read the linked article about auntie anne’s pretzels. then write 2

 

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read the linked article about Auntie Anne’s Pretzels. Then write 2 paragraphs to answer each question that follows. Please include one quote from the article in each answer.

1. What are the potential risks if Anne Beiler sells her company to cousin Sam Beiler? Please provide details from the article as you explain.Questions

2. How have Anne Beiler’s personal goals affected the business? Please provide details from the article as you explain.

 

……………………………….

 

AUNTIE ANNE’S PRETZELS: A KNOTTY PROBLEM

Sherry Robinson, Penn State University

John T. Finley, Columbus State University

CASE DESCRIPTION

This case involves growth and management issues, and is appropriate for small business and

management courses. A secondary issue is the owner’s social motives for the business, thereby

making this case appropriate to a discussion of entrepreneurial goals and social responsibility. It

traces the birth and growth of a new business into an international franchise system. It is a level 2

case designed to be covered within one class period and is appropriate for small business or

management classes. The purpose of this short case is to expose students not only to real-world

questions of strategic management and franchise development, but also the way an entrepreneur’s

personal goals can influence business decisions.

CASE SYNOPSIS

Auntie Anne’s is a family owned and operated snack eatery business that holds a strong

commitment to customer satisfaction. The company focuses on product quality, strong support to

its franchisees, and a commitment to relationships that will help in the long-term growth of the

franchise system. Auntie Anne’s success can be seen in its growth from a farmers’ market stand to

the expanded franchise system it offers today. Founder Anne Beiler started the business as a means

to fund charitable work, and now Anne is considering selling the business in order to focus on her

charitable projects. In addition,there has been an expansion of Auntie Anne’s to include a new café

format as well as the furthering of the charitable aspect of the business. This case study will examine

Auntie Anne’s past and possibilities for the future from a corporate and franchisee perspective.

INTRODUCTION

Auntie Anne’s Pretzels started selling soft pretzels at a single stand at a farmers’ market in

Pennsylvania. Mainly via its franchise system started in 1989, this private enterprise offers

customers its products at more than 900 outlets in 43 states and 12 countries including Japan,

Thailand, Malaysia, Saudi Arabia, the Philippines, and the United Kingdom (as of January 2007).

As with many franchises, outlets are primarily located in high-traffic areas, such as malls,

transportation hubs, and stadiums. (Hoovers, 2007) The company’s sales have grown every year

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Journal of the International Academy for Case Studies, Volume 14, Number 7, 2008

as has the price of a franchise outlet, paving the way for Auntie Anne’s current status as a segment

leader.

BIOGRAPHY OF ANNE BEILER

The story of Auntie Anne’s begins with founder Anne Beiler, whose overall goal for the

business was to make enough money to fund a counseling center that would help people of Amish

background find psychological help and healing. Anne and her husband, Jonas, had become

interested in mending people’s lives after their daughter died in a tragic accident. They wanted to

help people in the same way their friends and neighbors had helped their family. As a family

business, Auntie Anne’s Pretzels’ goals have been closely intertwined with the goals of the founders,

so it is important to understand the Beilers in order to understand the company.

According to her autobiography (Beiler, 2002), Anne’s story begins on January 16, 1949,

on a farm in Lancaster County, Pennsylvania. Born to Amish parents, she grew up without using

electricity. A horse-drawn buggy was the only means of transportation. As the third of eight

children, Anne gained a lot of experience baking and loved doing it. When she was 12 years old she

baked her own cakes and pies for a Philadelphia market stand where she worked with her parents.

By the age of 14 she had her first job as a waitress in a truck stop, where she developed her

philosophy that “kindness and a smile would open the door to anyone’s heart”(Beiler, 2002).

Anne met her future husband, Jonas Beiler, at a friend’s birthday party and they were wed

in 1968. They moved to Texas and lived there for 20 years. Upon returning to Pennsylvania in 1987,

Anne managed a soft pretzel stand at a farmers’ market in Maryland. After seven months, she and

Jonas purchased a booth at the farmers’ market in Downington, Pennsylvania, where they sold pizza,

stromboli, ice cream, and hot hand-rolled soft pretzels.

