FDD Talk: Wetzel’s Pretzels 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 Wetzel’s Pretzels franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Wetzel’s Pretzels 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 Wetzel’s Pretzels franchise, based on Items 5 and 6 of the company’s 2019 FDD

• Section IV – Number of franchised and company-owned Wetzel’s Pretzels 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 Wetzel’s Pretzels’ financial performance representations, based on Item 19 of the company’s 2019 FDD, including information on the:

• 2018 average, median, highest, and lowest adjusted gross revenues for the franchised Wetzel’s Pretzels bakeries that were open for 12 months ended December 31, 2018, by venue type (entertainment center locations, outlet malls, regional malls, transit locations, and Walmart store locations)

• number of franchised Wetzel’s Pretzels bakeries operated in regional malls for 12 months ended December 31, 2018 for each of the following sales ranges: $700,000 and up; $550,000 to $699,999.99; $400,000 to $549,999.99; $250,000 to $399,999.99; and up to $249,999.99

• 2018 average, median, highest, and lowest net sales, cost of goods sold, gross profit, labor, rent, other expenses, total expenses, and net operating income for the franchised Wetzel’s Pretzels bakeries that were open for 12 months ended December 31, 2018

Section I – Background Information

24 Things You Need to Know About the Wetzel’s Pretzels Franchise

Appoints New CEO as Co-Founder and CEO of 25 Years Steps Down

1.  In January 2019, Wetzel’s Pretzels announced that Jennifer Schuler – who has served as the company’s president since 2017 and previously as chief marketing officer when she first joined the company in 2014 – had been promoted to CEO.

2.  Schuler is only the second CEO that Wetzel’s Pretzels has ever had and she replaced former CEO and co-founder Bill Phelps, who told franchisees in late 2018 that he was stepping down. Phelps remains a large investor and will continue to have an active role in the company as brand ambassador and a board member.

3.  According to Phelps, “Jenn is uniquely suited to take over the CEO role at our organization. Since joining Wetzel’s Pretzels as CMO in 2014, she has combined her marketing and operations experience with global brands to drive same-store sales, profitability for our franchise partners and further growth for the brand domestically and abroad.”

4.  Under Schuler’s leadership, Wetzel’s Pretzels has realized a number of key accomplishments, including:

• Achieved comparable same-store sales increases of 2.8 percent;
• Grown system-wide sales to $175 million;
• Attracted a new genre of outstanding franchise partners who bring experience, infrastructure, capital, and creativity to fuel growth and brand performance; and
• Significant domestic and international growth, including multiple locations in China.

5.  “I’m looking forward to working with our partners at CenterOak, and the Wetzel’s Pretzel’s Board to continue growing this brand both domestically and internationally,” said Schuler. “By leveraging our category-leading economics, operational simplicity and unmatched unit flexibility, we’re well-positioned to track toward our goal of 500 locations by 2021.”

6.  In an exclusive interview with Nation’s Restaurant News, Schuler also said she plans to add about 25 to 30 new units in 2019 with a focus on premium shopping center locations and non-traditional venues such as airports and stadiums. However, Wetzel’s Pretzels is not backing away from its mall roots. Schuler added, “We continue to believe in malls, and will grow in malls. As people talk about malls dying, we see that as oversimplification.”

7.  Additionally, Schuler discussed the brand’s redesign. In 2017, the chain introduced a sleek prototype concept at the remodeled Westfield Garden State Plaza in New Jersey. Over the course of 2018, Wetzel’s Pretzels introduced the bolder design to about 40 new and existing stores including a remodeled store in Downtown Disney.

8.  The company closed the tourist location for nearly six months as it underwent a massive makeover at the Anaheim, Calif. shopping center, which is adjacent to the entrance of Disneyland. The California-inspired redesign features large-scale murals capturing scenes from Southern California, new tile work, custom-made “pretzel” door handles, and an enhanced exhibition counter showcasing the handmade pretzel-making process.

