NexCen Negotiates Debt, Cuts Costs and Sells Franchises to Survive
ATLANTA (Blue MauMau) – Troubled NexCen Brands Inc., parent of franchisors Great American Cookies, MaggieMoo's, Marble Slab, Pretzelmaker, Shoebox New York and The Athlete's Foot, has announced that it is close to revising incorrect and delinquent financial statements. Its CEO has taken strong steps to help turn around the troubled firm.
Early last year the franchise conglomerate bit off more debt that it could chew in the acquisition of Great American Cookies. It discovered belatedly that there was an overlooked debt payment that came with the deal that it could not meet. The new financial officer, Kenneth J. Hall, had discovered a ticking time bomb that required NexCen to make a $30 million balloon payment in October of 2008, a provision that no one in the company knew was there — not even the then CEO, Bob D'Loren. With the disclosure, D'Loren announced there was “substantial doubt” that the firm would remain in business.
Out went D'Loren. And Ken Hall was soon promoted to CEO.
At the top of the list for the new chief executive officer was how to get cash to make debt payments and survive. Not missing the opportunity that a crisis brings to make change, Hall states, “While NexCen faced a number of challenges in 2008, we took the opportunity to make significant changes to our business strategy and to take steps to improve our operations.”
Hall managed to obtain needed capital by selling retailing brands Waverly and Bill Blass, non-core licensing businesses. The firm then renegotiated credit and interest on debt to more manageable levels. Mr. Hall has also led a 35% reduction in operating expenses from May 2008 through year-end, no easy feat.
Still, Nasdaq announced on February 13 that it would finalize its delisting of NexCen within 10 days because it had not been able to supply updated and clean periodical financial reports to the Security and Exchange Commission. Although a little late, Hall stated a few days ago that the firm plans to provide complete 2008 financial results by March 31, 2009.
Having renegotiated debt terms, cut costs and readied the financial statements to be soon issued, another challenge has been to raise revenue.
Selling franchises seems to be the answer.
“We are now fully focused on growing our core franchise business,” Hall states. As proof of this the firm said that in 2008 it opened 97 franchised quick service restaurants and 67 franchised retail stores.
With Friday's announcement of the opening of NexCen's first co-branded Marble Slab Creamery and Great American Cookies store in Bahrain, international sales are now heating up . The firm has inked additional agreements to enter Kuwait, Lebanon, Bahrain, Guam and Vietnam.
Craig Slavin, president and founder of Franchise Architects and Franchise Navigator, and a thirty-year veteran of creating, managing or refining franchise systems, understands the fertile investment ground of the Middle East and the attraction for the firm to sell master franchises there. He observes, “Middle Eastern firms are greater risk takers because they generally have a lot more money than we do here in the U.S.”
Franchising Only
When asked if any franchise brands had company-owned stores, NexCen responded that they do not.
Not having company-owned stores worries Slavin, particularly now. “We have witnessed in the most recent recessionary climate, consumer tastes and demands change,” he observes. “That means the concept itself, along with the positioning and product or service offering, must be flexible enough to change accordingly. Not having company owned and operated locations means the franchisees are on their own to figure out these trends and make adjustments accordingly. I for one would not call this practice franchising.”
Chains that have only franchises contend that they are able to learn from franchises on store operations and disseminate that information to other franchises.
Quick service restaurant franchisor McDonald's seems to disagree. Having some 6,502 company-owned quick service restaurants out of a chain of 31,967, McDonald's last week discussed why corporate stores were so important, even though returns from franchises were higher. In its annual report, the company stated that the company-owned stores made it possible for the chain to “further develop and refine operating standards, marketing concepts and product and pricing strategies, so that only those that we believe are most beneficial are introduced Systemwide. In addition, we firmly believe that owning restaurants is paramount to being a credible franchisor and essential to providing Company personnel with restaurant operations experience. Our Company-operated business also helps to facilitate strategic changes in restaurant ownership."
Some brands of NexCen at one time had company-owned stores. The Athlete's Foot did, but it liquidated company-owned stores in 2005 when it could not figure out how to profitably run the outlets. NexCen later bought what remained of the brand – the franchises.
Brand Recognition and Store Costs
The firm said it is making efforts to increase brand recognition. NexCen is tugging The Athlete’s Foot franchisees to invest some $60,000 to upgrade their stores to focus more on four specific customer groups. Its Great American Cookies chain is offering consumers an online cookie cake ordering program. MaggieMoo's is introducing new packaging. And Marble Slab launched a new in-store presentation with a new menu board program.
The conglomerate also made efforts to keep down food and material costs at the franchise unit level. It said it consolidated vendors, looked for packaging synergy, reduced stock keeping units to simplify inventory, changed from plastic to paper, while continuing to explore co-op buying opportunities.
Such activities help raise store profitability.
But franchise expert Slavin wonders if this seller of franchises can possibly be plugged in enough with consumers to understand what is relevant to the real world in its initiatives. Slavin declares, “If the parent company is not operating company-owned locations, how is it possible they can create rules based on experience of what works and what doesn’t? Imaginary rules, based on fiction or hypothetical guesswork, is a potentially dangerous situation for both the franchisees who buy into the program as well as the company.”
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Related Reading:
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The Atlanta Journal-Constitution, NexCen: Surviving a steady decline
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McDonald's Says Critical to Have Corporate Stores in Franchising