 As she worked with the stand, Anne noticed the pretzels were the most popular item and

they appealed to people of all ages. She set out to develop her own pretzel, and for two months Anne

tinkered with the recipe but with disappointing results. Just when she was about to give up, Jonas

suggested some ingredients his mother used when he was a young boy. They added them to the

pretzel mix and a “new” recipe was created–the Auntie Anne’s pretzel. The hot, salty treat was a

hit with customers. Long lines of people who wanted only pretzels and fresh lemonade formed in

front of the stand. Within a year they opened a second stand and then a third and fourth. The Beilers’

garage became an office and family and friends helped her mix batches of pretzels, paint signs,

construct booths, and deliver ingredients, in addition to working at the market stands. The original

pretzel logo on the Auntie Anne’s signs came from a photocopy her sister Becky made of one of the

actual pretzels.

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Journal of the International Academy for Case Studies, Volume 14, Number 7, 2008

THE SUCCESS OF AUNTIE ANNE’S

The success of the stands made the news and Anne received her first request for a franchise.

She knew nothing about franchising but decided to try it, learning the business by trial and error.

The first franchise outlet went to her brother in 1989 for $2,500. Cousin Sam Beiler was another of

the first franchisees. In just a few years the price for a franchise rose to $7,500 and by 2005 it had

risen to $28,000.

Auntie Anne’s 2003 sales were approximately $234 million, rising to $247 million in 2004.

Same-store sales were up 2.1% during this time with an average check of $3.45. Revenues in 2005

totaled $252 million and they are projected to be $266 million in 2006 as well as rolling their

“billionth pretzel” (Burns, 2006). Auntie Anne’s Pretzeldog, the most successful new product in

many years, takes Auntie Anne’s closer to the sandwich market, yet, like a pretzel, is easy for

consumers to eat on the go. The outlook for 2006 includes the opening of about 45 new stores in

the United States and possible further international expansion into Japan in China (Jennings, 2006).

FRANCHISING & AUNTIE ANNE’S

As Auntie Anne’s is a network of franchised locations, a basic understanding of franchising

is essential. Auntie Anne’s 900 locations are managed by 250 franchisees worldwide. Franchising

entails a business model in which a franchisor (e.g. Auntie Anne’s, Inc.) licenses trademarks and

tested business processes to a franchisee (operator of a local outlet) in exchange for a recurring

payment known as royalties, including a percentage of profits as well as the annual fees. The

franchisee typically “have the ability to secure the necessary funds for locations within the United

States, which represents the initial investment to open an Auntie Anne’s franchise concept” (Auntie

Anne’s Pretzels, 2006). Specifically for Auntie Anne’s, the potential franchisee must typically have

the ability to secure around $350,000 in order to be considered qualified for an Auntie Anne’s store

location. For international locations the capital requirement ranges from $1 million to $2 million

USD. These amounts represent the initial investment for the opening of a location. The system

entails risk taken by both the franchisor and the franchisee.

To assess risk and opportunity, consider the following analysis from both the franchisor and

franchisee perspectives of the Auntie Anne’s concept. For the franchisor, the following can be

considered when offering the trademark and/or business process to a franchisee. A strength of a

franchisor is its size and potential to quickly expand due to the mobility of the franchising business

model. Additionally, since the localized risk is assumed by the franchisee, a franchisor can more

easily absorb the negative effects of a failed venture due to the initial investment by the franchisee.

A weakness of a franchisor is that intellectual property is vulnerable and ideas can be used by

franchisees to become a competitor. Opportunities include quick expansion and a turnkey process

which leads to a competitive advantage in many local markets. Independent businesses (non-

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Journal of the International Academy for Case Studies, Volume 14, Number 7, 2008

franchise) are threatened by the spread of franchises. Specific threats to franchise operations include

unfavorable legislation, processes required in certain states, as well as the possibility of franchisees

stealing ideas and becoming competitors.

From the franchisee perspective, a strength is that an entrepreneur can obtain quick access

to a proven brand and business model yet employ his/her enterprising spirit by entering into a

franchising agreement quickly. The franchisee usually has access to marketing, training, ongoing

support and an established supplier or distribution network. On the other hand, the established

suppliers may not be the least expensive or most efficient. The franchisee has minimal leeway in

this area in most franchise contracts. This is typically due to quality concerns. A weakness for the

franchisee is a loss of control that the entrepreneur starting from scratch retains in a business

venture. The franchisee is required to follow a certain protocol determined by the franchisor.

Among different opportunities figure the potential for good return on investment, a solid brand

name, and training opportunities. Threats include competition and risks with snack food location

employee turnover. Additionally, strong brand can hinder expansion into other products due to the

consumers’ brand/product associations.