9.  The location offers a glimpse of where the brand is headed. Schuler said the Disney location’s contemporary and whimsical look is “where we need to go.” “Staying true to the fun side of the brand, that’s so clear in the Disney store,” she added.

10.  As for menu innovation, Schuler said to expect a few new products in 2019 that focus on snacking and fresh food trends. She declined to name specific food products but did reveal plans to introduce a new frozen lemonade beverage in the summer.

11.  Schuler said that the chain was also looking to add digital ordering options to meet the on-demand movement. Tests will involve delivery, ghost kitchens, and mobile ordering and pickup. The pickup option, Schuler said, would be “perfect” for mall settings as many customers tend to be retail employees looking for a quick bite to eat on breaks.

Testing Delivery Options

12.  In early April 2019, Wetzel’s Pretzels announced that it had partnered with Kitchen United, a ghost kitchen, to begin developing a delivery program. Wetzel’s Pretzels said that while some brands partner with one vendor and offer a limited menu, the pretzel chain is taking its time to develop a platform that not only delivers the product but creates a whole new experience for the customer.

13.  According to Jennifer Schuler, CEO of Wetzel’s Pretzels, “For us, the bulk of our stores are in malls, but we do have a really good proof of concept outside of malls in non-traditional venues. We’re in Disneyland and Disney World, Dodger Stadium, Staples Center, and the Santa Monica Pier. So, we have proof of concept in entertainment destinations and tourist locations. We know that this works outside of malls.”

14.  Schuler thinks this is the perfect time for Wetzel’s to get into delivery. “It’s amazing to see how quickly delivery is growing and how big of a business it’s becoming,” she said. “The stat that really hit me is like that 86 percent of customers are using delivery services at least once a month, and they’re increasing about 20 percent per year.”

15.  By working with an incubator like Kitchen United – that’s just a short walk from Wetzel’s headquarters, Schuler notes – the brand can find out what truly works best. From packaging and consumer demands to delivery partners, this process allows the company to ask a lot of questions and experiment in order to answer them.

16.  Schuler added, “We have a big enough brand out there that it’s something consumers might crave. They might want a Wetzel’s on a Friday night without having to take a trip to the mall or take a trip to Downtown Disney. To me, it was the right time and the right partner to incubate delivery and figure out what does this mean for us.”

17.  Through Kitchen United, Wetzel’s can test all delivery services – Postmates, Uber Eats, DoorDash, Grubhub, etc. – to see what fits, but to also see where customers are actually ordering from. “It gives us some good insight into those different potential partners going forward,” Schuler said. “There’s a big wave of delivery and it’s only going to get bigger. It was the right time and the right way for us to insert ourselves into it so that we could learn what our consumers are looking for and do it with a great partner in Kitchen United.”

18.  During an innovation day, Wetzel’s brought in social media influencers to see how they interacted with the product and the flavors they were excited to top their pretzels with. Think horchata, matcha, or spicy Cheetos, Schuler said. “There’s a lot of cool ideas of what you can top on a pretzel so they’re very instagramable and also very tasty,” she says. “[The ghost kitchen] allows us to be an incubator for that type of creativity.”

19.  The testing is already showing some interesting trends. Average checks are considerably higher in the delivery space and more customers are ordering at night. Schuler said the orders are bigger and are almost like catering-style orders to fill a need for food at birthday parties or office meetings. Wetzel’s is developing party packs and other bundle options in order to cater to these new demands.

Company History

20.  Wetzel’s Pretzels was founded in 1994 by Rick Wetzel and Bill Phelps in Redondo Beach, California. The first location was a small stand in the South Bay Galleria mall. Wetzel and Phelps’ hot soft pretzels attracted long lines of customers, which led to an expansion of the menu as well as additional locations.

21.  The following year, Wetzel and Phelps opened the first stand-alone Wetzel’s Pretzels store and franchising began in 1996. That same year, Wetzel’s Pretzels added its now iconic pretzel dog to the menu.

