Auntie Anne's Pretzels: a knotty problem.

Robinson, Sherry ; Finley, John T.

CASE DESCRIPTION

This case involves growth and management issues, and is appropriate for small business and management courses. A secondary issue is the owner's social motives for the business, thereby making this case appropriate to a discussion of entrepreneurial goals and social responsibility. It traces the birth and growth of a new business into an international franchise system. It is a level 2 case designed to be covered within one class period and is appropriate for small business or management classes. The purpose of this short case is to expose students not only to real-world questions of strategic management and franchise development, but also the way an entrepreneur's personal goals can influence business decisions.

CASE SYNOPSIS

Auntie Anne's is a family owned and operated snack eatery business that holds a strong commitment to customer satisfaction. The company focuses on product quality, strong support to its franchisees, and a commitment to relationships that will help in the long-term growth of the franchise system. Auntie Anne's success can be seen in its growth from a farmers' market stand to the expanded franchise system it offers today. Founder Anne Beiler started the business as a means to fund charitable work, and now Anne is considering selling the business in order to focus on her charitable projects. In addition, there has been an expansion of Auntie Anne's to include a new cafe format as well as the furthering of the charitable aspect of the business. This case study will examine Auntie Anne's past and possibilities for the future from a corporate and franchisee perspective.

INTRODUCTION

Auntie Anne's Pretzels started selling soft pretzels at a single stand at a farmers' market in Pennsylvania. Mainly via its franchise system started in 1989, this private enterprise offers customers its products at more than 900 outlets in 43 states and 12 countries including Japan, Thailand, Malaysia, Saudi Arabia, the Philippines, and the United Kingdom (as of January 2007). As with many franchises, outlets are primarily located in high-traffic areas, such as malls, transportation hubs, and stadiums. (Hoovers, 2007) The company's sales have grown every year as has the price of a franchise outlet, paving the way for Auntie Anne's current status as a segment leader.

BIOGRAPHY OF ANNE BEILER

The story of Auntie Anne's begins with founder Anne Beiler, whose overall goal for the business was to make enough money to fund a counseling center that would help people of Amish background find psychological help and healing. Anne and her husband, Jonas, had become interested in mending people's lives after their daughter died in a tragic accident. They wanted to help people in the same way their friends and neighbors had helped their family. As a family business, Auntie Anne's Pretzels' goals have been closely intertwined with the goals of the founders, so it is important to understand the Beilers in order to understand the company.

According to her autobiography (Beiler, 2002), Anne's story begins on January 16, 1949, on a farm in Lancaster County, Pennsylvania. Born to Amish parents, she grew up without using electricity. A horse-drawn buggy was the only means of transportation. As the third of eight children, Anne gained a lot of experience baking and loved doing it. When she was 12 years old she baked her own cakes and pies for a Philadelphia market stand where she worked with her parents. By the age of 14 she had her first job as a waitress in a truck stop, where she developed her philosophy that "kindness and a smile would open the door to anyone's heart"(Beiler, 2002).

Anne met her future husband, Jonas Beiler, at a friend's birthday party and they were wed in 1968. They moved to Texas and lived there for 20 years. Upon returning to Pennsylvania in 1987, Anne managed a soft pretzel stand at a farmers' market in Maryland. After seven months, she and Jonas purchased a booth at the farmers' market in Downington, Pennsylvania, where they sold pizza, stromboli, ice cream, and hot hand-rolled soft pretzels.

As she worked with the stand, Anne noticed the pretzels were the most popular item and they appealed to people of all ages. She set out to develop her own pretzel, and for two months Anne tinkered with the recipe but with disappointing results. Just when she was about to give up, Jonas suggested some ingredients his mother used when he was a young boy. They added them to the pretzel mix and a "new" recipe was created--the Auntie Anne's pretzel. The hot, salty treat was a hit with customers. Long lines of people who wanted only pretzels and fresh lemonade formed in front of the stand. Within a year they opened a second stand and then a third and fourth. The Beilers' garage became an office and family and friends helped her mix batches of pretzels, paint signs, construct booths, and deliver ingredients, in addition to working at the market stands. The original pretzel logo on the Auntie Anne's signs came from a photocopy her sister Becky made of one of the actual pretzels.

