Children’s Orchard: Hyped to the Core?
March 2, 2009 by Sean Kelly
Filed under Business
Franchise due diligence warning: even the brightest, shiniest apple in the franchise orchard could be hosting this year’s Wormfest.
Franchisers are notorious for playing fast and loose with both general franchise “statistics” and representations of the growth of their specific franchise systems. Franchise attorney and blogger Michael Webster has posted a biting and informative piece on The BizOp News ( Taylor Bond growing the Children’s Orchard Franchise? ) on the importance of checking hyped statements before taking a bite into a juicy-looking franchise opportunity.
As a quick example, Webster quotes a past interview with Children’s Orchard CEO Taylor Bond that appeared on franchise advertising portal Franchise Gator. Regarding the children’s goods consignment chain, the article states that “Under the leadership of new President and CEO Taylor Bond, who brings with him a strong background in franchising and resale, Children’s Orchard, with nearly 100 thriving locations in 23 states, is selling 5 million items to approximately 1 million customers each year.” The “interview” with Bond (which, for some reason, is titled “Recent Interview With Russell Frith”) states that “Bond is well on his way to achieving his goal of having 300 locations open by 2007.”
Nearly 100 thriving locations? Soon to triple in size? Sounds like a great system to join!
But it’s just like an attorney to kill the buzz by bringing up reality. Webster posts the required disclosure of unit numbers from the franchise disclosure document:
The disclosure document indicates that the “growth” of the Children’s Orchard franchise is what’s euphemistically known as “negative growth.” Instead of “nearly 100″ locations, as the hype interview states, the chain had 82 locations by the end of 2005, then fell from 82 locations in 2006 to 73 in 2007, a net loss of 9 locations. How gaining 0 units in 2005, adding 2 units in 2006, and closing 9 – or 11% – of total units in 2007 indicated that Bond was “well on his way” to achieving 300 units by 2007 is beyond my limited mathematical capabilities.
Then again, I never would have guessed “nearly 100 locations” actually meant 80 I mean 73 locations.
The franchise due diligence lesson for today, boys & girls? Compare the publicly hyped representations of the franchise company, past and present, to the cold, hard facts. The disparity between the two will tell you bushels about the company you’re dealing with.
And when “nearly 100 thriving locations” turns out to mean 73 locations and falling, you better scrutinize every representation the company makes. In cases like this, it might be hard to find a core of truth in the whole orchard.
WHAT DO YOU THINK? LEAVE A COMMENT BELOW.
Photo: FranBest.com used by permission
Chart: public document, The Bizop News
Perhaps the Children’s Orchard will do even more business during a recession.
The retail price of children’s clothes is very high and Mothers know that children grow out of them rapidly and often don’t wear them out and, therefore, they can still be sold on consignment even after they are bought on consignment.
Up until a certain age, children don’t mind wearing consignment clothes. Baby clothes are particularly expensive and are a good buy in consignment shops. The recession will help Children’s Orchard.
Perhaps space in shopping centers will become cheaper and franchisees will be able to negotiate short term leases to try out this concept, and will not put so much at risk to begin with.
What are the startup costs and the royalties?
Forward looking statements are common under the law, and, of course, would be forgiven in a court of law as mere puffery by the franchisor.
Probably, the profit margins are thin or non-existant for Children’s Orchard franchisees unless they are in reasonably high income areas where the “consignment price” produces reasonable gross sales upon which the consigner and the franchisor get paid first, and there is something actually left for the franchisee after paying overhead.
But, of course, if the franchisee signed a 3-Net lease, they have to stand, don’t they, if they are only making their overhead. What happened in 2008? What percentage of those still standing are actually making profits?
We see where Item 20 that indicates expansion, sometimes achieved by churning, falsely suggests growth and profits, and where lack of growth suggests an unviable franchise.
Maybe it would be cheaper to take a few thousand dollars and buy up consignment clothes and then resell them through a garage sale and an ad in the local paper????
Let the experts join in here!
Sean,
Taylor Bond seems a bit odd, doesn’t he.
How can he be in charge of a franchise system and make simple arithmetic errors? Mistaking 73 for 100 for example. Does his internal bookkeeping system have the same flaws? Is he paying $100 for every $73 worth of services his franchise system consumes? Perhaps he is using Dale Nabor’s famed back office systems?
Michael:
Good point.
Bond’s numerical flexibility could be a great advantage to franchisees. I’d imagine they could pay 73% of the franchise fee and 73% of their royalties and he’d be fine, since it’s nearly 100%. Plus, their goal is to pay 300% by the end of the year.
Obviously Bond likes his numbers like his martinis: Shaken, not stirred.
This piece peeked my interest, and so I visited their website which is quite lovely. I learned that the concept is resale which is difference from consignment, and am thinking that in this economy for consumers to be able to get upfront dollars for their kids stuff would be enticing to say the least. But then I took a state-by-state count of their current up and running franchise units and only counted 62! Whoa! Talk about a startling free fall.
I quickly checked the other “used kid stuff resale” franchises and did not find attrition, but stable and consistent year-to-year numbers of units.
