Credit seen drying up for U.S. small business
Forbes Magazine reports that as losses mount at American banks and the pain of the credit crisis spreads from housing and finance to the broader economy, many small companies complain it is increasingly difficult to obtain loans.
Tighter credit could not only help to push the United States into recession, but prolong the downturn as ideas for new businesses get stymied once entrepreneurs sit down with local bank managers, small business representatives warn.
"In recent weeks we’ve seen banks becoming more cautious and the pace of lending has slowed considerably," said Weldon Gibson, a consultant at the Lamar University Small Business Development Center in Texas. "They are demanding higher credit scores and want more collateral before lending."
According to the U.S. Small Business Administration, for the year up to July 11, about 10 percent fewer 7(a) loans were issued than in the same period in 2007. These are the SBA’s most popular loans and — with a government guarantee covering up to 85 percent — low risk for lenders.
"Our loan volumes reflect the condition of the overall economy," said SBA spokeswoman Christine Mangi. "Credit is tightening and there is less demand for small business loans."
But not everyone agrees credit is harder to come by for small businesses. Earlier this month, a National Federation of Independent Business poll showed "no evidence of credit problems has appeared on Main Street. It is a Wall Street issue."
But the NFIB seems to be in a minority.
"In the past few weeks, we haven’t seen further deterioration of credit conditions, but they are certainly not improving either," said Todd McCracken, head of the National Small Business Association.
McCracken said that, with so much uncertainty over the U.S. economy, many small companies are "shelving expansion plans and are less likely to be looking for credit. Things would be a lot worse if there were a lot more business owners out there in need of loans."
Subway Continues to Expand
Advertising Age reports that while Starbucks is closing stores and McDonald’s is focusing its expansion efforts abroad, Subway, by far the largest fast-food chain, with 22,000 U.S. locations, is adding 800 this year.
Don Fertman, director-development for the sandwich shops, said there’s now about one Subway for every 13,800 people in the U.S., although some markets, such as Philadelphia and Boston, are "under-served." He said he thinks Subway can take the ratio to one restaurant for every 12,000 people in the U.S. while revving up growth overseas, where it now has 8,000 outlets.
A major factor helping Subway sprawl is its low overhead. The shops don’t need room for large kitchens, so there are outlets in hospitals, appliance stores, a smelting plant and even a church where the pastor wanted to provide job training for neighborhood kids. Subway is also the largest chain within Wal-Mart.
Mr. Fertman, who joined Subway in 1981, when there were 166 stores, said franchisee applications are up again this year and he credits the chain’s advertising for sparking renewed interest. He said that when he joined the company, most people thought he worked for New York mass transit. Now when he says he works for Subway, people chant "Eat Fresh."
Subway is "possibly out of all restaurants, by consumer perception, the healthiest restaurant out there through a combination of marketing and product," said Darren Tristano, exec VP at Technomic. "Because of the amount of marketing dollars put forth by the company and brand recognition, they have a great opportunity to be successful."
Mr. Tristano said Subway still has room to grow — within its existing stores. He noted that the average McDonald’s brings in more than $2 million a year, while the average Subway earns closer to $375,000. And since Subway has about 50% more U.S. stores than McDonald’s 14,000 locations, he said they can do more. "They’ve just started to get deep into breakfast," he said. "I still think there’s opportunity for growth."
Cross Posted at: Franchising in New England
Hot and Sexy Grinders?
The New York Post reported that business has not ended well for ex-franchisee, Anthony "Cousin Vinny" Agnello, who offered "Subway-style" grinders by day and exotic lap grinders by night. He has been sued successfully in court by the Subway chain.
Anthony "Cousin Vinny" Agnello ran afoul of trademark laws for offering the fast-food chain’s signature sandwich - as well as Subway wrappers, bags and menus - in his X-rated deli wannabe.
Agnello, 48, had sent out fliers promising customers free fountain sodas and $5 foot-long subs alongside "six hours of nonstop, hard-core, live action from some of the most beautiful young ladies who have ever chosen to take their clothes off in public."
A federal judge ordered him to stop using the trademarked goods in his skin scheme and forced him to pay more than $12,000 for the chain’s legal fees.
Does the RI Amended Law Set A New Franchise Standard?
Does the amended Rhode Island (RI) that was passed and agreed to by many parties including the IFA, CFA, DDIFO, Dunkin Brands and others set a new standard for termination clauses in franchise agreements, moving forward?
