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Interview: NexCen Speaks about Its Franchises

NEW YORK CITY —In part two of this three-part series, NexCen Brands' CEO, Ken Hall, and Chris Dull, the president of the firm's franchising arm, NexCen Franchise Management, are interviewed by Blue MauMau on how the firm is supporting its 1,700 franchisees during this time of financial distress for the franchisor.

From November 2006 through January 2008 NexCen went on a shopping spree, buying nine brands in 14 months. In the end, NexCen choked when it bought the Great American Cookies brand. The interest on the amended loan was so large that it placed the company on the edge of insolvency. The firm's new chief financial officer, Hall, inherited the problem. He was shortly promoted to chief executive officer, where he had to immediately deal with the possible insolvency of NexCen. He and his team miraculously managed to pull up the franchising conglomerate from a $38 million net loss in Q3 of 2008 to a $1 million net loss in Q3 of 2009.

NexCen Brands, Inc. (OTC: NEXC) is a collection of seven brands that franchise, including retailers TAF and Shoebox New York, as well as five quick-service-restaurant franchise brands: Great American Cookies, MaggieMoo's, Marble Slab Creamery, Pretzelmaker and Pretzel Time.

BMM: What are some of NexCen Brands' most pressing problems?

Hall: We have worked very hard to stabilize the business and as I shared with you, we have had three consecutive quarters of being able to be back in the black with positive operating income and positive cash flow. So we've transitioned from what I call the triage stage, where we were bleeding literally cash flow and we were totally in a reactive mode, to the point where we are no longer bleeding. We can afford to be more strategic and long term in our thinking. Indeed, we have committed to invest several millions of dollars throughout 2009 on repositioning and strengthening the brand.

We are in a much different position today than we were when we had the problem. I think that's behind us.

What are our most challenging issues today? There are two items that have the got the management team's focus going forward into 2010.

The first one is a financial issue and the second one is an operating issue.

The first one, the financial issue, is that we're still saddled with excess debt. Despite having sold off some of the assets of the two brands on the licensing side, NexCen is still over-leveraged from the legacy of having bought these brands during what in hindsight now has proven to be record-high prices in 2006, 2007 and early 2008. Our challenge is how do we reduce our debt? That is something we're working on right now. It's not a near-term threat to the operations, as I said, we're back in being positive cash flow, we have been paying principal and interest throughout 2009, we will continue to do that at an even higher level in 2010.

As we restructure the debt, the large principal repayment balloons are still a year and a half plus off. So we've got time to work through things.

The second major strategic issue is a global economic issue. I don't think it's unique to NexCen. We've done a super job in managing our expenses to get the company back to a cash flow positive position. Now we have to focus on how to grow the top line [revenue] on a consistent basis. We've had great success in expanding our franchise footprint internationally. We entered Chile. It was the 20th country on an individual brand basis that we've expanded into over the last two years. We have had good success with international expansion. The challenge we have is how to have continual growth both domestically as well as internationally. We all know there is limited financing that is out there for the small business operator.

BMM: Speaking of growth, how many franchise units do you have now at the end of 2009?

Dull: We have 1735 units as of November 30, 2009.

BMM: In NexCen's 10-K 2008 statement, it said, "We restructured our company during 2008 to operate in only one business segment, franchising." So you're in the business of franchising. Can you help me understand, why do you find a franchising company intriguing?

Hall: NexCen divested its licensing business and focused just on the franchising segment. I just want to make sure you're clear which business that we're exiting, which was strictly a license model. We were dealing with outside, for the most part, manufacturers that wanted to use trademarks for those names in order to sell their products under that trademark name.

BMM: You say your firm's core business is franchising. Does that mean you see your core competence in any sort of franchise? Will NexCen one day buy gas stations, hotel chains, truck dealerships, or bottling plants?

Hall: No, no, no. I think NexCen has a fairly focused franchise model. We have five brands along the quick service restaurant model. We have two brands that are in the footwear business. Chris, you want to talk about the synergy and when we go international being able to present a portfolio of seven different brands and how that's perceived?

Chris Dull

Dull: Sure. One of the things that gives NexCen great strength is that we have multiple brands. As we enter into an international market and seek developers, we're looking for people who have the ability to do more than just operate a few franchise locations. We're looking for individuals who have the ability to become a multi-unit franchisor, and in many cases, a multi-brand.

If we find a qualified prospect in the Middle East that is interested in our ice cream business, we have the ability to also pitch the cookie and the pretzel business that they may want to also take in underneath their operating model. That gives the franchisee the ability to offer multiple brands, and utilize co-brand opportunities that we do here in the United States. It gives them a more profitable and robust master franchise development arrangement. That's one of many examples on why we feel we have a good model.

BMM: Speaking of giving franchisees more ability to be profitable and have a robust business, with the improvements that NexCen has made financially with its own company, is it better positioned to help franchisees improve their bottom lines?

Dull: I don't think NexCen has ever been in a bad position to help our franchisees improve their bottom lines. Over the last twelve months we've invested a great deal of time and money into brand building or brand re-imaging initiatives for many of our businesses. What that entails is working with our franchisees doing customer intercepts to find out where our opportunities are at the unit level to capture more customers and increase same-store sales. So we're in as good a position as we always have been. We have a robust team here that are working day in and day out with our partners to find exactly what opportunities we can capitalize on.

Hall: Let me just add on two specifics. During 2009 we expanded our supply chain management purchasing staff so as to align them more closely with the individual brands. That has paid off very handsomely for our franchisees by enabling us to lower some of the costs of goods that they've been paying by enabling us to negotiate better deals under more competitive scenarios with a broad array of vendors.

That helped profitability.

We became involved with something else to help franchisees in 2009. We opened up an innovation lab for being able to develop new products on our quick service restaurant side. That is something NexCen invested in. We think that continuing to introduce new menu products is vital to driving traffic to the store. It ultimately will drive increased profitability for our franchisees as well. This is another example of where we made an investment in the future of strengthening the brands that will ultimately improve profitability for franchisees.

BMM: Where do you see NexCen in 2010 and what brands will it own?

Hall: Obviously we are looking into a crystal ball here. But I would tell you that by the end of the year I would hope that we have solidified our balance sheet so as to de-lever ourselves financially and once and for all to have taken off the table any lingering concerns about financial unviability for the company. That's from an overall corporate financial management point of view.

From a franchising point of view, I see NexCen continuing to extend its global footprint, to extend our model beyond traditional malls, to have franchises in non-traditional locations, and to have at least the same number of brands. Once the company's financial issues are fully resolved, we should look at ways that we perhaps can start to expand the brands.

BMM: You had to sell off two of your retail brands — Waverly and Bill Blass to survive. Do you anticipate having to divest an additional brand or two in 2010 or beyond?

Hall: It is not something that we are focusing on at this point in time. Hopefully, that is behind us with having exited with Bill Blass and Waverly.

Editor's note: This interview by Blue MauMau with Mr. Ken Hall and Mr. Dull took place in December of 2009.

Read part one of this three-part interview, or part 3, NexCen Brands Discuss Net Losses, Securitization

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