The core value of integrity in the case study.
Case Study:
Cousins Maine Lobster
Sabin Lomac and Jim Tselikis launched Cousins Maine Lobster as a food truck in southern California. Would you purchase a franchise from this fast-growing franchisor?
Some of the fondest memories that cousins Jim Tselikis and Sabin Lomac have of their childhood days near Portland, Maine, are family picnics that featured fresh, locally caught lobster and lobster rolls. Eventually, both Tselikis and Lomac moved away, Tselikis to Boston and Lomac to Los Angeles. In 2011, Tselikis flew to the West Coast to visit his cousin, and over drinks one evening, the two began reminiscing about the wonderful fresh lobster meals they had enjoyed as kids. They also noted the popularity of food trucks and decided to pool their resources to launch a side business, Cousins Maine Lobster, that would serve lobster flown in from Maine in the form of lobster rolls (chunks of lobster meat served on split-top rolls topped with butter), lobster tacos, lobster bisque, and clam chowder. They invested $20,000 of their own money, bought a food truck, and began outfitting it as a rolling lobster wagon. In April 2012, on their first day in business, Tselikis and Lomac saw a line of customers that wrapped around the block. Business was so brisk that they ran out of food, and they knew that they were on to a business with real potential. Within six months, they quit their jobs to run the business as a full-time venture.
Local media coverage led to an appearance on ABC’s Shark Tank, where the cousins pitched their idea to the sharks and endured intense questioning. During the eight weeks leading up to the show, Tselikis and Lomac practiced their elevator pitch, reviewed their company’s financials to come up with a value for the business, and rehearsed answers to the questions they thought the sharks might ask. At the end of their segment, Barbara Corcoran agreed to invest $55,000 in return for 15 percent of the company (which established a value of $367,667 for Cousins Maine Lobster). Corcoran proved to be a valuable investor, helping Tselikis and Lomac land appearances on national television shows, including The Today Show, Good Morning America, Master Chef, and others, and helping them realize that franchising would be the ideal way to expand their business. Although Tselikis and Lomac had never envisioned franchising when they started Cousins Maine Lobster, they began working with the Franchise Development Group to create the Franchise Disclosure Document that the Federal Trade Commission requires every franchisor to provide to prospective franchisees. Because they had been operating their food trucks, which now numbered four, for only a year, they spent many long days developing training manuals and courses for franchisees. They were still learning about payroll, insurance, and maintaining quality control and were busy opening an e-commerce division focused on shipping lobster and other seafood products directly to customers across the country.
Once their Franchise Disclosure Document was completed, Tselikis and Lomac made a follow-up appearance on Shark Tank, where they announced that they were selling Cousins Maine Lobster franchises. Their appearance garnered more than 1,000 inquiries from would-be franchisees, and the flood of applications continues. Franchise Development Group conducts the initial screening of the applications, before Tselikis and Lomac interview the remaining applicants either by phone or Skype. They make the final decision about awarding franchises only after meeting candidates in person at one of the company’s discovery days in Los Angeles. Every potential franchisee spends time in one of the company-owned food trucks, and Tselikis and Lomac have learned to include the chef’s opinions in their final decisions about awarding franchises, pointing out that they are almost always right about which candidates will be successful. Currently, the company, which generates $20 million in annual sales, has 20 food trucks in 13 cities across the United States, with more on the way, including some in international markets. Cousins Maine Lobster estimates that franchisees’ total investment ranges from $143,000 to $345,000. Franchisees pay an upfront franchise fee of $38,500, an ongoing royalty fee of 8 percent of their gross sales, and a 2 percent advertising fee. Looking back, Tselikis and Lomac say that although their journey into franchising has presented a steep learning curve and that relinquishing control to franchisees can be disconcerting, they are extremely satisfied with the path they have taken and the results so far.
Questions
1) Suppose that your best friend is considering purchasing a franchise such as Cousins Maine Lobster. What advice would you give him or her about the right way to go about purchasing a franchise?
2) What advantages do entrepreneurs who purchase a franchise get? What disadvantages do they encounter?
