July: Gone Fishing In this issue... Summer Reading Suggestions From The Publisher: I just finished A Thousand Splendid Suns by Khaled Hosseini (author also of The Kite Runner); A wretching, haunting book of vivid characters in Muslim – dominated Afghanistan. Also, old chesnuts which make great beach books are Shogun and Tai-Pan by James Clavell. Click Here Street Smarts: Is Bigger Always Better? Industry Focus: Low-Cost Franchises - the Cream of the Crop Guest Column: Resale Price Maintenance Gets Green Light.

News You Can Use Hilton Purchased by Blackstone Triarc Continues Push for Wendy's Sale McDonald's Routs Fast-Food Rivals Private Equity Firm Acquires Chili's Units Carlson Opens 13 New Hotels Can It Be? Healthy Doughnuts Featured Supplier My Business Assistant We Thank Our Sponsors FREE White Paper FranchiseHelp's Franchise Meal Assembly Report Subscribe | Unsubscribe to the Newsletter

Most people associate franchising with big - really big - brands like McDonald's, Marriott's, or Midas. It's only natural. After all, the whole point of franchising a company is to grow bigger in the most economically efficient way possible. One of the main differences between a big franchise and a small one is the big one has probably been in business a whole lot longer. That alone means there are fewer questions that might remain unanswered. But all things considered, when shopping for a franchise opportunity, is bigger really better? Take a look at the pros and cons of big franchises and decide for yourself.

Pros:
• A valuable brand and a proven operating system are firmly set in place.
• Consumer awareness and attitudes about the brand are well-known.
• Numerous franchisees are available to offer practical answers based on years of experience.
• Dependability – you know what you’re getting.
• Less uncertainty due to the large amount of information available about the organization.
• Less risk – all the bugs have long since been worked out of the system.
• Strong capitalization to support the brand, large-scale advertising, and support.

Cons:
• It’s often difficult for new, unproved operators to get approval to open new units.
• Buying an existing unit may mean buying someone else’s troubles.
• The bigger the system, the more rules are imposed on franchisees.
• Operators often feel more like employees than independent entrepreneurs.
• Competition to buy into a big system is tremendous. As a potential franchisee, just getting a big franchisor’s attention can be a challenge.
• Conformity is favored over innovation, creativity, and independence.
• Bigger often means slower and less responsive to needs and concerns of individual operators.

Big or small, a good franchisor cares about the success of its franchisees. When shopping for a franchise, don’t make any assumptions based on the size of the organization. Take the time to check out all the options and choose the best one for you.

Low-Cost Franchises - the Cream of the Crop

Last month, we released our Low-Cost Franchises Research Report that examines 50 franchises with a minimum initial investment under $50,000 (Click Here for details.) There are many potential franchise buyers with limited investment capital who are on the lookout for great opportunities. There are also many franchise systems that you can get into without taking out a second mortgage. But which ones truly hold the best chance for success and a reasonable ROI? Based on our stringent criteria, three franchises rose to the top: Coffee News, CruiseOne, and StrollerFit. In this issue, we take a look at our #1 choice in low-cost franchises, Coffee News.

Coffee News is a weekly publication delivered free of charge to restaurants, coffee shops, hotels, hospital cafeterias, and any other place where people are sitting around waiting to be served. "It fills that time void," says Bill Buckley, President of Coffee News USA, "after the food is ordered and there is 10 or 15 minutes with nothing to do but wait." Coffee News sure beats reading the back of sugar packets. The content, which franchisees receive from the company each week, is filled only with good news. "It's a quick read," says Buckley, "a bit like Weekly Reader with all the fun and entertaining things in it - only this is for adults."

There is also a space for local happenings, but the rest is reserved for 32 original ads. That's where the money comes from. "It's a soft sell that goes over easy with local businesses because it's cheap, effective, and exclusive. "We only allow one of each type of business to buy a space," explains Buckley.

Coffee News appeals to people who want to get out of the Dilbert world, work fewer hours, but still make good money. The entire operation - selling ads, collecting money, designing ads, printing, and distribution - takes about 10 hours a week. "Our franchise model projects an annual income of approximately $25-$30K per franchise. Our average publisher owns three franchises. For someone who wants to make $75-$90K working from home, this is a pretty good deal," says Buckley. "

It costs $7,500 for the first franchise, which includes a $2,500 training and mentoring fee. Each additional unit is $5,000. To make easy to get up to the break-even point, weekly royalty is waived for the first three months. "That's their startup period. Starting the 4th month, there is a $75 a week (flat) fee on the first franchise. A second franchise would only be another $20 a week - and that doesn't start for nine months. So the maximum fees if you own two franchises is only $95 a week. For that, you're going to own a pretty good homebased business" asserts Buckley.

