Meal Prep Franchising; "…a fad industry that grew way too fast."
May 9, 2008 by Sean Kelly
Filed under Business
(FranchisePick.Com) “Quick growth does not equal profitability… This is a fad industry that grew way too fast.” Richard Rosen
FranchisePick.com has been focusing on the rise and fall of the meal prep franchise as it serves as a contemporary case study and cautionary tale of the “hot new franchise” phenomenon, and an example of the devastation that can occur when individuals allow themselves to be swept up in the hype of an unproven new idea.
In the recent article Taking On Restaurants And Grocers, Forbes reporter Melanie Lindner recounts the rapid rise of the meal prep industry, and some of the questionable-to-blatantly-illegal tactics franchisors such as Dream Dinners used to hype their franchise opportunities to enthusiastic franchisees.
It started with a captivating, but unproven idea…
Like all “hot new franchises,” it starts with a captivating idea that seems like a breakthrough new trend. Generating quick growth is key to creating the “Gold rush” mentality, and people are eager to mistake a proliferation of stores with sustainable success. Lindner credits Dream Dinners with setting the Gold rush in motion:
The meal-assembly industry was born in early 2002 when Stephanie Allen and Tina Kuna opened their first Dream Dinners store in Snohomish, Wash. The concept: Customers prepare their own food in bulk using the restaurant’s kitchen, ingredients and recipes–all for less money than buying and cooking food from the grocery store. And, of course, no dirty pots and pans…
Smelling success early, Allen and Kuna began to franchise. And it caught on: Since Dream Dinners’ conception, 13 similar chains with more than 20 stores each have sprouted up, plus at least 12 chains with fewer than 20 locations. Today there are 1,293 of these stores in 49 states (West Virginia lacks such a location), according to Andy Potter of the Meal Assembly Network, which tracks the industry.
Read more about Meal Prep
Dream Dinners seized and maintained the leadership position
Dream Dinners got out front early by franchising soon after opening, and is today the largest of the chains. It maintained an aggressive franchise sales and growth program, growing to 208 locations in 37 states throughout the U.S. (and another 29 under construction), is the largest of these chains. The nearest competitor, Super Suppers, followed closely on its heels with 165 locations open today.
Rapid growth comes with a cost… which the franchise owners pay.
What’s the cost of such rapid growth by an inexperienced company with an experimental concept? And who foots the bill? As the Gold Rush goes Bust, and the homesteaders find themselves waking up from their dream broke and angry, the truth emerges:
Now more meal-assembly locations are closing than opening, says Potter. Since January, large chains (with more than 100 stores) have shuttered 11% of their stores; mid-sized chains (10 to 99 stores), 8%; and small chains (two to nine stores), a whopping 17%.
Franchisees are starting to bristle. In late April, 15 of them filed a lawsuit against Dream Dinners, claiming a host of transgressions, including violation of franchise laws, negligent fraud and breach of contract. “We were sold a proven concept,” says Jennifer Garcia of Oxford, Conn., a plaintiff who closed her two Dream Dinners franchises in December. “This is an untested, unproven and flawed business model.”
Allegations of illegal “earnings claims” to hoodwink Dream Dinners franchisees
The Federal Trade Commission’s franchise law prohibits franchise sellers from providing sales projections or representations to prospective franchise owners, unless they so within the context of the Uniform Franchise Offering Circular and its myriad disclaimers. According to Forbes:
Dream Dinners “totally disregarded these regulations,” says [attorney Michael] Garner. It not only posted financial projections on its company Web site, he says, it also put them in a Power Point presentation given to potential franchisees.
Jennifer Hemann, a former Dream Dinners franchisee in Maryland and one of the plaintiffs in the suit, alleges that she was shown that Power Point presentation–which included estimated profit margins for a given volume of customers–when interviewing with the founders. “They told us, ‘Our lawyers said not to show this to you, but if you write fast, you can get it all down,’” she says.
After sinking hundreds of thousands of dollars into her stores, Hemann claims she never turned a profit: “In my two stores, I lost a combined $800,000 in my initial investments and operating costs.” Garcia says she got the same routine from Allen and Kuna: “They offered financial information, but said their lawyers told them not to–then gave a wink-wink and a smile.”
…The slides, provided by Garner, present some tantalizing figures: Allen and Kuna projected that, at 187 customers per month, a franchisee could expect to earn $75,400 in profit annually, or 18.9% of total revenue. One the high end, at a quoted 328 customers per month, net profits jumped to $163,300, or 23.3% of sales. The estimated distance customers would be expected to drive: two to five miles…
The American Dream turns into a nightmare
Franchisees are closing in droves and joining the lawsuit. But what will they gain? Franchisors have notoriously few assets as a rule, and Dream Dinners is bleeding money:
As of Dec. 31, the company boasted $2.9 million in assets, against which it carried $3.4 million in liabilities. (Such negative book value implies that if Dream Dinners were unwound today, shareholders wouldn’t get much.) That’s a snapshot, but here’s a trend: Last year, the company lost $628,000 on $7.5 million in sales; compare that to 2005, when it earned $928,000 on sales of $4.5 million.
Manhattan-based franchise lawyer Richard Rosen sums up the latest hot new franchise fiasco: “Quick growth does not equal profitability… This is a fad industry that grew way too fast.”
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I think that more of us should join forces across franchise affiliation lines and file suit against this industry in every state that a MA franchise exists.
Is that possible?
Maybe Easy Meal Prep would organize it. – not the earnings claim legalities here. That’s what i was referring to with the Bellso’s and Make & Take Gourmet feeding sales numbers to the newspaper.
Sean, where did the quote from Richard Rosen come from?
Sean, where did the quote from Richard Rosen come from?
The Forbes article linked to above, the 7th paragraph:
“Quick growth does not equal profitability,” says Richard Rosen, a Manhattan-based franchise lawyer who closely follows the meal-assembly industry but does not represent any specific franchise. “This is a fad industry that grew way too fast.”
Just below what looks like the reporter’s 6th grade school picture. Good reporting and writing for someone who looks like she’s not old enough for prom. (Nice work, Melanie)
Am I the only one who appreciates the subtle interface between the Editorial and Sales departments on these features? The story sounds the death knell and the pictorial slideshows have happy happy pictures and links to their websites. The recent Business Week franchise feature recently was just the same.
Sean, why do you think that people cannot recognize an illegal earnings claim?
Michael/Sean –
Just curious, from what you know about it, what do you think of the merits of the DD lawsuit?
Whew…I visited a Super Suppers location today, just for take-out to see if the kids found it palatable at all. The owner struck up a conversation about needing to find a partner or to get out. I like the concept so I thought I’d look around and I’m so glad that I’ve investigated. Thank you!