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News at a glance


Mattress franchise goes bankrupt

A four-way battle has erupted over the ultimate fate of the bankrupt bed retailing franchise 1-800mattress.com.

In mid-March, the New York-based franchise signed a deal with an investment group, Dial-A-Mattress Acquisition, led by industry veteran Ken Mazda. Shortly thereafter, a trio of creditors owed $1.7 million filed a petition in U.S. bankruptcy court to involuntarily place the company into Chapter 7 bankruptcy.

1-800mattress.com, owned by the Dial-A-Mattress Operating Corp., then turned around and reached a deal to sell itself to rival mattress company Sleepy’s for $2.1 million. It asked the bankruptcy court to turn the Chapter 7 liquidation into a Chapter 11 reorganization—which would enable the sale and keep the company in business.

In its petition, the company cited the downturn in the economy for hurting sales, which sapped profits and left it unable to pay debts.

The Mazda-led investor group has since threatened to sue 1-800mattress.com for backing out of the apparent deal, according to bankruptcy court documents. In addition, the franchisor’s largest franchise group, Consolidated Mattress and Amalgamated Mattress out of Massachusetts, also opposed the deal.

“The franchisor is trying to push through a backroom deal that it cut with Sleepy’s prior to filing bankruptcy, whereby the people who ruined the company would get big paydays, and the creditors were left holding the bag,” said Robert Klein, Consolidated’s president.

A bankruptcy judge ultimately decided to cut the baby in half, so to speak, agreeing to 1-800mattress.com’s petition to move the case to Chapter 11, but delaying any sale until May. That delay would give other companies the time to file alternative motions.

Blockbuster in trouble?

Netflix and the Internet may have wounded Blockbuster, but the credit markets could be delivering the fatal blow.

The video rental store giant, which is 21-percent franchised, announced in its annual report last month that there are substantial doubts about its ability to continue as a going concern—a qualification in SEC documents that indicate an auditor’s doubt about a company’s ability to keep operating. At issue is a $250 million revolving loan that matures in 2010. Even if the loan is funded, execs said, “we may not have sufficient liquidity to finance the ongoing obligations of our business.” 

Last year, the company lost 143 franchise units in the U.S., nearly 17 percent of its domestic franchise units. Overall, the company lost $374 million on falling revenues last year.

Maui Wowi smooths the way for popcorn

Maui Wowi Hawaiian, a franchisor of coffee and smoothies shops, has reached a co-branding deal with Colorado-based flavored popcorn retailer Doc Popcorn.

The partnership will enable Maui Wowi franchisees to add a Doc Popcorn franchise to their units, giving them an ability to “significantly” increase their revenues, the company said.

Michael Haith, Maui Wowi’s CEO, said he’d been searching for some time for a business that could be co-branded with his smoothie retailer, and called Doc Popcorn a “perfect complement.”

The deal will also bring Doc Popcorn to a much wider audience through franchising—Maui Wowi’s 600 units will provide a “springboard” to quicken the brand’s growth pace.

AAFD to start rating franchise systems

The American Association of Franchisees and Dealers wants to play a crucial role in the franchise sales process. The AAFD plans to review franchises based on set criteria and then list them on the organization’s Web site or through the franchisee association. The review is a detailed analysis of the franchise based on its Franchise Disclosure Document, and rates the company based on its contract and eight criteria for choosing a franchise.

Buyers of the review also  receive a two-hour consultation with a franchise attorney.

AAFD President Peter Hanson said the review would give associations “a much greater role in franchise sales.” And Bob Purvin, the organization’s chairman, said the review is an outgrowth of efforts to require franchises to list any franchise associations on the FDD, regardless whether they are officially recognized.

Purvin anticipates the information will “shine a light on a franchise relationship” while also encouraging systems to adopt a more collaborative effort with franchise associations.

The review will look at “the totality of the opportunity,” including both the contract and the company’s actual practice, Purvin said. This is considered important—one of the highest-rated contracts was Cuppy’s Coffee, a franchisor that has apparently disappeared after a series of significant issues between it and its franchisees.

Purvin, in fact, called Cuppy’s the “Bernard Madoff of franchising” and said the company was running something akin to a “franchise Ponzi scheme.” He added that, “no matter how much you like a company or a brand, you still have to be careful.”

Denny’s franchisees get a co-op

The Denny’s Franchisee Association is planning to form a purchasing co-op and a national marketing advisory council. The association represents 80 percent of the more than 1,200 franchised Denny’s restaurants.

The co-op “will properly leverage the buying power of the Denny’s brand” and will increase the efficiency of the supply chain by streamlining the purchasing process, said DFA Board Chair W. Craig Barber. He added that the board held a series of meetings with members, who wanted to see improvements in the company’s purchasing effectiveness. The co-op will address those concerns.

Diedrich sells Gloria Jean’s

Diedrich Coffee has sold the domestic operations of its struggling Gloria Jean’s Coffees franchise to Praise International, a subsidiary of the company that holds the brand’s international franchise rights, for $3.1 million.

The deal affects Gloria Jean’s 102 domestic units, the vast majority of which are franchise owned. The brand has been struggling in recent years—nearly 30 percent of the company’s total units have closed or were sold since mid-2007, and Diedrich’s franchise revenue fell 30 percent in the last three months of 2008. Diedrich has been operating in the red for at least the past two years.

J. Russell Phillips, Diedrich’s CEO, said the company sold Gloria Jean’s to concentrate on its wholesale business, selling specialty coffee to restaurants. Gloria Jean’s operates coffee retailers mostly in high-traffic malls around the U.S. Yet domestic competition has proved fierce from giant retailers like Starbucks and a growing number of lower-cost options.

The brand has had more success outside the U.S. Nabi Saleh and Peter Irvine brought the brand to Australia in 1995 and expanded it in that country before buying all of the brand’s international franchising rights in 2004. Since then, the brand has grown considerably outside American borders. Today, Gloria Jean’s International operates more than 1,000 units. Phillips said that the company’s U.S. subsidiary, Praise International, “was the obvious successor and is in the best position to serve our Gloria Jean’s franchise community.”

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