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- Talk to Existing Franchisees: Contact as many franchisees as possible, especially those who have been in the system for a while. Ask about their experiences, both positive and negative. Are they profitable? Do they feel supported by the franchisor? Would they do it again? Don't just talk to the franchisees the franchisor gives you as references. Find others independently.
- Investigate the Franchisor: Check for any lawsuits, complaints, or negative press. Look into the background of the franchisor's management team. How long have they been in business? What is their track record?
- Analyze the Financials: Carefully review the franchisor's financial statements and any financial projections they provide. Be realistic about the potential return on investment. Consider getting professional financial advice.
- Understand the Market: Research the demand for the product or service in your area. Is the market saturated? What is the competition like?
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Legal and Financial Considerations:
- Hire a Franchise Attorney: A lawyer specializing in franchise law is essential. They can help you understand the franchise agreement, negotiate terms, and protect your interests.
- Secure Financing: Determine how you will finance the franchise. Explore loan options and understand the terms.
- Develop a Business Plan: Create a detailed business plan that outlines your strategy, financial projections, and marketing plan.
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Personal Fit:
- Assess Your Skills and Experience: Do you have the skills and experience necessary to run the franchise successfully? Are you comfortable with the level of involvement required?
- Consider Your Lifestyle: Franchising can be demanding. Think about how it will impact your lifestyle and family.
- Evaluate the Franchisor-Franchisee Relationship: Do you feel comfortable with the franchisor's management style and support system? A good relationship is crucial for success.
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Specific to Cousins Maine Lobster (or any food franchise):
- Food Costs and Supply Chain: Understand the costs of ingredients, the supply chain, and any restrictions on sourcing. Is the lobster supply reliable and price-stable?
- Operational Complexity: Food businesses can be complex. Consider the staffing, inventory management, and food safety requirements.
- Competition: The food truck and fast-casual restaurant market is competitive. How will you differentiate yourself?
2) Advantages and Disadvantages of Franchising:
Advantages:
- Established Brand: You benefit from the brand recognition and reputation of the franchisor.
- Proven Business Model: You are following a system that has already been proven successful.
- Training and Support: Franchisors typically provide training and ongoing support in areas like operations, marketing, and management.
- Reduced Risk: Franchising can be less risky than starting a business from scratch, as you are following a proven model.
- Marketing and Advertising: Franchisors often handle national or regional marketing and advertising, which can benefit all franchisees.
- Purchasing Power: Franchisees may benefit from bulk purchasing discounts and established supplier relationships.
Disadvantages:
- Franchise Fees and Royalties: You will have to pay upfront franchise fees and ongoing royalties, which can eat into your profits.
- Lack of Control: You may have less control over your business than if you started it from scratch. You must adhere to the franchisor's rules and guidelines.
- Dependence on Franchisor: Your success is tied to the success of the franchisor. If the franchisor makes poor decisions or faces financial difficulties, it can impact your business.
- Competition from Other Franchisees: You may be competing with other franchisees in the same system.
- Renewal Fees: You may have to pay renewal fees to continue operating the franchise after the initial term expires.
- Difficulty Selling: Selling a franchise can sometimes be more complex than selling an independent business.
In the case of Cousins Maine Lobster, the brand is still relatively young. While the early success is promising, a potential franchisee needs to carefully weigh the potential benefits against the risks, especially considering the competitive landscape of the food industry. The advice given in point 1 is even more critical when evaluating a newer franchise opportunity.
Let's analyze the Cousins Maine Lobster case study and address the franchise questions.
1) Advice for a Friend Considering a Franchise:
If my friend were considering buying a franchise like Cousins Maine Lobster, I'd offer the following advice, broken down into key areas:
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Due Diligence is Paramount:
- Thoroughly Review the FDD: The Franchise Disclosure Document is your bible. It contains crucial information about the franchisor, the franchise agreement, fees, litigation history, franchisee performance data (if available), and more. Don't just skim it; dissect it. If you don't understand something, hire a franchise attorney to explain it.