THE SUCCESS OF AUNTIE ANNE'S

The success of the stands made the news and Anne received her first request for a franchise. She knew nothing about franchising but decided to try it, learning the business by trial and error. The first franchise outlet went to her brother in 1989 for $2,500. Cousin Sam Beiler was another of the first franchisees. In just a few years the price for a franchise rose to $7,500 and by 2005 it had risen to $28,000.

Auntie Anne's 2003 sales were approximately $234 million, rising to $247 million in 2004. Same-store sales were up 2.1% during this time with an average check of $3.45. Revenues in 2005 totaled $252 million and they are projected to be $266 million in 2006 as well as rolling their "billionth pretzel" (Burns, 2006). Auntie Anne's Pretzeldog, the most successful new product in many years, takes Auntie Anne's closer to the sandwich market, yet, like a pretzel, is easy for consumers to eat on the go. The outlook for 2006 includes the opening of about 45 new stores in the United States and possible further international expansion into Japan in China (Jennings, 2006).

FRANCHISING & AUNTIE ANNE'S

As Auntie Anne's is a network of franchised locations, a basic understanding of franchising is essential. Auntie Anne's 900 locations are managed by 250 franchisees worldwide. Franchising entails a business model in which a franchisor (e.g. Auntie Anne's, Inc.) licenses trademarks and tested business processes to a franchisee (operator of a local outlet) in exchange for a recurring payment known as royalties, including a percentage of profits as well as the annual fees. The franchisee typically "have the ability to secure the necessary funds for locations within the United States, which represents the initial investment to open an Auntie Anne's franchise concept" (Auntie Anne's Pretzels, 2006). Specifically for Auntie Anne's, the potential franchisee must typically have the ability to secure around $350,000 in order to be considered qualified for an Auntie Anne's store location. For international locations the capital requirement ranges from $1 million to $2 million USD. These amounts represent the initial investment for the opening of a location. The system entails risk taken by both the franchisor and the franchisee.

To assess risk and opportunity, consider the following analysis from both the franchisor and franchisee perspectives of the Auntie Anne's concept. For the franchisor, the following can be considered when offering the trademark and/or business process to a franchisee. A strength of a franchisor is its size and potential to quickly expand due to the mobility of the franchising business model. Additionally, since the localized risk is assumed by the franchisee, a franchisor can more easily absorb the negative effects of a failed venture due to the initial investment by the franchisee. A weakness of a franchisor is that intellectual property is vulnerable and ideas can be used by franchisees to become a competitor. Opportunities include quick expansion and a turnkey process which leads to a competitive advantage in many local markets. Independent businesses (non franchise) are threatened by the spread of franchises. Specific threats to franchise operations include unfavorable legislation, processes required in certain states, as well as the possibility of franchisees stealing ideas and becoming competitors.

From the franchisee perspective, a strength is that an entrepreneur can obtain quick access to a proven brand and business model yet employ his/her enterprising spirit by entering into a franchising agreement quickly. The franchisee usually has access to marketing, training, ongoing support and an established supplier or distribution network. On the other hand, the established suppliers may not be the least expensive or most efficient. The franchisee has minimal leeway in this area in most franchise contracts. This is typically due to quality concerns. A weakness for the franchisee is a loss of control that the entrepreneur starting from scratch retains in a business venture. The franchisee is required to follow a certain protocol determined by the franchisor. Among different opportunities figure the potential for good return on investment, a solid brand name, and training opportunities. Threats include competition and risks with snack food location employee turnover. Additionally, strong brand can hinder expansion into other products due to the consumers' brand/product associations.

DUE DILIGENCE AND COMPETITION

The due diligence investigation of a potential investment serves to confirm the fundamental material facts in regards to a sale. This refers to the care a rational party should take before entering into an agreement or a transaction with another party. Due diligence analysis usually yields a go or no-go decision with regards to a purchase of an asset, or in this case a franchise commitment (franchisor <-> franchisee). This process should entail a thorough study of financial records in addition to anything else material to the sale. Sellers (franchisors) should also perform a due diligence analysis on the buyer (franchisee). Factors to be reviewed include the franchisee's ability to purchase, as well as other items that will affect the franchisor after the sale has been completed. Due diligence serves the purpose of preventing unnecessary harm to either party involved in a transaction.

