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Michigan-based coffee franchise company The Coffee Beanery continues to draw fire, as well as negative publicity from a number of publications and news sources. This time it’s a Forbes story, titled A Cautionary Tale For New Franchisees.
According to the article:
One couple, Deborah Williams and Richard Welshans, sunk $1.6 million into an Annapolis, Md., café they opened back in January 2004. They allege that Coffee Beanery–now with 131 locations in the U.S. and 25 overseas–duped them into buying into a failed business concept. The couple says their store has never turned a profit, and they are now fighting to recoup their losses in arbitration. (The Coffee Beanery declined repeated Forbes.com requests for comment.)
The Welshans claim they were victims of what amounts to bait-and-switch tactics. They started their search for a franchise when Rick lost his job as a sales rep for chemical maker Rohm & Haas. They surfed the Internet for coffee shop franchises and ended up at the The Coffee Beanery. While they were interested in the traditional The Coffee Beanery coffee-based concept, they were “sold” into opening a newer, inadequately tested Cafe concept.
At headquarters the couple met with Rick Greenbaum, head of franchise development. Greenbaum told them Coffee Beanery was moving away from its smaller coffee bar, coffee cart and kiosk-style models and was focusing more on a new franchise concept called the “café store.” These were bigger, more expensive and required franchisees to sell sandwiches, wraps and pastries in addition to coffee-related products.
When the couple balked at the price tag, Vice President of Development Kevin Shaw, they say, reassured them they could expect to clear $125,000 per year as café store franchisees. Impressed, the couple left Michigan with a signed agreement in hand; seven months later, they were open for business.
The couple complains that they started noticing that things weren’t quite right almost from the start.
For starters, Rick says, the mandated store design wasn’t conducive to crowds–everyone bunched up near the front so the store looked extra busy, deterring passersby. The two cash registers were a pain, too: They couldn’t be used at the same time, couldn’t ring up customized food orders and would repeatedly freeze and shut down, he says. On top of all that, he claims, the refrigerated display cases were defective; water would pool at the bottom, damaging the food.
Coffee Beanery’s financial condition is in similar soggy shape lately. For every franchise sold, the company receives an upfront $27,500 fee. (It also collects ongoing royalty payments.) But Coffee Beanery pulls in most of its revenues–roughly 63%–selling its equipment and products to franchisees, according to its latest UFOC for the fiscal year ended June 30, 2006. In that year, Coffee Beanery squeaked out just $24,295 on nearly $14 million in revenue. Meanwhile, cash flow from operations–arguably the most honest measure of a company’s health–had plummeted 78% since 2004. Starbucks, this isn’t.
Stories in Franchise Times and the FTC website have also been disturbing. It is especially troubling since the The Coffee Beanery has always seemed to be a well-respected franchise company and active industry member. I have met Kevin and Joanne Shaw on several occasions, and toured the The Coffee Beanery Home Office.
In fact, The Coffee Beanery founder Joanne Shaw currently serves on the board of directors of the International Franchise Association and in the year 2000 was the first woman to chair the 40- year-old Association. She is past president of the Specialty Coffee Association of America.
According to the company press kit, Shaw was named Entrepreneur of the Year in Michigan in 1991, and has been inducted as a lifetime member in the Entrepreneurial Institute. In 1995, Shaw became the first recipient of the Bonny LeVine Award, given by the International Franchise Association to an individual who has served as a mentor to women.
Hopefully, The Coffee Beanery can use their vast experience and resources to turn around this damaging situation, and to fix the allegedly flawed cafe concept before more damage is done.
For more information on the coffee franchise opportunities and news involving coffee franchising, visit the Franbest Coffee Franchise Blog.
I am thinking of starting a quick inexpensive drive thru Just For Coffee Booth for Baltimore area. Would you please assist my thought to make it happen. I will sell and dispense your product line.
I am a sad and sorry customer.