DUE DILIGENCE AND COMPETITION

The due diligence investigation of a potential investment serves to confirm the fundamental

material facts in regards to a sale. This refers to the care a rational party should take before entering

into an agreement or a transaction with another party. Due diligence analysis usually yields a go or

no-go decision with regards to a purchase of an asset, or in this case a franchise commitment

(franchisor<-> franchisee). This process should entail a thorough study of financial records in

addition to anything else material to the sale. Sellers (franchisors) should also perform a due

diligence analysis on the buyer (franchisee). Factors to be reviewed include the franchisee’s ability

to purchase, as well as other items that will affect the franchisor after the sale has been completed.

Due diligence serves the purpose of preventing unnecessary harm to either party involved in a

transaction.

Beiler moved up the learning curve quickly with regards to franchising. She seemed to

develop a keen acumen for the key criteria for potential franchisor/franchisee investment decisions.

Beiler realized the importance of national or international advertising, training, and other support

services are commonly made available by the franchisor. As franchising tends to be longer term

than a licensing agreement, greater due diligence by both franchisor and franchisee is advised. A

prospective franchisee has an array of franchises and industries from which to choose. Table 1 can

serve as a quantitative starting point for comparing Auntie Anne’s and direct competitor Wetzel’s

Pretzels. Conversely, qualitative factors tend to be subjective judgments based on non-quantifiable

information. Examples include perceived strength of brand, management expertise, firm reputation,

and industry cycles.

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Journal of the International Academy for Case Studies, Volume 14, Number 7, 2008

Table 1 – Franchise comparison

Revenues – Systemwide

Auntie Anne’s Wetzel’s Pretzels

Year U.S. only Worldwide

2003 $234,000,000 $394,000,000

2004 $247,000,000 $453,000,000

2005 $252,000,000 $567,000,000

Revenues – Per unit (U.S.)

Year U.S. only Worldwide

2003 $336,690 $1,931,372

2004 $363,770 $2,097,222

2005 $350,974 $2,486,842

Number of units (U.S.)

Year U.S. only Worldwide

2003 695 204

2004 679 216

2005 718 228

Initial Franchise Fee $30,000 $30,000

Royalty Fees 7.0% of gross sales 6.0% of gross sales

Advertising Fees 1.0% of gross sales 1.0% of gross sales

Initial Training Fee No charge, 3 partic.min. No charge for first two partic.

Initial capital requirements $192,875 to $373,600 $129,875 to $353,000

*Sources-FRANDATA.com, Hayes, Jennings, AuntieAnnes.com, Entrepreneur.com

Wetzel’s Pretzels, with well over 200 locations, is a national competitor with 2004 sales of

almost $453 million. Same-store sales were up 7.5% from $346,000 to $372,000 between 2003 and

2004. Wetzel’s pretzels weigh 6 ounces, 50% more than competitors’ average 4 ounce pretzels. The

pizza pretzel, topped with cheese and pepperoni, and a pretzel wrap with a hot dog and cheese are

two items that are, like Auntie Anne’s pretzeldog, closer to the sandwich category.

Two of the largest competitors, Pretzel Time and Pretzelmaker, are owned by Mrs. Field’s

Famous Brands. Each brand has more than 200 units, with Pretzel Time mostly in the east, and

Pretzelmaker in the west. Customers spend an average of $3.90 each on items such as cheese stuffers

(pretzel dough wrapped around cheese cubes), pretzel bites (small bits of pretzel with toppings) and

pretzels around hot dogs. Pretzel Time, has conditions similar to Auntie Anne’s: ongoing royalties

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Journal of the International Academy for Case Studies, Volume 14, Number 7, 2008

of 7% of gross sales, advertising fees at 1-3% of gross sales, no charge for first two individuals as

an initial training fee and a total estimated initial investment ranging from $107,000 – $238,500.

The quickest and easiest way for potential competitors to set up a soft pretzel outlet is to go through

a type of generic company such as Pretzel Plus. This company provides supplies and ingredients

needed for a potential entrepreneur to open a pretzel shop under any name (not restricted to Pretzel

Plus). To open a 500-1,000 square foot franchise outlet with this organization, a total investment of

approximately $80,000 to $103,000, with a minimum net worth of $150,000, of which $40,000

needs to be in liquid assets. The franchise fee is $12,000 with 4% royalties.