Beiler moved up the learning curve quickly with regards to franchising. She seemed to develop a keen acumen for the key criteria for potential franchisor/franchisee investment decisions. Beiler realized the importance of national or international advertising, training, and other support services are commonly made available by the franchisor. As franchising tends to be longer term than a licensing agreement, greater due diligence by both franchisor and franchisee is advised. A prospective franchisee has an array of franchises and industries from which to choose. Table 1 can serve as a quantitative starting point for comparing Auntie Anne's and direct competitor Wetzel's Pretzels. Conversely, qualitative factors tend to be subjective judgments based on non-quantifiable information. Examples include perceived strength of brand, management expertise, firm reputation, and industry cycles.

Wetzel's Pretzels, with well over 200 locations, is a national competitor with 2004 sales of almost $453 million. Same-store sales were up 7.5% from $346,000 to $372,000 between 2003 and 2004. Wetzel's pretzels weigh 6 ounces, 50% more than competitors' average 4 ounce pretzels. The pizza pretzel, topped with cheese and pepperoni, and a pretzel wrap with a hot dog and cheese are two items that are, like Auntie Anne's pretzeldog, closer to the sandwich category.

Two of the largest competitors, Pretzel Time and Pretzelmaker, are owned by Mrs. Field's Famous Brands. Each brand has more than 200 units, with Pretzel Time mostly in the east, and Pretzelmaker in the west. Customers spend an average of $3.90 each on items such as cheese stuffers (pretzel dough wrapped around cheese cubes), pretzel bites (small bits of pretzel with toppings) and pretzels around hot dogs. Pretzel Time, has conditions similar to Auntie Anne's: ongoing royalties of 7% of gross sales, advertising fees at 1-3% of gross sales, no charge for first two individuals as an initial training fee and a total estimated initial investment ranging from $107,000--$238,500. The quickest and easiest way for potential competitors to set up a soft pretzel outlet is to go through a type of generic company such as Pretzel Plus. This company provides supplies and ingredients needed for a potential entrepreneur to open a pretzel shop under any name (not restricted to Pretzel Plus). To open a 500-1,000 square foot franchise outlet with this organization, a total investment of approximately $80,000 to $103,000, with a minimum net worth of $150,000, of which $40,000 needs to be in liquid assets. The franchise fee is $12,000 with 4% royalties.

The Pretzel eateries are similar in many aspects, with Auntie Anne's having the highest initial investment, probably due to their more ornate store style and perhaps a more valuable and recognizable brand. There is anecdotal evidence indicating that it's near impossible for an individual franchisee to open up an Auntie Annie's anymore in the U.S.A. while most other brands are actively seeking individual franchisees. Several franchisers predictably have expanded their menu to include hot dogs, frozen custard and burgers, or from the other direction to include pretzels in their existing menu. When evaluating which franchise system to buy into, one might pay special attention to the franchisor with the lowest food and supply costs as a location will only support a narrow range of sales regardless of the franchise, ergo lower costs and fees over the year is very important. Additionally, the importance of a competent level of responsive service must be considered. A franchisee should also consider whether there is room for entrepreneurial selling, such as supplying local businesses, schools, or other events with tasty pretzels as the extra sale can make the difference between taking a salary or not.

Auntie Anne's is a current leader in the soft pretzel business, but it does face competitors that would like their own piece of the market. This may hinder Auntie Anne's future ability to charge premium prices as the market comes closer to saturation. In addition to the Pretzeldog, a hotdog wrapped in pretzel dough, Auntie Anne's has considered expanding its operations with a new cafe concept. Unlike the typical pretzel outlets that offer no seating, each Auntie Anne's Cafe seats approximately 30 people. Similar to other modern cafes, these serve gourmet coffee, offer a lunch and light dinner menu (sandwiches, pizzas, breads, soups, etc.), and provide wireless internet access. Most items on the menu are made from the same pretzel dough, but prepared in different ways. Five Auntie Anne's Cafe opened in Lancaster, Pennsylvania. Others may be opened if this concept proves to be a success.