This is one to watch, and proves that due diligence is more than falling in love with the concept.
Thanks, Grace. I now understand the difference between re-sale and consignment and I agree “resale” should do better. However, when looking up some of the “resales” I find that they are generally located in higher income areas where the cost of leased space in the shopping center is much higher than in lower income areas. The resale of quality and high priced children’s clothing and equipment depends on being located in those areas where the franchisee can buy and sell the merchandise for resale.
Remember that the long-term leases of these re-sale businesses are personally guaranteed and run for at least five years and generally for ten and fifteen year periods. The personal guarantees on the leases are upheld in the courts when a franchisee defaults by breaking the franchise and the lease terms which means that many franchisees have to try to stand at “breakeven” or less to avoid the DEBT on the lease that is personally guaranteed and is probably part of a REIT.
I have been trying to do some personal research with our local Children’s Orchard but the owner has not returned my call.
Lease agreements aside, I am more curious about the business model that can afford a stark nose dive and loss of units at the clip this particular franchise is experiencing. It was pointed out earlier that the system of this franchise was at 73. But that was then and this is now, because a cursory visit to their website to view current units, yields a count of 62.
Can this free fall be only about lease agreements?
Yes, Grace!
You are right! The contraction of units is a very bad sign! My remarks were meant to indicate that even those who are left, the 73, may not be operating at a profit and are just trying to avoid the debt on their lease that would be due if they default on the franchise/lease terms.
Since the owner of the two units in my area has not returned my call, I assume he/she/they have nothing to brag about.
The free fall is probably about lots of pain and even bankruptcies for those who are no longer a part of this franchise system.
http://unhappyfranchisee.com/2009/02/carolcross/
Yes,
Taylor Bond is a strange one. I am a CO franchisee. I have been scratching my head since Taylor purchased the company 4 years ago trying to figure out his strategy. He has done nothing to promote the growth of the company. He does no advertising for new franchises and does not participate in any franchise conventions. He preaches support of the franchisees but in truth all he cares about is the all mighty dollar. As the number of stores decline he claims that he is getting rid of dead weight or “hobbiest’s”. I don’t see him doing anything to replace them.
As far as profitability, it is very difficult to break even much less pull a profit. Many people think that resale stores should be doing very well right now. The truth is that the retailers are killing us with price cuts. Also the average ticket in a CO is lower than $20. In order to see a real jump in sales you must dramatically increase traffic. Most locations are in “B” centers that do not have the traffic that is needed to make it into the black.
Taylor, Taylor, Taylor you are a strange one!
Boy, it sure is a small world. I never thought I would be back here posting on this topic but I ran across a person who actually talked to the corporate office of this company. This person said that the corporate employee explained the store closures as being stores that were struggling in the first place, and needed help. Apparently, the new owner has been focused on trying to help those struggling stores and that is what has stilted the growth of new stores… his being distracted. I don’t quite buy into that reasoning, it sounds like an deflection tactic.
The person decided that this franchise would not be a good investment and felt that the response from the corporate office was strangely weak, overall a poor showing, with no energy about their own brand.
Just thought I would pass this on.
This franchise system is shrinking very quickly and then take a look at how many lawsuits the franchisor has filed or is in the middle of and it will make you run away from investing in this company as a franchisee. The lawsuits filed this year alone is already at 4, and think how many franchisees who closed their store just settled with the franchisor as a means to an end. Perhaps they are making so much money in federal court, they don’t need to worry about their core business and it’s exponential shrinkage.
I too am a current franchisee totally confused by the strategy of COI to survive and grow COI as a system and brand! I have heard top people at COI over the past two years talk about how it is not the number of stores that make our franchise, but how successful the stores are.
Look at the numbers and, although our system in total has experienced sales growth (despite store count decline), store credit offers are a portion of this growth, which are reflected as sales by COI. Store credits were introduced by Bond in lieu of coupons. These work in growing traffic and sales but not necessarily profit.
“Getting rid of dead wood”, which has been a phrase used by COI to explain terminating or not renewing struggling franchisees, has more to do with the newly implemented “royalty minimums” as well as subjectivity regarding the maintenance of an existing franchisee.
Marketing to get new franchisees is limited to using the franchisees customer email lists. Additionally, friendly reception and open sales information is not easily forthcoming when contacting COI for information about becoming a franchisee. Resale of existing units is a struggle and COI does not always act in the best interest of all parties involved.
Ask alot of old time franchisees who are still in the game. This has always been a way to make a modest living by watching the pennies and managing it tight. However, Bond seems to want to compete with “big box” competitor Once Upon A Child who does great sales numbers with unsubtanciated profit per store.
We can survive, make money, help the enviroment and our community if we continue to grow the number of stores. Branding means nothing if the general public is unaware you are a franchise chain. Being a part of a franchise chain gives us credibility, reputation and a long standing presence. In a time of difficult challenges for the resale business (due to the passing of the new lead law) I continue to hope that Taylor and the management at COI will go back to the basics of Franchising 101. Grow your business with store count AND sales per store.