FDD Talk 2020: Cheba Hut 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 Cheba Hut franchise opportunity, including relevant news updates

• Section II – Estimated initial investment for a Cheba Hut franchise, based on Item 7 of the company’s 2020 FDD

• Section III – Initial franchise fee, royalty fee, marketing fee, and other fees for a Cheba Hut franchise, based on Items 5 and 6 of the company’s 2020 FDD

• Section IV – Number of franchised and company-owned Cheba Hut outlets at the start of the year and the end of the year for 2017, 2018, and 2019, based on Item 20 of the company’s 2020 FDD

• Section V – Presentation and analysis of Cheba Hut’s financial performance representations, based on Item 19 of the company’s 2020 FDD, including information on the:

• 2019 average, median, highest, and lowest gross sales for the 12 franchised Cheba Hut locations that were open the full calendar year in 2019

• 2019 average, median, highest, and lowest gross sales for the 9 affiliate-owned Cheba Hut locations that were open the full calendar year in 2019

Section I – Background Information

20 Things You Need to Know About the Cheba Hut Franchise

Endures Beyond Experiential Dining

1.  At the end of August 2020, Cheba Hut, a self-described experiential fast-casual restaurant chain, talked about how the company had to pivot when the COVID-19 pandemic hit in March and dining rooms were shut down. The company’s foundation is based in counter-culture and “flipping the bird to the establishment” with its food. The relaxed environment often features a craft beer bar with beverages from local breweries. Cheba Hut’s colorful messaging to consumers is filled with puns like “drop a dime,” “munchies,” and inviting consumers into their “joint.”

2.  Seth Larsen, chief relationship officer of Cheba Hut, refers to the pandemic as a kick in the stomach, but the restaurant knew its strong menu and customers would carry it through the crisis. He said, “It’s always a concern anytime there’s a significant disruption like that. You take stock of yourself as a leadership team and as a brand. I think for the most part, we always felt we make great food, and at the height of the pandemic when your week-over-week sales are nearly down 50 percent, it’s your diehard fans and your customers that are keeping you in business.”

3.  “We’ve been operating here for 22 years and without our loyal fans, we certainly couldn’t have gotten through the pandemic. We never went backward in food quality ever in our 22-year history. Really committing to making great food – that’s really one of the basic principles of operating a restaurant,” said Larsen.

4.  After a sluggish start, the 32-unit brand is ranging from down 10 percent to flat in the past eight weeks (prior to the press release). A significant part of that growth was driven by an app and rewards program and curbside pickup – both of which were launched during the pandemic.

5.  Larsen said before COVID, less than 2 percent of sales came from the website and mobile. In the past month and a half, it has skyrocketed to more than 20 percent. Average ticket grew from about $14.50 pre-pandemic to $17.50 in the past couple of months. He calls it a “huge transition and push into the 21st century.”

6.  Larsen added, “Anytime you launch new technology, you risk interrupting a stream of revenue when every single dollar counts now more than ever. So the launch of the app and what our marketing squad and our VP of marketing Brian Loeb did was actually pretty cool, and the results that we’ve gotten from that app have been awesome.”

7.  Regarding the new curbside program, Larsen attributed the successful roll out to Cheba Hut’s operations team. Until dining rooms were allowed to open, locations were operating curbside only; some stores are still using that model. The chief relationship officer notes that even though Cheba Hut builds fun restaurants and wants to be a destination, when the pandemic hit and dining rooms weren’t open, guests weren’t coming for the atmosphere. They were coming for the food.

8.  “I’ve always said that our food is awesome,” Larsen said. “I personally feel we make the best sandwich around at the best price point with the best hospitality, and this pandemic has proven that. I’ve always said we’re relatively recession-proof and I guess that includes pandemic proof – we’ve shown that, as well.”

9.  During the pandemic, Cheba Hut managed to open three stores, and two more were planned for the first half of September. The brand is anticipating the opening of seven to 10 more units in 2021. Larsen added that the timeframe in which the company opened the three stores – whether there’s a pandemic or not – was impressive. Opening stores while also retaining sales and employees was a crucial accomplishment, Larsen said.

10.  Larsen further explained, “Without our people, for lack of a better term, we’re [expletive]. We do the best we can at our HQ level, but it’s really our employees on the front line that are making it happen every day. For us to operate continuously throughout the pandemic definitely helped us. Restaurants that shut down, even if it was for a short period of time, to then try to bring your employees back and fire back up your operations is a very tall order. So just keeping our employees happy and healthy I think was a big win for us. Without them, we can’t make sales. We can’t do what we do.”

11.  Larsen continued, “I think for us in particular, when there’s any sort of economic uncertainty, people go back to the brands they know, love, and trust and can afford. And we fit that model. If people are fearful of losing their jobs or no longer have those additional benefits, the first thing you’re going to cut out are your higher dollar expenses. You’re not going to cut out your fast-casual Cheba Hut sandwich experience. Most of our locations have full bars, as well, so for half the price, you can have eventually a full-service dinner experience. You can go out, grab a sandwich, grab a cocktail.”

12.  Larsen said the brand is well-positioned for the future. When citing the reasons for his optimism, he notes opportunities with real estate and an expanding pool of talent. Cheba Hut will continue to rely on its culture, employees, and simple menu to achieve growth during the unprecedented environment, the executive said.

