Franchisees Learn from Cuppy's Broken Coffee Chain
MUSCLE SHOALS, Ala. – Three Cuppy’s Coffee franchise owners sat down at a coffee shop to discuss their collapsed coffee chain and how they got to their present troubled position. Not having been able to contact their chain's CEO for months, they had traveled to Muscle Shoals to confront him as he appeared before the local court for writing bad checks. The troubled franchise chain peaked at 80-plus built coffee shops and some 200 sold-but-not-opened stores in late 2007. The head office and the chain has virtually ceased to exist.
It is rare to have events of a small start-up franchisor followed by the media so closely from beginning to end, but Cuppy's has been a small chain with big stories that touch on huge issues in franchising. Blue MauMau has reported on this coffee shop concept since its Java Jo’z founder Roy Snowden went to prison for tax fraud. From the ashes of Java Jo’z, the chain was reborn as Cuppy’s Coffee.
This is part one of a two-part series.
The Franchisees:
Alicia & Rickey Benefield – Alicia and Rickey bought a new Cuppy's coffee shop to build and equip in Carrollton, Georgia. The only problem was that after they gave the company $170,000, they say that Cuppy's and its affiliated firms did not build out or equip the shop. As the Cuppy's franchise chain disappeared, the Benefield's dug down even deeper in their pockets to build out and equip their coffee shop themselves. They now run it as an independent shop, Benefield Coffee Company.
Elinor (Pinky) Legaspi – Pinky paid $180,000 for her Cuppy's coffee shop in Tyrone, Georgia. She also didn't get a build-out or equipment for her money to Cuppy's. But in spite of many problems with the collapsing franchise chain, she managed to find a way to get more money and build out her coffee shop, Grand Coffee. Pinky works an office job from 8 a.m. to 5 p.m. Mondays to Fridays to help pay off her SBA-backed loans that paid her Cuppy’s Coffee bills for construction never done and equipment never delivered. After her day job, she toils at her coffee shop, joining her employees at 5:30 p.m. She then works full shifts on Saturdays and Sundays (7a.m. to 7 p.m.).
Ms. Legaspi states, “I am more than exhausted, having now been opened for five and a half months. I am a single mom and the only thing I regret is not seeing my son grow up. He is 11-years old. I don't even have time to take him to the movies.”
BMM: What interested you in buying a Cuppy's Coffee?
Alicia: Rickey works for Delta. We were looking to get into something since Delta doesn't have retirement anymore. So we were looking at something to supplement our retirement goals. We liked the idea of a franchise guiding us, holding our hand, showing us the ropes and supporting us. We didn't mind paying the royalties every month because we are supposed to get something in return.
Rickey started researching on the Internet. Then my son said that his finance professor expressed how coffee was a growing commodity with a huge markup. There was a strong future in the coffee business. Researching the coffee business online, we found Cuppy's Coffee. [It was a] great website.
We loved the fact that the company was new and upcoming. Franchise fees were low.
They were awarded the fair franchising award from the American Association of Franchisees and Dealers. [Cuppy’s was given an AAFD accreditation for having a fair franchise contract by the AAFD in May of 2007]. That was a great backing. It was very instrumental in persuading us. When AAFD backed Cuppy's, we were like, hey, they've got the backing.
Based on the other franchisees that we visited or called on the phone, there was nothing but praise about Cuppy's. We went to a [new] franchisee in Duluth. He showed us his store. He was pleased. He was doing pretty good. So then we went down to Fort Walton Beach [Florida to visit the Cuppy's head office for Discovery Day]. We met Morg [Robert Morgan, the then-owner and CEO]. Morg was wonderful. He shared everything with us. We met everyone there [at the head office].
Pinky: I didn't have restaurant experience. I've worked in an office all my life. With money saved up, I just thought, why not get into the coffee business. I love coffee. Starbucks had been doing great. Going on the Internet, I tried to find a good coffee franchise. I thought that a franchise would hold my hand. A franchisor would lead me through the coffee business. I looked on the Internet and discovered that Cuppy's was all over the place. I clicked on an ad and saw they had “low franchise fees, low royalty fees.” Cuppy's only required franchises pay a 3 percent royalty. That was a big difference from other coffee chains.
I emailed Cuppy's through one of its websites around September of 2007. In about 15 minutes a sales guy called me back. He talked me into it. It's a good franchise. They had 80-plus franchises operating. He offered to give me their contact information so I could see how they were doing. He said that Cuppy's had only two years in the business, but look how many stores they had opened.
That was enticing.
Cuppy's initially sent me the franchise agreement. They even suggested that I get a lawyer to look at the agreement. It wasn't a requirement, but they suggested it. They sent the agreement, plus the purchase order from Elite Manufacturing [to begin the build-out and equipment buying process]. To get a Cuppy's franchise, you have to sign both documents. The purchase order required 20 percent of what the build-out price was. So if I have a café that is worth $250,000, Elite Manufacturing required that I put $50,000 down.