The Coffee Beanery in Boynton Beach, FL closed last week. Such a lovely owner who was forced to work seven days a week since opening last June. The costs were too high, the footfall too low and the economy didn’t help. Whatever the reasons, another failure and another expensive and heart rending story to be added.
Another CB Cafe has closed
Williamsburg Va
We lost all of our savings and retirement STAY AWAY
Good for you, Otis!
Apparently, all the “honesty and knowledgeability” of CB didn’t induce you to buy a franchise from them because they wouldn’t disclose any of the advantages of the system to you.
Did they make an an “earnings claim” to you? How did you know that their concept was not a “winner”?
Would you agree that the government mandated disclosure document that accompanies a boilerplate non-negotiable long-term contract acts to subsidize the franchise industry? —while hiding the risk of the investment from the prospective buyer of the franchise?
Wanted to let everyone know that another Coffee Beanery has closed. OURS, in the Park Plaza Mall, Little Rock, Arkansas. We were let out of our lease because the store next to us was vacant and a new tenant wanted both stores, which was a godsend to us. I can’t tell you how much money from our pockets that we dumped into that store. I contacted Kurt at the Beanery and told him that we were closing. I have had no further contact with these people. There is only one Beanery left in Arkansas at this point. When I originally spoke to JoAnn Shaw, approximately 3 months before I closed, she advised me that I could not close. I felt like I had talked to a brick wall after about a 15 minute conversation with her. It was pathetic.
As far as the sale of the Beanery is concerned, my word is that the sale fell through. Maybe some of you folks know a bit more about what is going on. I go on their website once in a while to see how many Beanerys are left. I think they are down to somewhere around 81 now. When we purchased our store 3-1/2 years ago, there was about 200+.
I met with the Shaw’s back in the late 1990′s to buy a couple of franchise operations. I found them extremely knowledgable and honest. I didn’t buy from them simply because I had been in the coffee business for longer than they had and understood the “game.”
I joined a team of investors that purchased a Jamaica Blue Mountain Coffee Farm, opened a Coffee Plant in the Virgin Islands and Beans, Bytes and Websites Internet Cafe in St.Thomas. It’s not only several times more profitable, since we own the farms and factory, but it’s also a lot warmer in the Virgin Islands. I tried to discuss these advantages with the Shaw’s but never got anywhere.
First owners of franchises are very often first owners who have NO experience operating a small business, and this is why they select a franchise. The franchise is falsely represented often as a proven plan, a proven turn-key operation, that presents little risk. This, of course, is why franchising is so attractive to those looking for a job and income.
If franchisors had to disclose the material risk factor of the actual unit performance statistics of their systems, many prospective buyers of franchises would not buy franchises that demonstrated a high risk of failure or lack of profitability for the franchisees.
Obviously, this is why the FTC Rule doesn’t require disclosure of this material information by the Franchisor and offers up the confusing Artifice of Item 20 upon which new and inexperienced franchise prospects are supposed to do their due diligence.
Had any of these people had previous experience owning a business? Did they talk to and/or visit stores/current owners on their own? Not just corporate? Were they prepared to invest their (and many times their families) free time to make the company successful? As all small business owners must. Did they notice all of the coffee shops opening on every corner and realize that this was their competition? hmm….
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[...] The Coffee Beanery Franchise Woes Reported in Forbes Article [...]
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[...] The Coffee Beanery Franchise Woes Reported in Forbes Article [...]
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[...] The Coffee Beanery Franchise Woes Reported in Forbes Article [...]
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[...] The Coffee Beanery Franchise Woes Reported in Forbes Article [...]
STAY AWAY FROM CB, We have lost everything
and we tried for 5 years not 3 months, it is a flawerd concept, payroll double what they say
What good news for the Wilsham’s and their attorney! How gratifying to know that perhaps our “system” does, sometimes, work for the weaker party in the contractually imbalanced relationship of the franchisor and the franchisee —-when the franchisees and their attorneys have the courage and the financial resources to address the higher courts.
