SUPPLY CHAIN

Franchising Freedom

BY Connie Robbins Gentry

The traditional franchise model offers aspiring retail owners an opportunity to open their own store with relatively low risk, but also with little to no autonomy. Franchisees pay a fee to buy into a proven concept and essentially follow the franchisor’s mandated game plan. At the opposite end of the risk spectrum, entrepreneurs create their own concept and make decisions to suit their vision, but they do so with little or no support.

Between these two extremes resides Great Harvest Bread Co., a self-described “freedom franchisor” that provides franchisees with all the ingredients for success while allowing each owner the flexibility to individualize his or her business.

In 1976, the first bakery opened in Great Falls, Mont., and franchise headquarters was established seven years later in Dillon, Mont. Current CEO and president Mike Ferretti and five friends purchased Great Harvest Bread Co., in 2001.

Ferretti was attracted to the franchise-based model and to the superior product—breads “made from scratch” daily using all-natural, healthy ingredients including wheat grown in Montana and ground fresh at each bakery.

Although there have been company-owned stores in the past, all of the approximately 200 bakeries are now franchised. This allows each store owner to personally manage the bakery operations, including daily product preparation, while the parent franchisor concentrates on corporate infrastructure such as marketing, accounting, site selection and sourcing ingredients.

“We want our franchisees to be able to make their own decisions, but we give them all the support they need to be successful,” explained Ferretti. “Typically, a franchisor sends field support to ensure compliance [with corporate policies], but our teams visit bakeries to help implement new ideas or fix problems.”

The company is, however, a stickler for maintaining product quality. Each quarter, bakeries submit loaves of the mainstay honey-whole-wheat bread for evaluation by corporate inspectors. Loaves are rated based on their taste, smell and appearance.

“We do not allow investors to purchase a franchise; all owners have to be hands-on managers and we only allow owners to operate multiple stores after they have established a successful track record with one store,” continued Ferretti.

Great Harvest Bread Co. receives some 6,000 requests from prospective franchisees per year, of which approximately 300 actually complete the rigorous applications process and about half of those are deemed to be legitimate and workable possibilities.

“These numbers have not fluctuated over the last few years,” noted Ferretti. “The difference is that the final 150 applicants are now more serious and better qualified than the applicants were five years ago.”

The company’s proven success no doubt encourages interest from higher-caliber prospects. In 2006, sales reached $85 million and Great Harvest Bread Co. is on track to surpass $90 million this year. Another contributing factor is the growing consumer preference for healthy foods.

“The biggest trend impacting our business is the whole idea of knowing where the food you eat comes from,” said Ferretti. “Eating organic food is a big trend, but I think Americans are going to settle on the idea that what is important is not that everything is organic, but that they know where their food came from and what was done to it before they got it.

“There is considerable risk in sourcing raw products now. All of our wheat is grown on Montana farms; we know the growers and the specific field where every wheat berry comes from. Our store owners can identify each ingredient in every loaf of bread and track the raw materials by lot number on our internal Web site.”

In addition to controls that maintain the consistent quality of every product baked, Ferretti established a Franchise Agreement Board, comprised of elected bakery owners, that ensures franchisee input in all corporate decisions.

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Weekly Retail Fix

BY CSA STAFF

THE NEWS: SAM’S REALIGNS STORE-LEVEL MANAGEMENT

BENTONVILLE, ARK. Sam’s Club is changing the management structure in its stores. In the realignment, approximately 250 positions will be eliminated, Wal-Mart Stores announced last week. The company said it’s replacing five lower level management positions at each Sam’s Club location with three new higher level and higher paying assistant manager positions.

“This is not a cost cutting effort. We expect a slight increase in payroll upon completion of this change,” said Sharon Orlopp, senior vp of Sam’s people division.

THE FIX: Differentiation would better help Sam’s

Since Sam’s decided that its refocus on the business customer was too narrow, it has sought to find ways to make its clubs more attractive to primary shoppers, i.e., women. And that’s a pretty tough row to hoe, as Costco has done a pretty good job at satisfying the club customer in general and BJ’s has been going after female shoppers for several years now, with some success.

Having fewer managers with more direct responsibility could create a tighter knit club-level management and shorten lines of responsibility and accountability. Yet, without differentiating the offering, execution isn’t going to overcome all of Sam’s challenges.

That being said, a store-level management realignment might be overlooked at other retailers, but, this being Wal-Mart, everyone has to make a big deal about it. But that’s the price you pay as the big guy on the block.

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Weekly Retail Fix

BY CSA STAFF

THE NEWS: TOYS ‘R’ US EARNINGS GAIN 40.1%

WAYNE, N.J. Toys “R” Us today posted net earnings of $199 million for its critical fourth quarter, which meant it turned a profit for the fiscal year ended Feb. 3. But special charges and gains had an impact on its numbers.

Sales for the previous fiscal annum were $142 million, the difference translating into a net earnings increase of 40.1% year over year. For the last fiscal year, Toys “R” Us posted net earnings of $85 million versus a net loss of $384 million for the previous period.

Operating earnings in the fiscal 2006 fourth quarter gained 53.1% to $571 million versus $373 million for the fourth quarter of fiscal 2005. For the last fiscal year, operating earnings were $649 million versus an operating loss of $142 million for the previous period.

THE FIX: Improved shopper experience ups comps

Of course, any observer has to take into consideration special financial circumstances. Fiscal 2006 operating earnings were positively impacted by $96 million from gains on property sales, slightly offset by restructuring and other charges. In fiscal 2005, operating earnings were negatively impacted by $410 million in costs relating to the merger of the company, as well as $58 million of costs and charges relating to contract settlement fees, restructuring and other charges.

Still, sales were trending up at last year’s end. Net sales gained 15.8% to $5.7 billion. In the full fiscal year, net sales advanced to $13 billion, up 15.2%.

Comparable-store sales for the Toys “R” Us’ U.S. division gained 0.6% in fiscal 2006, and that represents the division’s first comps increase in six years. Comps at Babies “R” Us were up 4.8% and those at Toys “R” Us international were up 2.6% for the fiscal year.

Jerry Storch, chairman and ceo of Toys “R” Us, said the company is “pleased with the strides we made in fiscal 2006 to improve at all levels of the organization and reposition the company for profitable growth over the long term.”

He said the company’s new management team has been focusing on executing a strategy that would turn the retailer into a global toy and baby products authority.

“This translated into higher overall sales, positive comparable-store sales, improved gross margins and strong operating earnings growth for the 2006 fiscal year,” Storch asserted. “The key to our strategy has been improving the customer shopping experience in our stores. We are accomplishing this by delivering a more compelling merchandise selection, better service and a cleaner and more comfortable shopping environment.”

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