Why we sold

I received requests to explain why we decided to sell our Kumon center. There were several factors that led to our decision to sell but ultimately we decided to pursue an opportunity that gave us the best chance to meet our personal and professional goals.

We took ownership of our center in December, 2005. Shortly after we took over the center, we saw the potential for further growth and found ourselves thinking about moving to a larger space. The estimated cost to build out a larger space was $40,000 while remodeling the current space was approximately $10,000. We weighed the pros and cons and opted to move to a larger space because we saw long term potential with our business. After receiving approval from Kumon franchising, we opened our new larger space in November 2006. The space was zoned commercial office, had good visibility, and was in close proximity to several shopping plazas. Kumon was so delighted by our new space that a member of the franchising team suggested that we sign a 10 year lease to reduce our rent. We instead chose to sign a 5 year lease to be in better alignment with Kumon’s 5 year franchise agreement. Enrollment grew 80% in the new space over a period of 2.5 years. Business was good and we generated a nice profit. The $40,000 investment paid back very quickly.

In February 2009, we received notification that Kumon’s 2010 franchise agreement (FA) will require centers to be located in space zoned for commercial retail; with the caveat that Kumon can grant exceptions. In addition, Kumon corporate had the right to change a center’s hours of operation if Kumon corporate deemed it beneficial for the community. We were concerned about the language and asked how the new language will impact our business. The head of franchising explained that it was not Kumon’s “intent” for our center to be impacted by the language in the 2010 FA. Unfortunately, a business can not make long term decisions based on the “intent” of Kumon’s franchising department. We knew, based on the experience of other owners, that it was not easy to find a new location. We also knew from other owners that Kumon corporate did not help identify new locations or help address zoning issues. We did not like facing the possibility of having to spend more money on moving to a new location. Just 2 years earlier, we spent $40,000 on building out a new larger space. We also did not like Kumon corporate having the power to dictate hours of operation. After all, we are owners, not Kumon employees. The changes to the 2010 FA really made us consider selling the business.

Another issue that factored into our decision to sell was Kumon’s changing furniture requirements. In early 2009, the regional leaders visited our center and declared that we did not have approved Junior Kumon furniture. However, we purchased the Junior Kumon Kit from Kumon in 2005. It turns out that the furniture to which the regional leaders were referring was the same table we already had but with a different laminate top and chairs that were black instead of blue. Although this may seem like a minor issue, we felt this was another example of Kumon changes that may lead to additional costs to an owner. At this point we began seriously wondering how many Kumon changes were in store and the costs we could incur because of those changes.

We then started hearing about new franchise locations being placed in close proximity to existing successful centers; some new locations were less then 2 miles away. We thought that Kumon was changing their market penetration targets and was trying to implement a saturation strategy. There were already 5 Kumon centers within a 5 mile radius of our center according to Kumon.com. We were concerned about the possibility that another center could be placed within 2 miles of our center. It turned out Kumon corporate had plans to aggressively expand the number of centers in North America and in some areas, increased target market penetration rates.

At this point, we thought selling the center was our best option. Within 2 years of expanding our center, Kumon changed zoning requirements, furniture standards, and market penetration targets. We also felt that Kumon corporate did not respect the amount of money current owners already invested in their business. If Kumon did respect the amount of money invested by owners, subsidies and assistance would have been offered to owners that are impacted by Kumon changes. We thought our best move was to cash out.

Selling the center was a whole other ordeal, mainly because of Kumon franchising. We know we are not the only ones disappointed with the franchising department because we’ve been contacted by other franchisees (existing and potential) that are having issues with Kumon franchising in the NJ/PA area. I will not get into details, but let’s just say the leadership, professionalism, and skill sets in Kumon franchising is lacking. I’m sure there are some people within franchising that have the requisite skills, unfortunately we did not have the pleasure of dealing with those people during our sale. I may share details on our experience at another time. We have already sent a detailed account of our experience to leadership functions within Kumon corporate. I encourage the people that contacted me to share your experiences with the franchise department with Kumon leadership.