The RI law calls for:
60 days prior written notice of termination, cancellation, or nonrenewal.
30 days in which to cure any claimed deficiency, provided that a dealer has a right to cure 3 times in any 12 month period.
Even though the dates had been reduced from the original law, it still sounds fair and reasonable to me.
The AAFD Published Standard in its Fair Franchising Standards:
STANDARD 12.3 DEFAULT BY A FRANCHISEE
A franchise agreement should contain a provision setting forth material events of default by a franchisee, a franchisors right to terminate for good cause, after notice and a reasonable time to cure, where appropriate, and a franchisee’s post termination rights and obligations.
The RI Law quantifies the time frame, the question is: is 60 days notice and 30 days to cure sufficient?
If so, maybe the AAFD should consider using the RI law as the basis of its "Default By A Franchisee" standard?
If it does, that standard has already been vetted and agreed to in RI by the powers that be.
Cross posted at: Blue MauMau
Au Bon Pain to add 100 stores in India
The Boston Business Journal reported Au Bon Pain plans to add a total of 100 units over the next two years in India. The Boston-based bakery and cafe chain has signed a master franchise agreement with Spencer’s Retail Limited, the retail arm of RPG Enterprises, a $3 billion Indian conglomerate with 20 companies operating in six business sectors, including retail, power, entertainment, technology, transmission and tires. The announcement comes at a time when Au Bon Pain, earlier this year, announced a recapitalization by LNK Partners in March, the introduction of smaller portions and store openings in Kuwait and Dubai next month.
Au Bon Pain’s menu in India will include a line of vegetarian sandwiches as well as other vegetarian items to accommodate cultural traditions and religious dietary needs.
Cross Posted at: Franchising in New England
Remember ‘2 All-Beef Patties?’ McDonald’s Hopes You Do
The year was 1974: gas prices were high, inflation was rampant and an unpopular Republican occupied the White House. McDonald’s introduced a spirit-lifting jingle: “Two all beef patties, special sauce, lettuce, cheese, pickles, onions, on a sesame-seed bun.”
Now it is 2008, and McDonald’s is reviving it as a TV commercial. The company has asked consumers to write their own songs using the exact words of the jingle, and submit them to a contest on MySpace.com. The official reason is this year’s 40th anniversary of the Big Mac, but the then-and-now cultural similarities are not entirely lost on the company.
“That might be coincidental — unhappily, maybe, but coincidental,” said Marlena Peleo-Lazar, chief creative officer for McDonald’s U.S.A. The contest, she said, was dreamed up in the spirit of summer fun and the hamburger’s birthday. “Big Mac is just an iconic product for us, and it is a customer favorite,” she said.
Nevertheless, the jingle itself suggests getting a whole lot of food — for what consumers know is a low price. The message seems to resonate in today’s economy, which is why chains like Quiznos, and Subway have been marketing the fact that $5 can fill your stomach at their restaurants, no matter how little it does for your gas tank.
Today a Big Mac in New York costs $3.79, which is still less than a gallon of gas; in 1974, the price in New York was 85 cents, which was significantly more than a gallon of gas.
Starbucks Names Store Closings in Massachusetts
Seven Massachusetts Starbucks stores are are among the 600 stores nationwide slated to close. Those stores are located on the Middlesex Turnpike in Burlington, the Dartmouth Mall in Dartmouth, 70 Union St. in Newton Centre; Emerald Square Mall in North Attleborough; Five Post Office Square in Sharon; 425 Washington St. in Stoughton; and Shrewsbury Market Place in Worcester.
Starbucks said it is closing 600 company-operated, underperforming stores as part of a strategy given the challenging economy. It also announced it expects to open fewer than 200 new U.S. company-operated stores in fiscal 2009.
Both full-time and part-time retail positions will be eliminated, but the company said it expects to place many of the employees into available positions at nearby Starbucks stores.
The closings will begin this month and continue through the first half of 2009.
DQ aiming for an urban twist
The Chicago Tribune reported the that Dairy Queen and Orange Julius are popping up throughout the Windy City – from Bucktown and Lincoln Park to downtown and the South Loop as part of Dairy Queen’s effort to bolster its weak presence in urban areas. The suburban Minneapolis-based company, long known for a lack of standardization, wants its 4,600-plus U.S. outlets to eventually become Dairy Queen-Orange Julius "treat centers," which also sell smoothies, or DQ Grill & Chills, an updated version of its old concept.
