Still, in a perfect world, I would prefer the company-owned approach even though more capital is needed. Owning the stores allows more careful control of service and product quality and ultimately how the brand is perceived.
It takes almost no capital to open a new See's Candy store. We're drowning in capital of our own that has almost no cost. It would be crazy to franchise stores like some capital-starved pancake house. We like owning our own stores as a matter of quality control. - Charlie Munger at the 2001 Wesco Annual Meeting
Given RMCF's capital constraints during most of its existence, growing this way appears pretty smart to me as long as they control quality and franchisees share in the success. As their financial flexibility increases over time they could always tilt the model toward the See's approach.
So the franchise approach is not a fatal flaw but, at the margin, company-owned is my preference.
I continue to find RMCF to be a solid company with what looks like potentially attractive long-term economics.
Over time, I would like to learn whether the franchisees are also reasonably successful economically. Distribution has been a concern of mine but may not be problematic. It's just that franchisees need to be successful if the model is going to be sustainable and, service/product quality must be consistently good to reinforce the brand.
I'd also like to know why they need a 300+ (only 5 of them company-owned) store footprint to produce approximately $ 30 million in sales. See's Candy produces $ 380 million in sales with 200 stores. The economics seem to work for RMCF but it's still an open question.
According to the most recent 10-K:
The Company believes that, on average, approximately 40% of the revenues of Rocky Mountain Chocolate Factory stores are generated by products manufactured at the Company’s factory, 55% by products made in the store using Company recipes and ingredients purchased from the Company or approved suppliers and the remaining 5% by products, such as ice cream, coffee and other sundries, purchased from approved suppliers.
So the comparison is not apples-to-apples but that order of magnitude difference in sales is not explained by the franchise model of RMCF versus the company-owned model of See's Candy.
RMCF has no debt...had $ 3 million plus FCF during the recession (more like $ 5 million normalized), and requires less than $ 12 million of capital to run the business (that comes to ROC* in the 30-40% range...impressive if sustainable). So the economics appear to compare favorably to See's Candy...what Buffett calls his "prototype of a dream business".
BTW - the franchising model may be working beautifully...it's just an open question for me as an investor.
Just wish the stock would come down 20-30%.
* Return on Capital: If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result." - Charlie Munger at USC Business School in 1994