My intent in writing this post was to explain why we decided to sell our center, not to dissuade people from buying a Kumon franchise. We did not believe that putting more money into this business was wise for us. We were concerned about a corporate organization that did not seem to value the investment made by Kumon owners. We also thought we could find opportunities that were better investments in terms of time and money. Once we opened ourselves up to selling the center, a better opportunity did present itself. In the end, we decided to pursue the better opportunity and sell our center. We could not be happier about our decision.

Please feel free to continue to contact me if you have Kumon questions, need a different perspective, or just need to vent.

Wishing everyone the best of luck,

David Joseph

Does Kumon care about encroachment?

 

When I first read this question I thought the answer was obvious… but lets take a look at the facts that I’m aware of:  

1. In a town in NJ where there are already 3 Kumon centers, there are plans to open up to 3 additional centers.  Owners of the existing centers complained, but to date, nothing has changed.
2. Another owner complained about a location opening up in close proximity to an existing location, less than 2 miles away in a suburban community.  To date, nothing has been done about it.
3. As far as I’m aware of, no explanation was given to complaining owners as to why these additional centers are justified.
4. Impact analysis have not been given to existing owners.  
5. Rationale offered as to why opening up locations in close proximity is justified: ”More centers increase brand awareness.”  Please read my original post to get my views on that.

 

All that said, I may not be aware of all of the facts, so I will let you draw your own conclusion.

Potential Fall Out from Franchise Encroachment

Franchise encroachment occurs when a Franchisor opens new locations in close proximity to an existing franchisee and the sales of the existing franchisee are cannibalized (lost) to the new locations. Encroachment is a highly charged issue because there is real money at stake for current and new franchisees. It is not just a matter of dealing with lower profits and profit expectations; it can also be whether a franchise location survives.

Taking the perspective from a potential franchisee, I’d be concerned about encroachment because it affects a lot of assumptions that justify my investment into the franchise. I’d reassess my growth potential, price point, pricing power, and cash needed to finance day to day operations. I’d also take into consideration competitive response from existing franchisees that feel they have been encroached on.

From the existing franchisee perspective I’d also be concerned about my price point, pricing power, and growth potential. I may have to reassess my needs for space, furniture, and staff. I’d also have to figure out how best to deal with the new threat. Do I take a price discount strategy? Do I figure out new ways to differentiate? Either way, I have to figure out how I need to compete with new threats brought on by the franchisor. I’d also try to determine if the franchisor changed strategy on their criteria for market potential, market penetration, and the rationale behind any changes.

Besides economic fall out, encroachment can put strains on personal and professional relationships. It is possible that trust between franchisor and franchisee will be destroyed. It can also put strains between different franchisee locations as well strains between employees at the franchisor.

Encroachment is an issue with any franchise business. Franchisors must determine ways to minimize encroachment and still meet their corporate objectives. Franchisees must be wary of encroachment behaviors and determine ways to best deal with the encroachment threat. In an ideal world, franchisor and franchisees can work to together in an open manner to develop strategies and align goals. Unfortunately, more often than not, franchisor and franchisee goals do not align and it is difficult for franchisor and franchisee to see eye to eye.

Burger King $1 double cheeseburger issues

Last month, I received several questions about the Burger King lawsuit over the $1 double cheeseburgers; why is Burger King forcing franchisees to sell double cheeseburgers at $1? Why does BK not care about franchisees loosing money on a promotion?

For background information please follow this link http://finance.yahoo.com/news/Food-fight-Burger-King-apf-1338962807.html?x=0&.v=5

Burger King may be concerned about loosing share to competitors and is trying to compete by offering an attractively priced product. The $1 double cheeseburger from Burger King is going head to head against Wendy’s double stack burger which is also priced at $1.

I assume BK is looking at the price point in two ways: First, the variable margin on the product is positive (ie the cost of the burger, bun, cheese, and toppings is approximately $0.55). Second, Burger King hopes that the $1 double cheeseburger will attract more people that will buy other more profitable products. Some estimates say that the product can attract up to 20% more traffic. If those people come to BK, buy a double cheeseburger with a soda and fries, the franchisee has a profitable customer. Overall it does not seem like a bad idea from the corporate perspective.