13.  “I think people are going to want to go back out and dine,” Larsen said. “Of course there’s always going to be people that are a little more fearful than others, but people have been cooped up for a long time here, and once we’re kind of over the hump here, whether it’s vaccines or just treatments, or it just fizzled out, or if we live with it continuously, I think people are going to find a way, and restaurants are certainly going to find a way.”

Opening First Locations in Chicago

14.  In early March 2020, Cheba Hut announced that it was making its debut in Chicago, to capitalize on the buzz over legal recreational marijuana, with two locations. One local franchisee has signed a lease in Wicker Park, the company confirmed, while another is working to lock down a space in Wrigleyville or Lincoln Park. At the time of the press release, an opening timeframe was not yet available. Legalization of recreational marijuana went into effect on January 1 in Illinois.

15.  The puns from the Arizona-based chain keep coming. Cheba Hut’s subs are available as a 4-inch “nug,” an 8-inch “pinner,” and a 12-inch “blunt.” Varieties include the “White Widow” (grilled chicken, ranch, mushrooms, bacon, provolone) and the “5-0” (smoked ham, Genoa salami, prosciutto, pepperoni, bacon, giardiniera, cheddar). Appetizers, or “munchies,” include loaded “not’chos” (cheddar, jalapeños, red onion, black olives, Nacho Cheese Doritos, ranch) and garlic cheese bread with marinara or ranch. Desserts include marshmallow cereal bars and “goo balls” (Rice Krispies, peanut butter, honey, cocoa).

16.  Patrons could also expect a full bar with a list of drinks, or “Cottonmouth Cures,” plus beer, iced tea, Kool-Aid, and soft drinks. The company encourages its franchisees to make each location their own when it comes to cocktails, local beers, and decor, Cheba Hut founder Scott Jennings explained. “Each location really takes on neighborhood feel and franchisee feel,” he said.

Company History

17.  Cheba Hut was founded in 1998 by Scott Jennings in Tempe, Arizona near Arizona State University. Jennings was a lifelong foodie and worked at various restaurants as a young adult. He knew that he wanted to eventually open up his own restaurant someday. While working as a delivery driver, Jennings noticed that there was an underserved market for late night deliveries. Jennings settled on opening a cannabis-themed sandwich shop that catered to the college crowd.

18.  He wanted the sandwiches to be better than what was being served in the fast-casual market at the time. Jennings also wanted to create an environment where everyone felt truly welcome and got to experience a genuine and authentic level of care in customer service.

19.  Cheba Hut started franchising in 2002, but the brand’s growth has remained fairly slow and steady. Today, there are a mix of company-owned and franchised locations in a handful of states, primarily in the Southwest.

Entrepreneur’s Franchise 500

20.  Cheba Hut did not rank on Entrepreneur’s 2020 Franchise 500 list.

Section II – Estimated Costs

• Please click here for detailed estimates of Cheba Hut franchise costs, based on Item 7 of the company’s 2020 FDD.

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

• Please click here for detailed information on Cheba Hut’s initial franchise fee, royalty fee, marketing fee, and other fees, based on Items 5 and 6 of the company’s 2020 FDD.

Section IV – Number of Franchised and Company-Owned Outlets

Franchised

2017

• Outlets at the Start of the Year:  16
• Outlets at the End of the Year:  12
• Net Change:  -4

2018

• Outlets at the Start of the Year:  12
• Outlets at the End of the Year:  13
• Net Change:  +1

2019

• Outlets at the Start of the Year:  13
• Outlets at the End of the Year:  14
• Net Change:  +1

Company-Owned

2017

• Outlets at the Start of the Year:  3
• Outlets at the End of the Year:  8
• Net Change:  +5

2018

• Outlets at the Start of the Year:  8
• Outlets at the End of the Year:  9
• Net Change:  +1

2019

• Outlets at the Start of the Year:  9
• Outlets at the End of the Year:  15
• Net Change:  +6

Section V – Financial Performance Representations (Item 19, 2020 FDD) and Analysis

• As of the December 31, 2019, there were 15 Cheba Hut Businesses owned by Cheba Hut’s affiliates (“Affiliate Locations”) and 14 Cheba Hut Businesses owned by franchisees (“Franchised Locations”).

• The financial information provided in this Item 19 represents the historical performance of the nine Affiliate Locations and 12 Franchised Locations that operated all of 2019 (“2019 Reporting Group”), and reports on results attained January 1, 2019 to December 31, 2019 (“2019 Reporting Period”).

• The following locations were excluded from the 2019 Reporting Group: one Affiliate Location that was reacquired from a franchisee in 2019; five Affiliate Locations and one Franchised Location that opened in 2019; and one Franchised Location that ceased operations in 2019.

• Franchised Cheba Hut Businesses will share many of the same characteristics as Cheba Hut’s Affiliate Locations, including degree of competition and services and goods offered, except that Affiliate Locations do not pay the Royalty, Brand Fund Contributions, and are not subject to the Local Advertising Requirement.

Part 1 – Franchised Locations in the 2019 Reporting Group

• Table 1 provides Net Sales information for the Franchised Locations in the 2019 Reporting Group during the 2019 Reporting Period.