SOCIAL RESPONSIBILITY

To some degree, the level of social responsibility that Auntie Anne's undertakes can serve as a source of competitive advantage. Auntie Anne's Incorporated started with an objective of funding a counseling center and has also been involved with the Children's Miracle Network. Additionally, for employees, Auntie Anne's provides some educational scholarships as well as home down-payment gifts. The organization also has sponsored events such as the national competition for the recitation of the tongue twister "picky pretzel people pick pretzel perfect pretzels" which took place during the summer of 2006 and resulted in each participant receiving book donations, as the winners receiving substantial prizes of $2500 for 1st and $500 for 2nd place. The tongue twister is also part of a new branding program

Charitable work is Anne and Jonas Beiler's passion. Auntie Anne's was created primarily to support the couple's charitable projects. In 1992, Jonas opened the doors to the Family Resource and Counseling Center, which is still in operation. The company also funds a non-profit organization, the Angela Foundation, named after the daughter who was lost to them years before. Anne feels that this is the part of the company that extends the belief to give back a portion of the gifts God has given her and her husband. Such activities have positive impacts on the brand.

CHANGE IN OWNERSHIP

Anne has considered selling Auntie Anne's to her distant cousin Sam Beiler, who is also the President and CEO of the company. He has been part of the Auntie Anne's family since 1989 when he became one of the company's first franchisees. Since then, he has concentrated on opening 137 foreign stores and overseeing 37 company owned units. If the company is sold, it is likely that he will take it in a new direction. Sam Beiler has already stated that he would like to open about 40 pretzel stores a year. He alsoplans to introduce the Auntie Anne's Cafe slowly to see if it will be profitable. With the right marketing and products the Cafe may be a very profitable franchise.

By selling the business she created, Anne will have the time she wants to work towards her long-term goal of helping families in need. Anne and her husband would also be able to work to open a family center that will provide help to children in their hometown. However, Anne wonders if her strong beliefs in commitment, giving, and customer satisfaction will continue to be instilled in employees if she leaves.

If Sam buys Auntie Anne's, he will be purchasing a brand that is synonymous with good quality, reliability, and profitability. He will have to maintain the good reputation that the company currently holds. Since he has succeeded in the past with providing more business opportunities for Auntie Anne's, he may be able to further succeed with the core business. However, the question remains as to the future of Auntie Anne's Cafe.

REFERENCES AND SOURCES FOR FURTHER RESEARCH

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Beiler, Anne. (2002). Auntie Anne: My story. New York: Auntie Anne's Inc. Blough, Amy (2001). Auntie Anne's branches out. Central Penn Business Journal. 17, (42), 21.

Burns, Patrick. (2006, October 11). Auntie Anne's HQ to move downtown. Intelligencer Journal.

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Milstead, David (2001, February 6). Pretzel chain plans 5 to 7 area outlets. Cincinnati, p. 3. Pinnell, Gary (2001) Auntie Anne's: Focus on the People. Central Penn Business Journal. 17(49), 20

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Wetzel's Pretzel data (2007) http://www.entrepreneur.com/franchises/wetzelspretzels/282932-0.html

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Sherry Robinson, Penn State University

John T. Finley, Columbus State University Table 1--Franchise comparison Revenues--Systemwide Auntie Anne's Wetzel's Pretzels Year U.S. only Worldwide 2003 $234,000,000 $394,000,000 2004 $247,000,000 $453,000,000 2005 $252,000,000 $567,000,000 Revenues--Per unit (U.S.) Year U.S. only Worldwide 2003 $336,690 $1,931,372 2004 $363,770 $2,097,222 2005 $350,974 $2,486,842 Number of units (U.S.) Year U.S. only Worldwide 2003 695 204 2004 679 216 2005 718 228 Initial Franchise Fee $30,000 $30,000 Royalty Fees 7.0% of 6.0% of gross sales gross sales Advertising Fees 1.0% of 1.0% of gross sales gross sales Initial Training Fee No charge, No charge for 3 partic. min. first two partic. Initial capital $192,875 to $129,875 to requirements $373,600 $353,000 * Sources--FRANDATA.com, Hayes, Jennings, AuntieAnnes.com, Entrepreneur.com