FDD Talk 2019: California Closets Franchise Review (Financial Performance Analysis, Costs, Fees, and More)

In this FDD Talk post, you’ll learn the following:

• Section I – Background information on the California Closets franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a California Closets franchise, based on Item 7 of the company’s 2019 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a California Closets franchise, based on Items 5 and 6 of the company’s 2019 FDD

• Section IV – Number of franchised and company-owned California Closets outlets at the start of the year and the end of the year for 2016, 2017, and 2018, based on Item 20 of the company’s 2019 FDD

• Section V – Presentation and analysis of California Closets’ financial performance representations, based on Item 19 of the company’s 2019 FDD, including information on the:

• 2018 average, median, highest, and lowest gross revenue for the 43 franchised California Closets outlets that were open and operating as of December 31, 2018 and had been open and operating for more than 12 months, and for whom California Closets has complete sales data

• 2018 average and median gross revenue for the first quartile, second quartile, third quartile, and fourth quartile of the 43 franchised California Closets outlets that were open and operating as of December 31, 2018 and had been open and operating for more than 12 months, and for whom California Closets has complete sales data

• 2018 average, median, high, and low closing rate and gross revenue per job for all California Closets franchisees, excluding those operating internationally

Section I – Background Information

25 Things You Need to Know About the California Closets Franchise

Launches Showroom 2.0

1.  California Closets began rolling out its redesigned “Showroom 2.0” in its stores in January 2018. For years, California Closets has been on a mission to create a consistent look for its showrooms located across the country. For most of the retailer’s 41 years of operation, its stores have sported very different looks, in part because approximately two thirds of the locations are franchises rather than corporate-owned stores.

2.  The company’s other big brick-and-mortar challenge has been finding enough square footage in its stores to show off multiple examples of the retailer’s creative, customized closet designs. Larger showrooms can house as many as 10 displays, but the retailer creates customized storage spaces for bedrooms, pantries, and garages, so there’s a constant fight for space.

3.  According to Lisa Gold, director of showroom design for California Closets, the company has deployed Elo 46-inch endless aisle kiosks in its redesigned “Showroom 2.0” stores to show the depth of what the brand has to offer. The interactive touchscreens resemble drafting tables and have been instrumental in the positive results seen at these locations.

4.  California Closets aims to have 90% of all its stores, both franchise and corporate-owned, upgraded to the consistent 2.0 look by the end of 2019, with the rest completed in 2020. Gold said, “Our ‘close rate’ among customers that come into the 2.0 stores has been higher, and during the first six months of their operation, job sizes [average order values] increased.”

5.  While California Closets’ in-store designers had anticipated using the kiosks alongside shoppers, the application’s interactivity and depth of product information enables customers to use them without assistance. “We were a little surprised at how open the customer was to ‘playing’ with the technology,” said Gold. “They wanted to discover on their own and then ask questions of the designers if they have them. It opened up an alternative way of learning about us.”

6.  The application provides detailed product information, plus educational content that highlights California Closets’ commitment to sustainability and its manufacturing processes. Other functionalities include designing to a specific budget, and the ability of shoppers to “favorite” a design they like or feel inspired by.

7.  “We’re capturing leads and information about what they want, but we’re also ensuring that they don’t have to repeat their story,” during a future visit to a showroom, said Gold. Additionally, shoppers can use the touchscreen interface to schedule appointments with designers, either for in-store consultations or in-home visits.

8.  According to Gold, “Our designers call this a lifesaver. If a customer comes into a showroom and doesn’t see what they’re looking for, they can bring them over to the touchscreen and it shows them beautiful images. Previously designers had to show pictures in the plastic sleeve of a portfolio notebook, and there are just times when that’s not enough to show these images in a way that really inspires people, that ‘wow’ moment. It’s an amazing demonstration of what we can do.”

9.  In 2017, California Closets began working with CreativeRealities and Elo to develop the kiosks. Angela Nicholson, director of digital marketing for California Closets, said, “They offered a solution that was cost-efficient and had the quality we were looking for — the Elo touchscreen and the customized base. That spoke to the designer aspect of the solution.”

10.  California Closets is still planning refinements and additions to the kiosk experience. Gold added, “We have ‘before and after’ shots on our web site — images of a chaotic room before, and what we can do to create calm in a person’s house. We would like to bring that thought into the newer touchscreens, because we think it will be more fun for the customer. That will be the 2.0 version of Showroom 2.0.”

11.  While the kiosk does have self-service functionalities, California Closets still stresses the role of its designers. “We’re steeped in service to the customer, and our foundation is to be a design service,” said Gold. However, the endless aisle and exploratory elements of the kiosk are delivering benefits that could increase customer lifetime value.

12.  Gold added, “People at the touchscreens might be looking at just a reach-in closet, but then they start to look at a complete entertainment center. They’ll often think beyond what they originally came in for, for other spaces in the house. Hopefully they will come back after their immediate needs are met, and we will have created a lifelong customer.”

Further Expands Company-Owned Operations

13.  At the beginning of April 2019, FirstService Corporation, parent company of California Closets, announced that it has further expanded its California Closets company-owned operations with the acquisition of its Baltimore and South New Jersey franchises. Following these transactions, California Closets now has 19 company-owned operations among its 80 total franchised territories. Terms of the transactions were not disclosed.

14.  Charlie Chase, president and CEO of FirstService Brands, said, “These two acquisitions provide key market footholds in the attractive and growing Mid-Atlantic region. Both operations will benefit from the migration of production into our eastern centralized manufacturing facility in Grand Rapids, Michigan and ongoing investments to increase capacity.”