22.  Over the next decade, Wetzel’s Pretzels continued to grow around the United States. The brand opened its first international location in 1998 in Puerto Rico. By 2001, Wetzel’s Pretzels had grown to 100 locations and there were now stores in sports stadiums and even Disneyland/Disneyworld. Wetzel’s Pretzels’ strong growth continued over the next few years.

23.  In 2016, Wetzel’s Pretzels was acquired by Dallas-based private equity firm CenterOak Partners, LLC. CenterOak had purchased the company from Leichtman Capital Partners, Inc., who had owned Wetzel’s Pretzels since 2007. Today, there are Wetzel’s Pretzels stores in over 28 states and six countries.

Entrepreneur’s Franchise 500

24.  Wetzel’s Pretzels ranked No. 497 on Entrepreneur’s 2020 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Wetzel’s Pretzels 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 Wetzel’s Pretzels’ 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:  265
• Outlets at the End of the Year:  275
• Net Change:  +10

2017

• Outlets at the Start of the Year:  275
• Outlets at the End of the Year:  292
• Net Change:  +18

2018

• Outlets at the Start of the Year:  292
• Outlets at the End of the Year:  290
• Net Change:  -2

Company-Owned

2016

• Outlets at the Start of the Year:  8
• Outlets at the End of the Year:  12
• Net Change:  +4

2017

• Outlets at the Start of the Year:  12
• Outlets at the End of the Year:  12
• Net Change:  0

2018

• Outlets at the Start of the Year:  12
• Outlets at the End of the Year:  18
• Net Change:  +6

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

• During the 2018 fiscal year, there were a total of 290 franchised outlets.

• The information presented in this Item 19 excludes sales information from (a) affiliate-owned Bakeries, (b) Bakeries that were not continuously open and operating under the same franchise owner throughout the last fiscal year, and (c) Bakeries that submitted late, incomplete, or illegible financial information, experienced hardware or software technical issues that inhibited proper reporting, or submitted such information in an unacceptable format.

Part 1 – 2018 Fiscal Year Adjusted Gross Revenues

• The chart below reflects the Adjusted Gross Revenues for franchised locations. The chart does not reflect net income or profits and does not include costs or expenses you will incur in operating your Bakery.

• The chart below includes 203 Bakeries that were open for 12 months ended December 31, 2018. Of the 203 Bakeries, 23 were in Arizona, 1 in the Bahamas, 107 in California, 2 in Canada, 2 in Colorado, 2 in Connecticut, 1 in Florida, 1 in Georgia, 2 in Iowa, 2 in Idaho, 8 in Illinois, 3 in Indiana, 1 in Massachusetts, 3 in Michigan, 1 in Minnesota, 2 in Nevada, 7 in New Jersey, 7 in New York, 4 in Oregon, 1 in Puerto Rico, 15 in Texas, 1 in Utah, and 7 in Washington.

• The franchises are substantially similar to those being offered in the disclosure document.

• The figures for franchised Bakeries were provided to Wetzel’s Pretzels by franchisees. In all cases, these sales figures have been used as the basis for collection of royalties. In many instances, the franchisor has not audited those figures nor has it independently confirmed their accuracy.

• For purposes of Part 1, the following terms have the following definitions:

• Entertainment Center Locations: An Entertainment Center Location is a place where people congregate to be entertained by performances or amusement, including but not limited to movie theatres, sports arenas, casinos, amusement parks, and theme parks.

• Outlet Malls: Outlet Malls are typically a large group of shops, “outlet shops,” or “factory shops” usually located outside of a town or city in which the shops sell products and services at discounted prices.

• Regional Malls: For purposes of Part 1, the term Regional Malls means all types of malls other than Outlet Malls.

• Transit Locations: Transit Locations shall mean airports, railroad stations, train stations, and other similar locations intended for other modes of transportation.

• Each of the Bakeries used in compiling the figures in Part 1 had been in operation for at least 12 months. In most cases, financial performance, revenues, and overall results for Bakeries are materially less favorable during a Bakery’s first 12 months of operation.

All Franchised Bakeries