Dairy Queen, which began 60 years ago as a single outlet in Kankakee, has had scattered stores in cities for years, but it has always focused on rural and suburban areas. Chicago "is the first urban market we are really jumping into," said Troy Bader, Dairy Queen’s chief development and legal officer. The company chose Chicago because two local franchisees were particularly interested in opening stores in the city. Cities offer Dairy Queen a new front for growth, Bader said. And analysts say Dairy Queen, which is owned by Warren Buffett’s Berkshire Hathaway Inc., needs new avenues for expansion as the snacking business has gotten increasingly crowded.
While Dairy Queen is still king of the soft-serve ice cream business, consumers have plenty of alternatives. Meanwhile, the non-ice cream sweet treat business has blossomed. Frozen yogurt chains like Pinkberry and Red Mango are spreading in major cities, and smoothie purveyor Jamba Juice now has more than 700 stores nationwide. The smoothie surge helped drive a key Dairy Queen strategy that’s playing out in some of its new Chicago stores.
Dairy Queen-owned Orange Julius has had a full lineup of smoothies for several years, though the company has done little to market them. That should change with Dairy Queen’s strategy of transforming many of its outlets into co-branded treat centers with Orange Julius. Dairy Queen has operated such co-branded stores in shopping malls since the late 1980s. But in 2006, the company began testing the concept outside of malls, a move partly prompted by "the incredible growth in the smoothie market," Bader said. It has 36 Dairy Queen-Orange Julius co-branded stores in the U.S. and expects 60 by the end of the year. A much larger rollout is anticipated next year.
Earlier this year, several franchisee associations, including one representing Illinois Dairy Queen operators, sued Dairy Queen in federal court in Michigan, claiming the company was forcing them to undertake expensive renovations.
The suit was dismissed last month, but an attorney representing the franchisee associations say the issue hasn’t gone away and franchisees are weighing their options.
Burger King buys 72 franchised restaurant
Forbes reported Burger King Corp. announced it has bought 72 restaurants spread throughout Iowa and Nebraska from franchisee Simmonds Restaurant Management for an undisclosed amount. Burger King operates more than 11,400 restaurants worldwide, about 90 percent of which are owned by franchisees.
"As a result of this deal, we have expanded our company restaurant presence to attractive Midwest markets, enabling us to leverage our existing infrastructure and established brand presence," said Chuck Fallon, president of North America Burger King Corp.
Does Starbucks need more Caffeine to stimulate sales?
Starbucks recently announced that it would shutter 600 of its more than 7,000 stores (8%) nationwide, shedding up to 12,,000 full and part-time jobs. The price of this stock reached a new 52-week low of $15.62 on July 1st.
Many people believe that Starbucks opened shops too close to each other. The company reported that seventy percent of the stores affected are less than three years old.
The company has yet to disclose which stores will close.
There is no doubt recession fears have not helped the company, but I believe Starbucks’ decision to close stores has more to do with competitive pressures other than just the economy.
Getting rid of stores that were cannibalizing each other is a good financial move but they may need more to prevent things from going bad to worse.
Troubles at Starbucks come at a time that Dunkin’ Donuts has been aggressively expanding and McDonald’s has introduced low-cost premium coffee.
See the Let’s Talk Franchising post on: Franchise coffee sales need some perking
Jim Coen, Mr. Franchise
I have learned franchising from the ground up. I’ve been a franchisee for a bad franchisor. I’ve worked for good franchisors and I’ve worked for marginal franchisors. I’ve helped many franchisees succeed.
I provide a consulting process that saves you time and money in your franchise search and provides you with the tools to make the right choice for you and your family.
Call Toll Free: 877-469-3002
BlogRoll Or Other Links of Interest
Directory of Franchises
- Blue MauMau Franchise Directory The webs most comprehensive franchise directory
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Franchise Associations
- American Association of Franchisee and Dealers The AAFD is a national non-profit trade association.
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- New England Franchise Association NEFA mission is to share information and ideas for success.
Franchise Perfection
- Home Page At Franchise Perfection we are franchise consultants and advisers, helping those interested in buying a franchise business opportunity.
Government Sites
- Franchise Rule Facts for Consumers The FTC Franchise and Business Opportunity Rule.
- Small Business Administration The SBA ia a US goverment agency to aid, counsel, assist and protect the interests of small business concerns.