15.  According to Bill Barton, president and CEO of California Closets, “We are delighted to add two strong-performing operations, which have been led by long-standing franchise owners, to our rapidly growing company-owned platform. With the addition of the Baltimore franchise, which is adjacent to our existing Washington, D.C. operation, we are well-positioned to capitalize on our significant market opportunity. The South New Jersey franchise also provides a sizable geographic footprint within close proximity to the New York metropolitan area, the largest U.S. market.”

Debuts E-Commerce Line

16.  In late March 2019, California Closets announced an e-commerce platform with California Closets Essentials, a curated collection of best-in-class closet accessories designed to create a more comprehensive brand experience for customers. Featuring an initial rollout of eight product categories and over 150 items, the private-label offering is assembled for superior performance and style, allowing the brand to become a full-service organizational resource.

17.  Bill Barton, CEO of California Closets, said, “This is an exciting and important opportunity for our brand as we look to extend and deepen our customer relationships, and remain an industry-leading source for custom closet solutions.”

18.  California Closets Essentials launches with an exclusive collection of premium hangers, bins, watch winders, mirrors, and a wide assortment of luxe vegan leather valet and smart-storage accessories, as well as jewelry boxes and stackable trays with patented LusterLoc technology. A pre-selected range of sizes, materials, and colors that complement California Closets’ best-selling finishes further inspire clients with smart and elegant ideas for optimizing spaces, big and small.

19.   Jill LaRue, senior vice president and chief merchandising officer of California Closets, added, “This is an exciting and important opportunity for our brand as we look to extend and deepen our customer relationships, and remain an industry-leading source for custom closet solutions.”

Company History

20.  California Closets was founded in 1978 by Neil Balter – who was still in his first year of college and only 18 years old – in Woodland Hills, California. Balter had installed shelves in his friend’s closet and realized that he could turn that service into a business. For the next two years, Balter did minor closet renovations as part-time work while he continued to attend school.

21.  In 1980, Balter decided to turn California Closets into a full-time business with just a few employees. He took out an ad in the Los Angeles Times, which generated more business for California Closets than in the previous two years.

22.  After securing a $10,000 bank loan, Balter moved California Closets out of his home and into a real office building. At the time, California Closets was bringing in $40,000 a month in sales. Building on this success, Balter decided to start franchising the California Closets concept in 1982.

23.  Initially, things were moving slowly, but Balter caught a lucky break when he boarded an airplane and sat next to Wall Street Journal reporter Jennifer Bingham Hull. During the plane ride, Balter discussed California Closets with Hull and, as result, his company became the WSJ’s featured small business on March 19, 1984. Over the next decade, California Closets grew rapidly and Balter and the company were featured on Good Morning America, Today, Geraldo Rivera, and the Oprah Winfrey show.

24.  As California Closets continued to grow across the country, the company was acquired by Williams-Sonoma in 1990. After the acquisition, California Closets struggled and Williams-Sonoma sold the company in 1994. Four years later, California Closets was purchased by FirstService Corporation, which remains as the brand’s parent company today.

Entrepreneur’s Franchise 500

25.  California Closets did not rank on Entrepreneur’s 2019 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of California Closets franchise costs, based on Item 7 of the company’s 2019 FDD.

Section III – Initial Franchise Fee, Royalty Fee, Marketing Fee, and Other Fees

• Please click here for detailed information on California Closets’ initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2019 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2016

• Outlets at the Start of the Year:  61
• Outlets at the End of the Year:  56
• Net Change:  -5

2017

• Outlets at the Start of the Year:  56
• Outlets at the End of the Year:  50
• Net Change:  -6

2018

• Outlets at the Start of the Year:  50
• Outlets at the End of the Year:  46
• Net Change:  -4

Company-Owned

2016

• Outlets at the Start of the Year:  22
• Outlets at the End of the Year:  26
• Net Change:  +4

2017

• Outlets at the Start of the Year:  26
• Outlets at the End of the Year:  32
• Net Change:  +6

2018

• Outlets at the Start of the Year:  32
• Outlets at the End of the Year:  35
• Net Change:  +3

Section V – Financial Performance Representations (Item 19, 2019 FDD) and Analysis

• This Item sets forth certain historical data submitted by California Closets franchisees, including average and median annual gross revenue, annual gross revenue in quartiles, average revenue per job, and average closing rates for the period from January 1, 2018 to December 31, 2018 (the “Measurement Period”).

• This Item sets forth historical data for 43 franchised outlets that were open and operating as of December 31, 2018 and had been open and operating for more than 12 months, and for whom California Closets has complete sales data (the “Reporting Franchisees”).

• Forty-six franchised outlets were open and operating as of December 31, 2018, but 3 of those franchised outlets were excluded due to not operating for the last 12 consecutive months as franchised outlets.

• This Item does not include financial information related to Design, Sell, and Install franchises because, as of the date of the 2019 disclosure document, there are not yet any franchisees operating Design, Sell, and Install franchises.

• California Closets has not audited this information, nor independently verified this information.

• A number of factors will affect the success of your franchise. These factors include the current market conditions, the type of market in your franchise area, the location of your franchise area, the competition, and your ability to operate the franchise.

• Your results may vary depending on the location of your franchise.

• This Item 19 does not contain any information regarding operating costs. Operating revenues and expenses may vary substantially from business to business.

• California Closets does not make any financial performance representations regarding the operation of franchises who have signed franchise agreements solely for the operation of retail showrooms.

Part I – Average and Median Annual Gross Revenue

• The chart below presents the Average Annual Gross Revenue and Median Annual Gross Revenue for all Reporting Franchisees during the Measurement Period.