From the franchisee point of view, the $1 double cheeseburger relates to product/ customer mix and absorption of SGA costs. A spokesman representing BK franchisees explained that the true cost of a double cheeseburger is approximately $1.10 when you take rent, employee wages, and other costs into account.

The problem can get worse if the increased traffic is only buying the $1 double cheeseburgers and passing on french fries and soda. In addition, the value of a $1 double cheeseburger may cause some of their existing customers to trade down from more profitable items (ie: whopper, whopper jr. etc). In this scenario, there is an overall shift in product and customer mix toward the lower priced lower margin product. The franchisee looses out because they are increasing volume on a product that generates a loss.

The question of profitability will be difficult to answer because it is about the level of profitability that the franchisee and the corporation are measuring and what cost are included in those calculations. I’m not sure what the current product/customer mix is for a typical BK franchisee. Since November, I’ve visited BK one time. I picked up a $1 double cheeseburger and nothing else.

Questions from a potential franchisee (Some details are left out)

Question

Hi David,

I’m messaging you this way, as 140 characters is too short!

My business plan suggests that it will take me around 16 months to break even and then my capacity will only be (providing everything goes perfectly!) around X  students. This is because of the area the centre will be in (small villages, not a city), the resultant limited number of children and the attrition rate which I’m hoping to have at a maximum of 3%.

As a single mom of three children, X  students will bring in nowhere near the amount of salary I could earn if I went back to the city – but it will allow me to be closer to my kids, and concentrate more on them. In addition, I love the Kumon method, and the fact my children can do it for free is a big bonus!

As I think I said in one of my tweets, I’m due to sign the contract during December and open in January. I’m trying to get all the additional information I can before I commit to signing that contract!

Putting aside Kumon’s expansion plans, do you believe that this is a viable business outside of a city as this is actually my biggest concern at present?

It appears to me that whilst Kumon staff are well intentioned, they are completely out of touch with what it actually means to run the business at franchisee level and the personal investment required. I have been told all along that I will need about Y to get going, whereas my figures show nearer Z is needed. Most franchisers are much better giving help on the business side and this is clearly a major failing of Kumon.

Thanks in advance for any thoughts/advice you may offer.

PS – I have always been concerned at the lack of information to be found on the internet regarding Kumon – I’ve been searching the past six months – and it’s only in the past week that information has suddenly been online! What’s that about?!
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Answer

Hi, I can understand your concerns and your desire to be closer to your kids. Owning a franchise is a business and lifestyle decision.

I’m not familiar with the area you are in but Kumon can be successful in a number of locations. It really depends on the make up of your local market, how you drive your business, and your ability to price (ie, how much are your customers willing to pay). Kumon does well in med to high middle class income areas. In general, if the income level of the area is too high, people will have the ability to spend more to get a “quick fix”. If the income level is too low, people can not afford to send their kids to Kumon.

I’m assuming your total capacity of X students is your “peak capacity”. Meaning that if all you fill all your seats, it will hold X students. That should be more than enough.  Think of your center as a fast food restaurant. You really are concentrating on the “turns” that you can generate in your space. You want the kids to get in and out as quickly as possible. The more turns you can generate the greater your overall capacity.

The attrition rate assumption you are using is ambitious, especially because you are a new owner that will have to go through a learning curve. I’d estimate 10% to start. It will take you 12-18 months to really get into the groove. After 12-18 months I think you can be around 5% attrition or lower.

Your comment about the Kumon staff is a feeling that many owners have. The lack of understanding of owning a business is a problem that runs throughout Kumon’s management. The fact is that Kumon staff only have experience running a center. They do not have experience owning a center. Owning a center means getting it going, dealing with cash flow issues, dealing with zoning, dealing with Kumon’s changing requirements, etc. A corporate run center does not simulate the challenges of owning a center. All a corporate center does is helps the staff understand the issues of running a center.

