Tuesday, March 06, 2007

Trouble Brewing at Coffee Beanery?

This posting was written by Peter Reap, editor of CCH Business Franchise Guide.

Several disgruntled franchisees of coffee shop franchisor the Coffee Beanery are teetering on bankruptcy and unhappy with the Flushing, Michigan-based company’s franchising practices, writes Mary Crane for Forbes.com. Five of the struggling franchisees were willing to go on the record with the reporter, and all of them had similar complaints.

The five franchisees bought into the franchisor’s new concept of a “café store,” a larger and more expensive unit than the franchisor’s traditional small coffee bar or kiosk-style concept. The café-store model required the franchisees to sell sandwiches and pastries, in addition to coffee products, Ms. Crane observes.

The disgruntled franchisees of the new concept all have similar complaints. The Coffee Beanery, they assert, never disclosed that the café stores business model was flawed—the stores were historically unprofitable and that the equipment they would be required to purchase was both defective and overpriced. In addition, each of the franchisees reported spending 30% to 40% more than they had expected to build their store.

Franchisee Fights Back

In January 2004, Richard Welshans and Deborah Williams, spent $1.6 million in opening their Coffee Beanery café store in Annapolis Maryland. Alleging that their franchise never turned a profit the couple filed a complaint with the Maryland Attorney General’s office.

The lynchpin of their complaint was that the franchisor failed to distinguish between its traditional stores and its café stores. Thus, it was difficult to draw conclusions about the profitability of the café stores from the franchisor’s 253-page offering circular. Harry Rifkin, an attorney representing the couple, claims that of the 60 to 90 café stores opened during the last 10 years, only one has ever been profitable.

Maryland Consent Order

The Maryland Attorney General, pursuant to the couple’s complaint, issued a consent order on September 12, 2006, finding the franchisor in violation of the Maryland Franchise Registration and Disclosure Law. The franchisor had made material misrepresentations of fact or omissions of material fact in its sales to Maryland franchisees and failed to provide prospective franchisees with the type of prospectus the law required, the Attorney General determined. As a result, the Coffee Beanery was permanently barred from offering and selling franchisees in Maryland in violation of the law.

The consent order offered the complaining couple a choice. They could release any claims they had against the franchisor in return for the rescission of their franchise agreement and the return of their initial investment. Or they could refuse the rescission and elect to pursue their claims against the franchisor. The couple refused rescission, Ms. Crane reports, choosing to fight to recoup all of their losses. They are now awaiting the results of an arbitration action they filed against the franchisor.

Mary Crane’s article for Forbes.com may be accessed here.

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