The Pretzel eateries are similar in many aspects, with Auntie Anne’s having the highest

initial investment, probably due to their more ornate store style and perhaps a more valuable and

recognizable brand. There is anecdotal evidence indicating that it’s near impossible for an individual

franchisee to open up an Auntie Annie’s anymore in the U.S.A. while most other brands are actively

seeking individual franchisees. Several franchisers predictably have expanded their menu to include

hot dogs, frozen custard and burgers, or from the other direction to include pretzels in their existing

menu. When evaluating which franchise system to buy into, one might pay special attention to the

franchisor with the lowest food and supply costs as a location will only support a narrow range of

sales regardless of the franchise, ergo lower costs and fees over the year is very important.

Additionally, the importance of a competent level of responsive service must be considered. A

franchisee should also consider whether there is room for entrepreneurial selling, such as supplying

local businesses, schools, or other events with tasty pretzels as the extra sale can make the difference

between taking a salary or not.

Auntie Anne’s is a current leader in the soft pretzel business, but it does face competitors that

would like their own piece of the market. This may hinder Auntie Anne’s future ability to charge

premium prices as the market comes closer to saturation. In addition to the Pretzeldog, a hotdog

wrapped in pretzel dough, Auntie Anne’s has considered expanding its operations with a new café

concept. Unlike the typical pretzel outlets that offer no seating, each Auntie Anne’s Café seats

approximately 30 people. Similar to other modern cafes, these serve gourmet coffee, offer a lunch

and light dinner menu (sandwiches, pizzas, breads, soups, etc.), and provide wireless internet access.

Most items on the menu are made from the same pretzel dough, but prepared in different ways. Five

Auntie Anne’s Café opened in Lancaster, Pennsylvania. Others may be opened if this concept proves

to be a success.

SOCIAL RESPONSIBILITY

To some degree, the level of social responsibility that Auntie Anne’s undertakes can serve

as a source of competitive advantage. Auntie Anne’s Incorporated started with an objective of

funding a counseling center and has also been involved with the Children’s Miracle Network.

Additionally, for employees, Auntie Anne’s provides some educational scholarships as well as home

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Journal of the International Academy for Case Studies, Volume 14, Number 7, 2008

down-payment gifts. The organization also has sponsored events such as the national competition

for the recitation of the tongue twister “picky pretzel people pick pretzel perfect pretzels” which

took place during the summer of 2006 and resulted in each participant receiving book donations, as

the winners receiving substantial prizes of $2500 for 1st and $500 for 2nd place. The tongue twister

is also part of a new branding program

Charitable work is Anne and Jonas Beiler’s passion. Auntie Anne’s was created primarily

to support the couple’s charitable projects. In 1992, Jonas opened the doors to the Family Resource

and Counseling Center, which is still in operation. The company also funds a non-profit

organization, the Angela Foundation, named after the daughter who was lost to them years before.

Anne feels that this is the part of the company that extends the belief to give back a portion of the

gifts God has given her and her husband. Such activities have positive impacts on the brand.

CHANGE IN OWNERSHIP

Anne has considered selling Auntie Anne’s to her distant cousin Sam Beiler, who is also the

President and CEO of the company. He has been part of the Auntie Anne’s family since 1989 when

he became one of the company’s first franchisees. Since then, he has concentrated on opening 137

foreign stores and overseeing 37 company owned units. If the company is sold, it is likely that he

will take it in a new direction. Sam Beiler has already stated that he would like to open about 40

pretzel stores a year. He alsoplans to introduce the Auntie Anne’s Café slowly to see if it will be

profitable. With the right marketing and products the Café may be a very profitable franchise.

By selling the business she created, Anne will have the time she wants to work towards her

long-term goal of helping families in need. Anne and her husband would also be able to work to

open a family center that will provide help to children in their hometown. However, Anne wonders

if her strong beliefs in commitment, giving, and customer satisfaction will continue to be instilled

in employees if she leaves.

If Sam buys Auntie Anne’s, he will be purchasing a brand that is synonymous with good

quality, reliability, and profitability. He will have to maintain the good reputation that the company

currently holds. Since he has succeeded in the past with providing more business opportunities for

Auntie Anne’s, he may be able to further succeed with the core business. However, the question

remains as to the future of Auntie Anne’s Café.

 

 

 

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