projects Construction Expenses

After a successful initial offering, Buffalo Wild Wings recently presented a rather aggressive growth strategy in its annual report filed with the SEC. The company projected that it would spend $19 million in 2004 to build new restaurants and renovate old ones. BWW spent $10.7 on restaurants in 2003. The company plans to open 20 company-owned and 45 franchised restaurants in 2004.

Great Clips Heads to Pittsburgh

Great Clips, a Minneapolis-based franchisor, has set its sights on Pennsylvania. The franchise company, which has been growing by 200 stores per year, announced to begin development of the Pittsburgh territory with one or two locations in 2004 and aggressive development in 2005. The company believes that Pittsburgh could ultimately offer as many as 60 Great Clips locations.

J.C Penney Sells Eckerd for $4.5 Billion

The New York Times reports that J.C. Penney has announced long-awaited plans to sell the Eckerd drug store to two competitors, CVS and Jean Coutu Group. The company split the 2,800 store chain between the buyers, offering 1,260 stores to CVS for $2.15 billion and 1,539 stores to Jean Coutu (a Montreal company) for $2.53 billion.

Marriott and Cendant End Venture

After a two-year venture, Marriott has announced plans to sell its interest in the Ramada and Days Inn brands to its partner Cendant Corporation for $200 million.

Kahala Acquires Seventh Franchise Concept

Adding to its current holdings of Taco Time, Samurai Sam's Teriyaki Grill, Ranch * 1, Surf City Squeeze, Frullati Cafe and Rollerz, Kahala has announced that it has acquired the Great Steak & Potato restaurant chain, a 260-unit chain out of Dayton, Ohio, for an undisclosed amount. Great Steak & Potato restaurants offer Philly cheesesteaks and french fries. With the addition of Great Steak & Potato, Kahala has increased its total units under the Kahala umbrella to 900 and total system sales to more than $450 million.