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A group of Deli Delicious franchise owners are concerned about their franchise leadership’s transparency, support and vendor options. File Photo

published on June 19, 2019 - 12:38 PM
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Concerns regarding transparency, franchise support, vendor options and a bakery have spurred a majority of Deli Delicious franchisees to form an independent association to give themselves a seat on the corporate board to have a say in the company’s future.

Of 52 stores company-wide, 32 came together in January to create the nonprofit mutual-benefit corporation Deli Delicious Franchise Association (DDFA), said franchisee Eric Sha, an officer for DDFA. This constitutes what he calls a supermajority of owners who want to be a part of the decision-making process amidst a “growing and competitive market,” said Sha, who has stores in Turlock, Tracy and two in Downtown Fresno.

Since its formation — first reported by the Visalia Times-Delta — DDFA has hired a consultant, retained a lawyer and met with food suppliers and payment processors.

 

‘Upside-down model’

Sha, who was named franchisee of the year several times, said Deli Delicious “is the pride of the Central Valley.” But with other sandwich shops such as Mr. Pickles and Ike’s Love and Sandwiches opening, it worries franchisees whose investment they feel is on the line.

Sha feels the company is no longer able to scale and attract new investors. Many of the franchisees have signed agreements to expand, but “that’s not happening,” Sha said. Over a quarter of the businesses are paying more in royalties than they are profiting, he said after talking with other members of the association. “That’s an upside-down model.”

Stores have closed in Citrus Heights, San Luis Obispo and Morgan Hill. Stores in Tracy, Atwater and Porterville are struggling to stay open, said Nicholas Huerta, who owns the Deli Delicious in Visalia.

Sha, who owns the Tracy location, said considering the high-density and growth, the San Joaquin County city should be a “good market.” Nationwide chains including Jimmy John’s and Jersey Mike’s went in around the same time Deli Delicious did. But without marketing, customers are paying premium prices for sandwiches without knowing what the brand offers, he said.

These struggling locations could be in the black with better support from the corporate office, Huerta said.

 

‘Happy with the system’

A representative of Deli Delicious disputes that claim. Initial requests for responses from Deli Delicious Franchising, Inc. were answered by email. The corporation did not provide someone to comment further on the matter.

“Most franchisees tell us they’re very happy with the system of support and communication with them,” Nate Gilbert, Deli Delicious director of franchise development, wrote in an email.

The franchise support office sends weekly newsletters, Gilbert said, and host meetings and workshops to help business owners.

In a 2018 interview with Deli Delicious Vice President Ali Nekumanesh, he said the company prides itself on the support they give to franchisees, many of whom are first-time business owners.

“You have folks that are just graduating from college,” Nekumanesh said last year. “They have never initiated a business startup. The franchise support office takes this person through all the steps of negotiating a lease, finding a site, finding contracts, building the restaurant and going through a 31-day extensive training supervised by the operations team.”

Entrepreneur.com ranks Deli Delicious at No. 351 of its 500 best franchises to own. Since 2011, when the company had 11 stores, two of them company owned, 41 additional stores have been built throughout California, with one opening in Selma earlier this month.

But that number leveled off after 2016, and Sha feels a lack of support from the corporate office, Deli Delicious Franchising, Inc. may be a contributing factor.

“They wanted to have a hundred by the end of 2018,” Huerta said.

 

Where’s the growth?

In a separate interview last year with Nekumanesh and Gilbert, the pair said they had 118 franchise agreements on the books and 52 stores. But Huerta said a lot of development has stalled. When the Selma store opened, it took four years to finish and went through three different franchisees, he said. Huerta feels the cost to open and operate a Deli Delicious has hampered development.

Deli Delicious can cost up to $30,000 a month just to operate, he added. Huerta said he follows the franchise’s recommendations “to a tee.” He operates with food costs at 32%, and 22% for labor costs, what he said the franchise recommends.

“How do I make $1,800 bucks last month and Deli D makes $3,400?” asked Huerta. “How is that possible if I’m following their recipe for success?”