Resale Price Maintenance Gets Green Light
By: Steven B. Feirman

The United States Supreme Court recently overruled nearly a century of precedent by holding that resale price maintenance (RPM) agreements are not per se violations of Section 1 of the Sherman Act and must be evaluated, case-by-case, under a rule of reason. For many franchisors, this means that it will be lawful to specify the minimum price, or even the actual price, at which their franchisees must sell their goods and services. This decision presents franchisors with many opportunities in structuring their franchise systems and in marketing their products to the public.

The case in question, Leegin Creative Leather Products, Inc. v. PSKS, Inc., involved a manufacturer of women's fashion accessories that prohibited its 5,000 retailers from reselling its products at a discount. When Kay's Kloset was discovered to be selling at discount prices, Leegin stopped shipping its products to Kay's Kloset. The lower courts ruled that cutting off sales to a retailer that had been selling at discounted prices was a per se illegal price fixing agreement, in clear violation of the Sherman Act. All such vertical price fixing agreements have been automatically illegal since the Court so ruled nearly a century ago in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

In Leegin, the Court overruled Dr. Miles. In a 5-4 decision, Justice Kennedy wrote that conduct should be per se illegal only when it always or almost always tends to restrict competition. Reviewing the economic literature, the Court found that vertical price fixing may harm competition in some circumstances but may enhance competition in other situations. Accordingly, the legality of vertical price fixing should not be automatically unlawful but should be evaluated under the more common rule of reason standard. Under that test, it is necessary for the fact finder to balance any anticompetitive effects from the restraint against its procompetitive benefits. The Court provided some guidelines in undertaking a rule of reason analysis, including whether the supplier or retailer have market power, whether the price restriction originated with the supplier or retailer, and whether many competing suppliers also have adopted vertical price restraints.

As a result of this landmark decision, a franchisor who operates in a competitive industry will be able to establish a uniform retail price throughout its system, assuming that there are no contractual impediments to establishing resale prices. In that case, intrabrand competition (competition between and among franchisees and company-owned units of a single brand) will be based on service, not price. Moreover, franchisors will no longer have to rely on territorial restrictions, customer limitations, and price influencing techniques (such as suggested resale prices or minimum advertised price programs) to maintain order within their franchise systems. The Court decision also greatly simplifies the operation of national account programs and national advertising programs -- if RPM is permissible, there is no need for "at participating dealers" or "prices may vary."

While all of the implications of the new rule remain to be seen, there is no doubt that the Court decision will have a big impact in the franchising community.

Steven Feirman is a franchise lawyer who has handled domestic and international franchise and antitrust matters for nearly twenty years. His practice focuses on counseling franchising companies in the structuring and development of their franchise systems, and he serves as a strategic advisor to many leading franchisors. An accomplished antitrust lawyer and former FTC official, he has helped franchisors in dozens of industries with their pricing policies, supply chain management, and distribution practices. Previously a partner at DLA Piper, Mr. Feirman recently joined the Washington, DC office of Nixon Peabody, where he is co-chair of the firm's Franchise and Distribution Practice. Please feel free to contact Mr. Feirman at sfeirman@nixonpeabody.com or (202) 585-8395.

Hilton Purchased by Blackstone

Hilton Hotels Corp., the second-biggest U.S. hotel chain, agreed to a $20 billion buyout by Blackstone Group LP, ending more than 60 years as a public company. Blackstone will pay $47.50 per share. The acquisition will greatly bolster Blackstone's hotel portfolio which already includes such showcase properties as The Boulders in Scottsdale, Ariz., the El Conquistador in Fajardo, Puerto Rico and The London in New York. The deal would bring into the fold at least nine additional hotel brands including Doubletree, Embassy Suites, The Waldorf-Astoria and Hilton's namesake chain.

The buyout has been approved by the lodging company's board of directors, who estimated that the deal would close during the fourth quarter, pending approval by shareholders. The company agreed to pay a $560 million "break-up" fee to Blackstone if it should accept another offer or otherwise prevent the deal from being consummated. The parties noted that the deal, one of the largest ever seen in the hospitality industry, is not subject to acquiring the needed financing. Blackstone, one of the world's largest and most active private equity funds, recently went public. (Bloomberg.com, 7/4/07)

Triarc Continues Push for Wendy's Sale

Nelson Peltz has accused Wendy's International Inc. of attempting to thwart his Triarc Cos. from buying the fast-food giant for at least a year, prompting him to alert Wendy's that he views it as a logical acquisition for his Arby's business. In a letter sent to Wendy's chairman, Jim Pickett, he asked the company to invite Triarc, the parent of Arby's, into the due diligence process, but also noted that the holding is already considering whether or not to pursue that friendlier route. His statements seemed to raise the possibility of a hostile takeover attempt. Peltz feels that the lack of response from Wendy's and its advisors and the feedback they are hearing form the market clearly indicates that Wendy's would prefer to sell itself to anyone other than Triarc.

