Hack, just wanted to chime in on a great thread. I'm a one unit franchisee of a fast casual in the Midwest, so I've enjoyed the thread.

We're in the process of writing the business plan for locations two through six. Exciting times! I'm too tired to think of questions right now, but I know a couple will come up as I read the thread again. Best of luck with your operations.

Interest article: https://www.yahoo.com/food/mapping-a...982398426.html

Thanks! good luck with your expansion-if you have questions you don't want to have posted in the forum you can pm me also

That is interesting...another article from the same site......

http://www.thrillist.com/eat/nation/...rillist-nation

OP,
It does read like I'm poking the founders/management. I don't have much confidence in them & it is my belief the franchisee's would benefit from some management changes. The 2014 results are going to be interesting.

ITT you brought up the development fees paid by 5Gs franchisee's. I will copy/paste for anyone who wants to follow along.

“The initial investment comes before you build a store-that is the purchase of territory from the franchisor-all organizations are a little different, but with FG the fees are split into 2 components, the Development Fee and Franchise Fee. When you commit to FG the DF is paid in full for ALL stores in your territory-For example if you agree to a 10 store territory and the DF is 30K and FF is 25K you cut a check for 325K-DF for all 10 and the FF for the first store, and then as you open stores you pay the FF for the additional stores. Total for the 10 stores would be 550K”

In this example you used 30K/unit as the development fee. How did 5Gs come up with that number? Was it based on some measure of market value or were the dev fees standardized?

Near the beginning of this year 5Gs stated there were 2,500 sold but un-built stores in the system. Units they would have already collected dev fees for. @30K/unit = $75,000,000 that franchisee's have already payed 5Gs for the right (and the obligation) to build out these units.

5Gs stated that unit-growth is main reason behind the AUV loss. (I wonder how wise it was to make that statement from a franchisor perspective) I'm guessing the system was around 1K units at the time.

So how do you think the un-built stores & the collected dev fees will resolve?

Several things here-

The price for the development fees were standard, as it remains today- This fee has increased over time-and January I believe it will be 125k per-(primarily for international development)

I believe that the total units sold in the system would be closer to 2500 not your total(3500)-meaning that the system is almost 50% built-

I have no problem with FG being honest about their thoughts on AUV's. I have stated several times that I believe that system AUV's will recover (due to our market experience-we deeply penetrated our primary market quickly and our transactions and AUV's suffered. As we have matured in the market, our transaction counts and AUV's have shown strong growth-we have almost 2 years of weekly, and monthly year over year growth in both transactions and AUV's).

The Murrells seem to me to be committed to the long term success of the brand, and as such they are working with Franchisees to insure that the system can withstand the growth. For example: We are going to fulfill our commitment in terms of total stores, but have stretched the completion by a short period. From my work with the development team I believe that if someone presented a strong enough case to them that one could suspend growth indefinitely depending on the size of the market and percentage to completion the market is (ie-if your 80%, or over, built out). In my opinion FG would definitely keep the development fees for any unopened locations (keep in mind, this store could still be developed as a market matures)-Its important to remember, I am not speaking for FG this is my opinion only.

The 2500 un-built stores in the system is not my number, it is the franchise director's (mark's) Let's assume his number is accurate. Over what period of time do you anticipate that qty of build-out will be fulfilled? Just your best guess/estimate obviously.

What makes you think the family is in such bad financial shape? The FGO (company owned stores) system does pretty close the AUV for the system-yes i think they have some underperforming stores, but I think they have as a whole a strong system.

Let's look at what it cost them to get to these 400(we know this to be high but it makes the math simple) stores-lets use estimates because I don't know the exact breakouts and assume that the system was 1/2 built and 1/2 acquired(i think they have built a higher percentage of the total-but for the purpose of this exercise lets use 1/2). Lets also assume for the sake of discussion that each built store cost them 350k (more than I am spending, and I think more than they are-but again this is an estimate for discussion) and each purchased store cost 500k(I am using this number because I have no idea what they paid-I have been offered stores for from 5 to 7 times net-so this would be in the range for an average unit-you have stated that you believe they were purchased for low multiples-but for the sake of discussion-lets use this number). This would put them at $170M right? We have already established that they have received $75M in development fees-and 1000 stores built by franchisees would produce another $25M in revenue-so they would only be 70% into the $100M credit line if they have not paid anything on the note (which is improbable)

What is the need for the other financing tools? The system produces approximately $78M(6% of 1.3B) in annual revenue from franchise fees and then the additional $32M(8% of $400M) or so from FGO. Lets estimate that they are spending 40 million a year running the company(again this number is grossly high--they are a very small organization probably less than 150 at FGE) that still leaves $70M for debt service annually

I'm not sure where you got this Mark Moseley quote-are you saying he told you this directly-because I'm pretty sure my number is accurate-any number I have ever heard for domestic development is 2500 or under (usually the number is 2200 us and 300 canada I believe-but I could be wrong on this)-maybe he is including the UK in this number-but I doubt they are planning 1000 stores for that area

That being said, I can't really answer this-I don't know the original build out schedule-we will be close to our dates. Either one of our numbers will take several more years at minimum

Hack,
I don't think I said they are in bad financial shape. I was just speaking to a possible exit. The founder said he would seriously consider offers that will allow them to keep control. I think control is the issue tho. They have been wined & dined for a while. If there was a private deal out there that would have left them in control they would have taken it. If & when the money comes in, I just don't think they will be there.

