Penguin’s Dive : Bankruptcy: Many franchisees contend they’re hurting because of actions by the frozen-yogurt company, which has filed for protection under Chapter 11.
Long before Penguin’s Place Inc. filed for bankruptcy reorganization last month, relations between executives of the Thousand Oaks-based frozen-yogurt company and its franchisees had grown increasingly frosty.
Penguin’s, known for its snazzy black-and-white stores and rich assortment of yogurt toppings, cited changing buying habits, increased competition and an unseasonably cool summer when it filed for protection from creditors under Chapter 11 of the bankruptcy laws.
But some of the chain’s franchisees saw the filing as the company’s attempt to pull out of burdensome franchise agreements and to avoid costly litigation over alleged contract violations--allegations Penguin’s denies.
Penguin’s itself operates five stores and its franchisees run an additional 118 outlets, most of them in California. The system’s combined sales last year were $29 million, down from $32 million the previous year. Penguin’s has lost nearly $9 million over the past three years, and many of its franchise owners contend that they’re also hurting financially because of Penguin’s actions.
The tensions began in 1988 after Penguin’s was bought by Zausner Foods Corp., a New Holland, Pa., cheese and yogurt producer owned by Bongrain S.A., a French dairy foods concern with annual sales in excess of $1 billion.
Many of Penguin’s 92 franchise owners (some own more than one outlet) said they invested their life savings into the stores only to see a big foreign conglomerate squeeze them to pay for Zausner’s $7-million purchase of the chain.
Among other things, the franchisees alleged that Penguin’s new executives forced them to buy frozen yogurt mix made by Alta-Dena Certified Dairy Inc.--another Zausner subsidiary--at what they claim were inflated prices. When added to start-up fees of $20,000 per store and royalties and advertising fees totaling 8% of gross sales, the higher yogurt prices forced some store owners out of business and caused others to refuse to pay the royalties, said James Toledano, an attorney representing several franchise owners.
Since Zausner took over, more than 12 franchise owners representing about a third of the company’s gross sales have filed arbitration claims alleging the company’s $1.75-a-gallon markup on the Alta-Dena yogurt mix violates their franchise agreements.
Some owners have formed groups, including one called Save Our Associated Penguin’s, to complain about the company’s direction. And the owner of two franchises in Orange County is suing Penguin’s in Orange County Superior Court, accusing the company of overstating its sales to entice him to buy the stores. Penguin’s denies the allegation and is countersuing the franchisee.
“It’s a billion-dollar company that bought Penguin’s and they are taking it out on all us little guys,” said the owner of one franchise, who asked not to be identified.
“We’ve put our retirement in it,” said the owner, who recently closed two other franchises because of what he called a lack of support from Penguin’s. “It kind of irritates you when a big company hides behind Chapter 11 and pretty much puts you out of business.”
(Under Chapter 11, a company is shielded from creditors’ claims while it works out a reorganization plan to pay its debts.)
But some franchise owners say the bankruptcy gives them a chance to work out their problems with Penguin’s.
“It’s a good way to put everything on the table and say, ‘This is what we’re making and what we need to make to survive,’ ” said Mike Weaver, co-owner of a Simi Valley Penguin’s franchise and president of the Penguin’s Place Franchisee Owner Assn., which represents 68 franchisees. “They are entitled to make money, but so are we. Let’s come up with a happy medium.”
Penguin’s executives said the bankruptcy filing will not affect day-to-day operations of the parent company and its franchise stores. The company said it may close two of the stores it operates directly, but no layoffs among its 31 corporate employees are planned.
The bankruptcy has put the Orange County lawsuit and the arbitration claims on hold while the company and a committee of seven franchisees, who are also creditors, try to develop a reorganization plan. Meanwhile, the company is trying to negotiate lower rents on its 64 store leases and it plans to then transfer the leases to the franchisees, who now sublease the space from Penguin’s.
And Penguin’s is looking into selling its yogurt more profitably in supermarkets, much as Haagen-Dazs Co. did with ice cream in the late 1980s after its franchise sales dropped.
Penguin’s President Stephen Van Velkinburgh, a former Haagen-Dazs executive who was appointed by the Penguin’s board of directors in August to see the company through bankruptcy, said the firm had no choice but to file for bankruptcy because frozen yogurt has become a “commodity” that people can now buy in supermarkets and fast-food restaurants.
“The yogurt business has changed,” Van Velkinburgh said in an interview. “We used to be a destination business. Now it’s more of an impulse buy.”
As a result, Penguin’s liabilities as of Dec. 31 totaled $6.1 million while its assets were only $2 million, according to Van Velkinburgh.
He said company sales (not including franchisee sales) have dropped 40% from their peak levels in 1985 and 1986 to $3.4 million last year. Its sales through July 31 of this year were $1.8 million while expenses topped $2.4 million.
Van Velkinburgh said Penguin’s franchise agreement gives the company a right to charge a markup on the yogurt mix and to select the producer of the mix, in this case Alta-Dena. He also insisted that the mix is competitively priced, although franchise owners say it costs them more than did the old brand, which was made by a company called Honey Hill Farms.
“The decision to charge a markup was to try to add to the margin of the company to address the revenues--the money that we weren’t making,” he said. “We understand that for us to be successful, the franchisee has to be successful, but it’s the other way around too.”
The bankruptcy filing does not mean Penguin’s will try to back out of its franchise agreements, Van Velkinburgh said. Nevertheless, the company in May persuaded about 50 franchisees to sign a form releasing Penguin’s from any past claims arising from their franchise agreements, Van Velkinburgh said. As part of its so-called Operation Teamwork program, Penguin’s promised franchise owners who signed the release that it would pay half the costs of certain new equipment.
“The purpose of the Operation Teamwork program is to lay a solid foundation upon which we can build a positive future,” Penguin’s then-President Benton Silloway Jr., also a former Haagen-Dazs executive, told franchisees in a letter dated May 23. “We can’t do that when several people are looking over their shoulder and threatening litigation.”
Van Velkinburgh said Penguin’s has no plans to get out of the franchise business. In fact, it wants to expand its current stable of stores to a nationwide network of between 400 and 500 in the next several years, he said.
“We want to grow the franchise system based on what it’s going to take to compete in the 1990s,” he said.