The staff never had to risk their own money. They can only sympathize but not really appreciate the financial risk an owner takes. An example of this is that new FAs (franchise agreements) will require commercial retail space. Owners that are in commercial office space will have to move when their FA is up. It is frustrating for owners in commercial office space because many of these owners had to spend $20,000 to $50,000 to build out their space. Some even purchased commercial office space. Now Kumon is requiring these owners to go find retail space and pay for another build out.  That means going through zoning issues, the cost of another build out, etc.  Again, no real understanding of the financial burden they are placing on owners.

I can not really say anything about the lack of online information. I think you are starting to find things now because owners are frustrated with Kumon management and are starting to talk publically about the challenges they are facing.

Other pieces of info that I can share:

You need to spend a lot of time at your center. The time commitment is more than a typical 9am to 5pm job.  Also, there are some things people forget as they transition from a job to an owner.  Things like vacation. Who is going to run your business if you can not be there? That is just one example. There are a lot of other questions and answers you will need to figure out. 

Also, as with anything in life, things don’t always go as planed. You need to have access to cash (savings, loan, etc) to handle the times when things do not go to plan.

I can not offer advice on if you should own a Kumon or not. It is a very personal decision that depends on your financial and lifestyle goals. All I hope is that I gave you enough information to help you make an informed decision.

Dave

Original Post on UnhappyFranchisee.com & blogspot

Hello, My name is David Joseph and I own a minority share in a center located in NJ. I’m putting up this post to make my views plain and clear to everyone. My statements here are mine and mine alone. I’m concerned about Kumon’s strategy. I’m not concerned about issues involving associations, products, services, or contracts. I also don’t care about rants and insults that are now popping up on this page.

I’m concerned about Kumon’s strategy because I’m seeing encroachment and cannibalization. Although I’m not affected by encroachment, I directly and indirectly know people that are, as I believe we all do. For owners that are not directly affected now, you may be affected in a few months or a few years because of Kumon’s strategy and implementation plan.

For those who don’t own a center, think of encroachment and cannibalization as a pay cut or a layoff. I use this analogy because you lose money and, in the worst case, you can lose your job.

Kumon’s strategy is to build brand awareness through expansion. In essence make Kumon a household name because there will, so to speak, be a Kumon on every corner.

When I think of educational companies with great brand awareness, I think of Sylvan. However, I don’t see a Sylvan on every corner. In North America, there are approximately 1100 Sylvan centers. Kumon has approximately 1500 centers in North America. Yet the average person is more familiar with Sylvan than they are with Kumon.

Sylvan’s brand awareness was developed through heavy TV advertisement. TV ads and spots can cost a lot of money. The money used for advertisement directly affects Sylvan’s bottom line because that money comes directly out of the corporate budget. Sylvan corporate took a financial risk because they invested corporate money into advertising. I’m not sure what Sylvan’s return on investment was but I feel safe to say they achieved their brand awareness goal.

Kumon’s brand awareness strategy is based on increasing the number of centers. Speaking strictly from a corporate viewpoint, it is a brilliant strategy in terms of capital and return on investment. The majority of the money needed to expand comes from owners buying new center locations. New centers may end up encroaching on existing centers but from the corporate viewpoint that is OK. Corporate believes that there will be an overall increase in enrollment. Again, strictly from a corporate viewpoint, there is a lot of upside with minimal financial risk. The risk, from a corporate view, is generating vocal owners. These vocal owners will limit Kumon’s ability to attract new franchisees.

In order for Kumon to justify expansion, they must justify that the market can handle more centers. That is why I questioned and will continue to question the assumptions used to justify expansion. For current owners, take the time to understand your local market in terms of the number of potential students, family income of the students attending your center(s), where they live, etc and estimate what your market penetration rate is. Your concerns and challenges will be dismissed by corporate if you do not come with hard facts. You will also be more confident when you raise issues.

From the franchisee view, expansion can be positive or negative. It is positive if you are operating in an unsaturated market. However, it is especially dangerous if you have large center(s) or if your center(s) are in a saturated market(s). There are centers in NJ that have lost 100+ subjects because a new center opened up in close proximity. Although those centers are very large, loosing 100+ subjects is a huge hit on the profitability of those centers. This is why some owners, especially in NJ, are very concerned about Kumon’s expansion strategy. For owners that operate in less saturated markets, please understand that if left unchecked, expansion will turn from a positive to a negative very quickly.