The fact they control about 65-70% has been known publicly for a while.

I know I am clogging your thread with all this brain damage. It is not directed to you or any franchisee. Will have zero problem being wrong about 5Gs.

What has the year been like? Is there a rebound in system sales or do you think it might come in flat or <.

As an outsider, I must say it sure appeared you had intimate knowledge.

It seems like he has done due diligence.

Well, you definitely made it look like that in your previous post about the exit strategy-indicating that not only were they maxed on the credit line, but they had pledged portions of all of the revenue streams and other debt as well. I have no doubt that venture capitol groups have tried to buy the organization-But yes the Murrells want to keep control-and frankly counter to your thoughts on this, we think this is best for the brand.

They did sell a portion of the company before the big push past the ohio river-I don't know how much was sold or for what-but I believe you could be in the range.

No worries-I started the AMA-and really I think you are to caught up in the process flaws you perceive from the family, and I believe that the product is the lynchpin in this and what will make the brand successful long term. I obviously disagree with you about the long term viability of the brand-but I appreciate your perspective on this.

Actually I think you will see a slight increase this year in transactions and definitely in AUV-the year started soft for the system, but has been strong for several months now and I believe we'll see the year end with positives in both categories.

The 2013 AUVS were reported to be just about 1 million/unit vs 1.1. Do you think the system might get back to 1.1 in 2014? Even getting back to flat would be a nice result for the franchise owners.

What do you think unit growth will look like?

Oh, I didn't state that a particular credit line was maxed.

Can we talk about milkshakes?

I think the number will be under 1.1 but over 1- 1.08 will be the mark I think.

Net Unit growth will be around 55-60 in 14 and I am guessing, but from my read it will be closer to 100-125 in 15

but that gets back to my question, why would they do things like sell a portion of revenue streams if they still have plenty of accessible credit?

I don't know much operationally about Milkshakes yet, as I was not involved in the test. I do think it is a positive for the system, with shakes running to a much lower COGS and higher price elasticity (people pay more for treats, and don't seem to mind the price point)

I just estimated for the Chipotle comparison, but if we use mores specific results estimates, the AUVs look like this:

2011 1,156
2012 1,059
2013 1,027
2014 1,080 *OP estimate

Re: price elasticty of demand. Yes, but in isolation. You go to XYZ for a milkshake & buy a milkshake, but in this case you need to consider the blended cost of a hamburger, fries & a milkshake. Right now, a cheeseburger, small fry & reg drink at 5Gs is ~$13, when we replace the soda with a milkshake we are at ~$15.

@ apocalypse 5:

smashburger's milkshakes are like $4.50, right? i am lead to believe that you think this is very suboptimal for them?

When you hit certain price levels the price-value equation (from the consumer's pov) comes into question. I feel there are structural issues with the 5Gs menu itself & a few things that inform it. To somebody's credit, they made one sharp adjustment. Some of the stuff I'm talking about operates on a very subtle level & don't want to get into very much. Ask yourself this, why does smash price like they do?

honestly i usually choose Five Guys over Smashburger, and partly that's bc Smash's obscene milkshake prices annoy me.

i'd love it if you would get into some of this subtle stuff when you have the time. edit: i haven't thought about it much, but it seems like what hack said: take advantage of price insensitive customers

The 5Gs shake I had was about $5. I think that's close to smash pricing. My point was smash did some smart stuff with their menu structure.

your prices are pretty close for the largest metros-FGO stores-most of the smaller markets run about $1 under your totals, but fairly close-

It is exactly the price value equation that I think works well for FG, as we provide the best product in the segment, and the portions are also the best value. I don't think that the price elasticity for treats is greatly affected by the cost of the entree's, as the choice to buy a shake is separate from the decision to eat. Meaning-they are coming to us for burgers and fries, the shakes are a great add on-but seldom the reason to choose a dinner spot-For example people don't choose to go to Chik Fil A because of their shakes, but once they go to CFA they may decide that they want a shake-and now the ticket is $2.50 more than if they had purchased a different drink.

Smashburger is more about the sizzle than the steak, and from my perspective this will cause them to struggle.

Hack, I think you may have misunderstood my point on the milkshakes or perhaps I did a poor job expressing it. I agree that customers are less price sensitive to "treats" such as milkshakes, but generally that is when they are going to a "treat" specialty store like a dairy queen or likewise.

When we replace a regular size drink with a milkshake at 5Gs we are
building check averages outside of fast casual pricing (generally accepted to be $8-$12). @$14-$15 consumer expectations start to change, they re-calculate the price/value.

I think the 5Gs price/value proposition is exactly where your competition is aiming for because there is significant weakness there. We can just agree to disagree on that.

Anyway, what do you think of delivery?

Delivery would not work well with FG product, fry quality suffers if they are in a bag for too long-

In general I am leery of the additional liability and insurance costs vs the amount of sales it would offer-and our ability operationally during peak hours batch orders for delivery and offer consistent ticket times for in-store guests

What kind of sales increases are stores that do deliver experiencing? The founders were pretty clear in not wanting any delivery. Is it moving the needle at all?

I am not aware of any stores doing delivery-this is news to me