There were two shops open in north Georgia, Kennesaw and Sugar Hill. I went up there. They were fine. They were great. They were operating. I called a few franchisees [in Cuppy's new franchise system] from California and all over the country. They said, “Business is good. We get support from Cuppy's. They have marketing staff. Everything looks good.”
Low rates, their persistent sales guy and staff who were warm and friendly and the AAFD certification motivated me to buy. The marketing sales guy was the only person who buyers talked to. I asked him what if I don't get approved for the [SBA-backed] loan. He said, "Don't worry, you are going to get approved. We have a finance department that takes care of that."
I asked, “What about finding a site?”
He said, “Well, we have a real estate section that helps you out with that."
But I couldn't talk with any of them until I paid the purchase order and signed the franchise agreement. Fair enough.
Alicia: One of the franchisees had a big influence on us, but we can't find her anymore. Her dual drive-thru is gone.
With over 35 years of experience, franchise consultant Craig Slavin has developed tools and processes to help match franchisee candidates with appropriate franchisors. He thinks there are some key lessons to learn on due diligence in buying a franchise from the three Cuppy's franchisees who were interviewed. Slavin is president of Franchise Central, Franchise Navigator and Connect Me.
Beware of buying a franchise on either an impulse or emotional basis. Sit back and relax and take a piece of paper and draw a line down the middle. On the left side list all of the reasons why the franchise might be a good idea and the strengths you see. On the right hand side list all of the negatives and reasons in which you should step back or ask more questions. A strong franchise sales person is going to sell through using an “emotional transference.” They want you to feel the way they do about the franchise. Don’t buy emotionally.
Beware of any organization that prevents a prospective franchisee from meeting corporate executives. Running a franchise is a complex process that must be conducted by specialists and not generalists, such as Operations, Training, Marketing, IT, Branding, etc. These are just some of the critical components to running and maintaining a strong franchise organization.
Beware of any franchise that is growing fast! Without the proper infrastructure there will be problems such as what happened at Cuppy’s. These companies outgrow their ability to provide viable services to the franchisees.
Beware of any young franchisor that sells franchises throughout the entire United States. Franchising is a market penetration strategy that works best when growth occurs in concentric circles. It allows for the brand to gain traction and awareness in these markets. When a company fragments their own growth efforts, by selling franchises anywhere and everywhere, it splinters consumer level efforts and puts unnecessary financial and human resource strains on the organization. These companies are engaged in a franchise sales program and not a bottom-up, stable growth program.
Beware of awards and accolades. Most organizations and/or publications grant awards to significant advertisers and/or supporters. Most of these awards are “paid for." Unless an organization provides a totally objective award, without strings, they are nothing more than propaganda.
Beware of rankings that are originated by publications. There is generally a connection between advertisers and rankings.
Beware of aggressive franchise sales people. They are generally measured and compensated by the number of franchises they sell versus the quality of people they recruit to the system.
BMM: You then purchased the Cuppy's franchise.
Alicia: We purchased the franchise. We signed the agreement and started looking for a site. We originally purchased a dual drive-thru, but the site that we wanted fell through, so we moved to a café. We had to send in more money because the café was more expensive. So we gave another $8,000 or more, so that the total we gave to Cuppy's for its franchise fee was $41,900 just for the initial build-out of the café. Morgan was still in charge.
Rickey: We gave them our money and found a site. But they couldn't get to a build-out. Originally, we had nine months to get it built before the lease kicked in.
I kept wondering where they were at. I kept calling, telling them that it was time for the build-out. They sent some guy on the phone for the build-out, Ron Folks from Indiana came up. He was vice president of Elite at that time. He came up and authorized me to do the build-out since I had a background in build-outs. They were short-handed. They were growing so fast that he couldn't get their builders in here.
Elite didn't have enough people to do the build-out.
Pinky: They contracted Supreme Building Technologies to do the build-out. SBT needed to hire local contractors in each state.
Rickey: Initially they said they had a group of men that were coming in. I found out that a couple of guys [typically] would come in [to a site] and hire the builders locally. They would purchase the permits and they took care of everything. I ended up doing everything, the complete build-out. They did nothing for my site.
BMM: Did you read the discussions of Cuppy's on the Internet? In 2007 there were quite a few blogs, articles and forum postings from investors who were angry that their investment money was missing.
Alicia: In the process of signing our contracts, my son found Blue MauMau. He told me, "you need to go in there and read it." Well, I started to go in and read about Java Jo'z and Roy Snowden. And I'm like it's over my head. And I'm [also] like yeah, but that happened back before and this is a whole new group of people. I don't think this is going to pertain to us.
And my son is like, "Well, Mom, I don't know. You may not want to do this."
Pinky: At that point, the complaints [on Blue MauMau] were only about deposits. Those complaints could be because they weren't approved for the SBA loans. Or maybe they [the depositors] couldn't find a location. Well, we got approved and we found a site. So I thought the same thing was not going to happen to me.
Rickey: That's exactly what it was. It was for people who didn't find a site or weren't approved for the loan.
Alicia: I went on Blue MauMau and read everything.
Rickey: But I was impressed with Cuppy's marketing and promotional efforts.