I put posts on twitter that eventually resulted in postings on unhappyfranchisee.com. I did not hide my name so that Kumon corporate can find me. Eventually corporate contacted me and we had a heated discussion. To be honest, I was too heated to articulate the reasons I chose to post on twitter so here goes:

1) I wanted to demonstrate how much attention only 1 owner can generate and therefore the true risk of Kumon’s strategy.
2) I wanted to be a voice for those who are concerned about expansion and could not get their voice heard.
3) I wanted to give potential franchisees information on some unstated/understated risks of owning a Kumon center.
4) I wanted to demonstrate the effectiveness of utilizing a low cost alternative media channels.

On point 4, let me be more specific. I don’t have a lot of followers on twitter, yet I managed to reach a very broad audience. How did I do it? I spent a few hours finding my target audience. In this case it was Kumon franchising personal, certain franchising experts, and a few owners that actually used twitter. I crafted messages that spoke to different segments and the rest is history. My point here is that my upfront time was figuring out my goals, figuring out who I should target, and crafting messages to get the results I wanted. It only took a few hours over a weekend to generate the buzz.

Now think about Kumon’s customers. Imagine if Kumon corporate invested the resources into understanding customers segments and helping franchisees reach those segments. That is why I challenged Kumon to gain a better understanding of their customers and develop customer segments. I sincerely believe it is a better investment to gain an in-depth understanding of customers and reach people that will truly value Kumon’s offer rather than simply saturating a market.

In addition, the cost to build brand awareness has dropped dramatically. It is not necessary to spend a lot of money on traditional media to reach a targeted audience. Kumon is a word of mouth business and right now word of mouth can be multiplied 1000 fold by utilizing social media. I’m not saying that every Kumon owner needs to get on twitter. I believe it is actually more effective for Kumon corporate to invest their resources into developing a social media plan. Kumon corporate already knows there is something to it because a lot of Kumon’s franchising team already utilizes twitter to attract potential franchisees.

Take aways:

Kumon owners – Don’t just talk about how you lost business to a new center because corporate does not see that as big picture issue. Think in terms of corporate goals, strategies and assumptions used to justify corporate goals and strategies. There are a lot of assumptions that can be challenged. Do your homework and your challenges will carry more weight. If you decide to use public online outlets, do not get yourself dragged into taunts and fights. It’s a waste of your time. Utilize public forums to draw attention to your concerns about Kumon’s expansion strategy. Its not just about you, it’s about everyone that owns a Kumon center.

Kumon Corporate – The expansion strategy has a lot of financial upside but it is very risky if continue to alienate owners. More and more owners will utilize public forums to express their opinions about expansion. NJ is only one market. Imagine if owners in other markets start doing the same thing. Imagine the affect on franchisee recruitment.

The cost of building brand awareness is a lot lower now than just a few years ago due to alternative media channels. If the goal is to build brand awareness, social medial is an effective low cost tool to reach target customers and build brand awareness.

Potential franchisees – If you found this post, you have received insight that most of the current owners did not have at the time they purchased a franchise. It is an interesting time at Kumon. There is a lot of potential but there is also a lot of risk depending on how Kumon moves forward with their strategy. There are some good posts that can help you make a more informed decision. Work with your franchising people but also seek out information from current owners. Ask current owners the benefits and downsides of owning a franchise. Ask their opinion about Kumon’s strategy. I’m sure there are enough owners out there that will give you their honest opinion. Also, if expansion is limited, you can feel safer about your investment.

Final Thoughts: I’m very passionate about business and Kumon. I believe Kumon offers a good service but my opinion is that Kumon’s expansion strategy will escalate franchise franchisee conflict. Escalated conflict will limit both franchisor and franchisee in reaching their goals.

If you’d like to talk to me directly, please find me on twitter. I’m happy to address any questions or concerns.

Sincerely,

David Joseph