Triarc or one of Peltz's other investment arms have been cited as likely bidders for Wendy's since the company disclosed several months ago that it planned to consider a deal or other ways of boosting the value of its stock. On June 18, Wendy's indicated that it would explore a sale, without abandoning other strategic alternatives. (Nation's Restaurant News, 7/3/07)

McDonald's Routs Fast-Food Rivals

McDonald's is turning the latest Great Global Burger War into a rout. Rebounding mightily from the doldrums at the turn of the millennium, the company has widened its lead as the world's largest restaurant network with an all-time high market cap of $60 billion versus $17 billion for Yum! Brands, $3.52 billion for Burger King and $3.18 billion for Wendy's. Same store sales - a key indicator for the industry - show remarkable 8.7 percent growth at McDonald's for last month, far ahead of the field. Its operating margin for the latest 12 months reached 21.7 percent vs. 13.1 at Yum!, 11 percent at BK and 5 percent at Wendy's. Finally its net income for that period was a record $3.06 billion, about 30 times its nearest competitor.

When the chain began its revitalization program, CEO Jim Skinner realized that bigger is not better and that the key is focusing on enhancing existing restaurants and becoming truly customer-centric. According to Skinner, sustaining the streak will take a few initiatives. His aspirations include the renovation of more than 2,000 McDonald's units among the 13,800 across the U.S. and the opening of 800 new ones. Worldwide, the company sees expansion of about 1.3 percent this year and estimates that same pace over the next five years. McDonald's also plans to open 100 new units in China this year, a 12 percent increase. (Suntimes.com, 6/26/07)

Private Equity Firm Acquires Chili's Units

The private-equity firm Olympus Partners has acquired 95 Chili's Grill & Bar units from Brinker International for $155 million as the foundation for a new franchise operating company called Pepper Dining Inc. As part of the deal, Pepper Dining has agreed to develop at least 14 and possibly as many as 38 additional Chili's outlets.

The new venture will be headed by John McGlone, a former Chili's operations executive. The new units are located in the Northeast and mid-Atlantic area. Olympus said its portfolio has included HomeTown Buffet and franchises of Taco Bell, KFC, Wendy's and Golden Corral. It recently sold Travel Centers of America, the chain of travel plazas, for $1.9 billion. (Nation's Restaurant News, 6/28/07)

Carlson Hotels Worldwide announced this month that the company added 13 new properties to its global portfolio of brands during April and May - bringing its expansion pace to an average of six new hotels per month since the start of 2007. The company currently has more than 950 hotels in 70 countries. Among the 13 new hotels are the Regent Palms Turks and Caicos managed by Regent Hotels & Resorts in the British West Indies; two Radisson SAS hotels in Ireland; two new Radisson Hotels & Resorts properties in the United States; five additional Country Inn & Suites by Carlson, including one in Canada and four throughout the United States; and two Park Inn hotels in Ireland and the United Kingdom. Carlson hotel brands also include Park Plaza Hotels & Resorts. (Hotelinteractive.com, 6/21/07)

Can It Be? Healthy Doughnuts

As expected, Krispy Kreme Doughnuts has introduced a multigrain doughnut as a more healthful alternative to its signature treat. The new multigrain cake doughnut is made with seven grains and topped with an oatmeal crisp crunch. It is made with molasses, brown sugar and pecan flavors. Franchisor Krispy Kreme Doughnuts, Inc. alerted shareholders several months ago that it planned to add the new doughnut as a possible traffic builder. Executives also noted that Krispy Kreme's signature Original Glaze doughnut is perceived to have more calories and perhaps a worse nutritional profile than it actually does.

Krispy Kreme has been unable to stem a decline in sales, a trend it initially attributed to the low-carbohydrate craze. The company recently reported that its losses deepened for the quarter ended April 29 to $7.4 million, compared with a net loss of $6 million in the year-earlier quarter. Revenues were down to $110.9 million compared with $119.4 million a year earlier. (Nation's Restaurant News, 6/27/07)