I have just read the Decision of the 6th Circuit Court of Appeals on this matter and have hope that, ultimately, justice will prevail for the Wilsham’s and that this NEW case law will be an important means of making the little FTC acts a viable means of litigating fraudulent inducement to contract in a a private right of action in the State Courts.
As a lay person who likes to read the law, I am especially impressed by the plain language and reasoning of the 6th Court’s Decision that even non-attorneys can understand.
The Internet will make it possible for the “people” to look at and understand the “rule of law” that applies to their circumstances and attorneys and judges, and arbitrators, perhaps, will be held to higher standards in the interests of fairness and justness and equality before the law.
Thanks to Forbes.com and to Blue Mau Mau and to Franchise Pick and to Janet Sparks of The Franchise Times for their coverage of the Coffee Beanery injustice. I’m sure we will be hearing more about this in the future.
Well said Carol.
It was just disclosed yesterday that the court in Maryland vacated the arbitor”s decision in favor of Coffee Beanery. In that finding, it was determined that Kevin Shaw had never disclosed that he had been convicted of grand larceny. So much for the good clean family owned business. How sad.
Google “Coffee Beanery” under Google News
Yes! And, when franchisees sign ten-year contracts and long-term leases, they are trapped into as situation where they are always workiing to provide profits for the franchisor, even as they never make a dime in profits for themselves during the entire term of the contract.
Even if they eventually fail, all of the time franchisees are trying to reach break-even status, they are working for the franchisor, who takes profits off of the gross sales, even as the franchisee is failing to thrive and struggling to pay the bills for the business and service the debt that built the business.
Franchisees either have to try to sell their losing or break-even business, if they can, usually at a loss, or remain standing to service their debt, or lose everything.
In failure, they have to give their businesses away to get out from under the terms of the lease and the franchise agreement, that are personally guaranteed. Even then, they have to continue to service their startup debt for years to avoid default and bankruptcy and when the franchisor can get their assets and businesses for pennies, the failed franchisee continues to provide profits for the franchisor for many years to come.
Franchisees are indentured for the term of the franchise agreement and the long-term lease and this, of course, is the INTENT of the usual adhesory and malicious contracts that provide no reasonable exit solution for franchisees who don’t thrive.
I believe this is why most franchisors don’t disclose “earnings” in Item 19. Franchisors can obscure the fact that the franchised business doesn’t really produce profits for the franchisee and really just produces a low paying job with long hours and no benefits —-and, sometimes, not even that.
Many franchisees work for nothing just to keep standing and to keep trying to break even. All of the time they remain in business, they provide profits for the franchisor, and many feel ashamed that they were “taken” and don’t want to share this with prospective buyers of the franchise, or even with their friends. Because, franchisors don’t have to share their unit performance statistics with their franchisees, even the franchisees have no idea what percentage of stores in the system are profitable.
If franchisors were mandated to disclose the unit performance statistics in their possession to new buyers of franchises, this, of course, would reveal that the franchise wasn’t delivering profits for the franchisees and they wouldn’t be able to sell their franchises to the public and continue to perpetuate themselves.
Obviously, this is why prospective franchisees of some systems have to be “tricked” by appearances into signing long-term contracts that are malicious legal traps!
Obviously, this is why franchisors are not mandated to disclose “earnings” to new buyers, who then, unknowingly, buy into systems that produce no profits and long-term grief.
Brutal reality and truth! .
And for Lea’s benefit,
Coffee Beanery in Michigan made money, even if an individual store did not. They get royalties on sales, not profits! I would really like for Lea to state what affiliation she (or he) has with CB. Unless Lea pays the bills, Lea is not qualified to comment on the financial status of a particular store. Lots of customers does not mean lots of money if the business model is flawed. I challenge any CB cafe owners to prove otherwise.