Alicia: Amy Rynearson. She conducted Coffee College [a week-long training program for franchisees]. Coffee College was good. That's when Dale was in the process of acquiring Cuppy's.
BMM: In listening to your story, it sounds like when you were doing your homework in buying a Cuppy's franchise that you were pretty excited. Did you feel like your dream of owning your own business distracted you from the warning signs?
Rickey: It was like I had blinders on. It was all I could focus on to get the shop up and going since I was approved. I thought this is going to be a wonderful thing. I didn't want to see anything else. I was more into using my energy to build the coffee shop business. I didn't want to see anything else. Certainly, nothing negative.
Then all of a sudden the blinders come off and here we are.
Pinky: When they sent out the franchise agreement, we should have hired a franchise lawyer. The lawyer we spoke with said that he didn't see anything [particularly damning] in it. An Alabama franchisee has a wife who is a lawyer. They didn't see problems. I don't think there is anything in the franchise agreement. There may or may not be.
I didn't consult a lawyer.
Rickey: We didn't. We were so gullible. They had so much of our money already. We shouldn't have sent it [the additional $90,000] in because they [already] had enough money to get something started on the build-out or send in the equipment. We were so blinded by getting it [the shop] up and going that we agreed to this. That will never happen again.
BMM: Dale Nabors owned a company that focused on providing franchisors with back-office solutions. Eventually, Cuppy's Coffee, Java Jo'z, Elite and other affiliated companies were handed over to Dale from Robert Morgan of Medina Enterprises. What were your impressions of your new CEO, Dale?
Rickey: Dale came in while we were receiving franchise training at the head office to give us his FranSynergy speech of “believe and succeed.”
When I walked out I told my wife, “This is a man who can blow smoke up your butt.”
There was a [life] timeline that he had us fill in of where we wanted to be from where we were and how much time we had to get there.
BMM: You have outstanding SBA-guaranteed loans where you have some $170k or so to pay back. What do you hope will happen in the future?
Alicia: I'd like to get my money back so that I can pay my SBA and I won't lose my home. I can finish sending my children to college. But I probably won't get a whole lot of money back, if any. But I want him [Dale, Cuppy's current CEO] to pay for the crime he has committed. And I don't want him to ever do this to another human being. I looked him [Dale] in the eye today and said I won't stop until I get done. As long as I've got breath in me, I'm after you.
At the federal level, if they find something, they may split something amongst us. We won't get the full amount but we'll get something out of it in the years to come. It may take a year or two years but something is going to come out of it. They are going to find something on him [Dale].
I don't believe the money was spent on operational expenses.
When we found out that we weren't going to get our equipment and the stuff we paid for, all three of us moved ahead to open independently. We had no other choice. We were so far in it that we couldn't back out so we just took our working capital and finished up and bought what we already paid for. So he [Dale] sent out an email and said we are trying to get Cuppy's up and we are still trying to do these build-outs but here are the sacrificial lambs. Meaning that he had to sacrifice us for the good of the company.
BMM: One criticism of this system is the apathy of Cuppy's franchise owners. For example, the American Association of Franchisees and Dealers held a free teleconference to get Cuppy's owners to form an association to begin to address the issues that you've been talking about. Only 5 owners out of some 300 bothered to call in. Sometimes when franchise systems start spinning out of control, franchisees take control because they realize that it falls in their lap to save the chain and their investment. But Cuppy's franchisees seemed disconnected and distant. Why was that?
Alicia: That's exactly how it was. For me, one reason I didn't follow up with that was because I wasn't educated enough on what AAFD was trying to do. Second, that's when we were in the store. I didn't have time to sit, work on it and read it. I was opening up my store and working the counter. I couldn't sit, research and read. The other reason I didn't fall into it was because I had such a bad taste in my mouth after what was done with us. I didn't want to be a part of it. I was ticked at Bob Purvin because he's the one with AAFD. He's the one that gave Cuppy's the award, so I was mad at him and I didn't want to have anything to do with him.
Pinky: The other thing is that you have to pay money to get into that organization that he is putting together. Then he's going to put lawyers together and then we all have to pay for those lawyers.
Alicia: Right. We didn't have the money.
BMM: But there are franchise systems where franchisees combine together to protect themselves, whether there is an AAFD or not. Why did that not happen?
Pinky: We were just communicating amongst ourselves. That's all we did.
Rickey: Even if franchisees did get together [and form a franchisee association] after Dale came on board, what could have been done? Even if you did organize and come together, the harm had already been done.
Pinky: Cuppy's already had all our money by the time Purvin wanted to organize a franchise association. That was the time that we were already looking for a lawyer.
Alicia: We were already going independent and separating from the franchise. So there wasn't any point in us getting involved.
[Writer’s note] Rickey, Alicia and Pinky are now pursuing legal action to get back money paid for alleged services not rendered and equipment not delivered.
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Related Reading:
- Cuppy's Speaks Out on Accusations, SBT, AAFD and More
- Cuppy's Coffee Goes to Court: SBT Sues Elite Mfg.
- Interview with CEO Dale Nabors: Cuppy's Failed Turnaround Attempt