What DDFA wants is transparency from the corporate office, both Sha and Huerta said.

With 32 of 53 stores and emailed letters of intent for another eight stores to join, DDFA wants a vote on the board. But many there feel they have not been acknowledged by the Deli Delicious corporation.

 

Outside help

They’ve brought on a consultant from the National Jack in the Box Franchisee Association, whose own organization is at odds with their leadership. DDFA also retained attorney Rodney Hatter of Newport Beach after what Huerta said have been numerous attempts to reach out to Deli Delicious, resulting in not much more than referrals to franchise agreements.

“We are recognized by the state, we have board members, we have committee members, we have action plans, meetings every month,” Huerta said.

Franchisees pay 6% royalties to the corporate office. On top of that is another 2% that goes toward national advertising, which franchisees feel is being spent without their knowledge.

Every last dime contributed to [Deli Delicious Franchising, Inc.] advertising budget is spent on advertising programs and the administration of those programs,” Gilbert wrote in an email. Deli Delicious formed an advertising committee made up of four-to-six franchisees to discuss strategies and budgeting.

Huerta equates what is happening with Deli Delicious with Quiznos, In 2014, Quiznos settled a $40 million lawsuit from 12 defunct franchisees because of markups on food and supplies, according to an article from Entrepreneur.com. That lawsuit was one of a number of actions brought against the corporation by its franchisees. The restaurant chain shrank from 4,700 locations in 2007 to fewer than 400 by 2017 before being sold to a San Diego investment firm.

 

Vendor choice

Vendor pricing and rebates are another of DDFA’s grievances. Distributors and vendors often offer rebates for using their products and services. According to Huerta, those rebates aren’t getting filtered down to franchisees.

Those rebates are listed in the franchise’s disclosure document and “are highly regulated,” wrote Gilbert.

“It may be legal, but we don’t believe its ethical,” Sha said. “When you have a store that’s underwater and you’re getting rebates, it makes you feel violated.”

“[Deli Delicious Franchising Inc.] goes through exhaustive negotiations with its purveyors, securing the best possible terms which are then passed along to franchisees,” wrote Gilbert. “As you can imagine, with any franchise system, consistency is of prime importance to brand success,” he continued.

In 2018, Deli Delicious owner Mohammad Hobab opened D.D.’s Bakery. D.D.’s Bakery operates independently of Deli Delicious Franchising, Inc., but is an approved vendor, according to Gilbert.

However, a number of franchisees felt it was a conflict of interest. While Gilbert said many franchisees see the product as competitively priced and of superior quality, other franchisees felt it was being forced on them.

The $2 million bakery was built without franchisees’ knowledge, said both Sha and Huerta.

“We didn’t agree with the product and we didn’t agree with the pricing. It was more expensive,” Sha said. “It had no benefit to us.”

Franchise agreements, according to Huerta, told franchisees they could only buy bread similar to that being made by D.D.’s, which uses organic flour, an ingredient Huerta said is rarely used on its own unless all of the ingredients are organic.

“Where else can you find organic flour? You can’t,” said Huerta. “Nobody else will do this.”

 

Exploring options

Basque French Bakery, which used to be the main supplier of Deli Delicious bread, did agree to include the ingredient, said Huerta, whose association has been in talks with the Fresno-based bakery. But in a letter to franchisees earlier this year, French Basque Bakery was taken off the list of approved vendors.

Despite this, about 30 stores within DDFA still use French Basque Bakery, Huerta said.

“So now, we’re at the point where we’re going to go with other vendors. We’ve already met with Sysco,” Huerta said. “That’s how we know it’s cheaper for the same products.”

Next week, attorneys for DDFA will be sending Deli Delicious Franchising, Inc. a letter requesting a seat on the board of directors.

“This isn’t to say we’re going to take over or we’re going to do rebranding,” Huerta said. “That’s not our intent. We love Deli Delicious.”

“But the leadership and the franchise model is broken right now,” he said. “And that’s evident in the lack of revenue, the lack of growth and the lack of leadership there currently.”


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