Lea stated that she worked at a CB. She probably doesn’t own it. We had many employees that still got paid! Our store seemed busy too! However, it never made money because of the cost associated with buying it, building it, and operating it. The help got paid. We did NOT…….
Lea demonstrates the “Ace” that the franchisor always has up his sleeve, because, she, of course, has a successful Coffee Beanery Business and she thinks that any criticism is harmful to her asset, and that any criticism or recovery by failed or failing franchisees is a threat to her business if it weakens her franchisor. And, this, of course, is true!
Obviously, regulation was promulgated with the view that it would protect franchisors and the successful franchisees in franchise systems, and protect franchisors in the courts and in arbitration from litigation by the unsuccessful franchisees who feel that they were defrauded in the process of buying thei franchises that have either failed or are unprofitable business operations.
But! the point is that franchisors are permitted, under regulation and the current status quo of the law to sell franchises that fail in great numbers for first-owners of the franchise and not disclose this failure of performance to new buyers of the franchise. They are enabled by regulatory policy to sell unviable and/or unprofitable franchises to the public as a means of perpetuating their existence and growth in the economy. Churning is permitted and encouraged by existing regulation.
The point is, as the franchisor’s proven plan become less viable in the economy for many reasons, including saturation and demand for product, franchisors react by selling more unviable franchises to more new buyers in an effort to perpetuate THEIR visibility and their profits. They churn and saturate to survive but they can hide the churn from new buyers of the franchise and the regulators who don’t look at the disclosure documents until there are complaints from franchisees.
The dark side of franchising is that NEW buyers of franchises are tricked by the package of the FDD and the franchise agreement itself into unknowingly buying franchises that have demonstrated very high failure rates of first-owner, i.e. first-generation franchisees and high churning activity that can be obscured from the view of the new buyers and from the regulators, as well.
The CB injustice in the Welshan’s case demonstrates federal regulatory policy that premeditates the sacrifice of franchisees to the perpetuation of the franchisor, even when the franchisor has violated the disclosure rules.
The current regulatory policy and the failure of the banks and the lenders to apply checks and balances and risk assessment to franchise loans has contributed to growing fraud in the sale of franchises —if fraud is defined as selling high risk and unprofitable franchises to the public while hiding the actual risk of the investment under cover of federal regulatory policy.
Franchisees weep while the FTC and the Congress sleep and fail to mandate that the franchisors, themselves, disclose unit performance statistics of their systems to new buyers of franchises.
If new buyers of the CB franchises, and if the Welshan’s, had known the true performance statistics of the Cafe concept sold to them, they would, of course, not have purchased the franchise. Yet, law and process has been used to protect the franchisor who sold them this failed concept to them and the FTC Rule protects the franchisor from any recourse from the Welshan’s because in effect, the FTC Rule deems that unit performance statistics in the possession of the franchisor are NOT material facts that have to be disclosed to new buyers of the franchise.
As Susan Kezios of the American Franchisee Association has indicated in public comments to the FTC and to the Congress. The failure of government to require franchisors to disclose historical unit performance statistics is the fatal flaw of the Rule and is misleading by omission. But, it appears that the “omission” is the intent of the Rule that mandates 22 items of disclosure but doesn’t mandate Item 19 disclosure of “earnings” by franchisors to the new buyers of their franchises.
Unfortunately, the FDD and the franchise agreement, the “package,” does, as necessary, give the franchisors a license to lie, cheat, and steal in order to perpetuate their systems that are considered vital to the local and national economies.
Does the end justify the means? Could franchising stand and grow in the economy to the great extent it has grown the past thirty years IF the unit performance statistics of systems had to be disclosed to new buyers of the franchises and to new buyers of the stock of franchisors who have gone public?
Sorry, Mike, but you’re wrong. The Coffee Beanery here is great & does amazing business. Just because it doesn’t work in one place doesn’t mean it doesn’t work in another.