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MUSCLE SHOALS, Ala. – The chief executive officer of Cuppy’s Coffee franchise chain sits down to give an exclusive interview about his legal problems, the demolished chain and where to go from here. The troubled chain peaked at 80-plus built coffee shops and some 200 sold but not opened stores in late 2007.
It is rare to have events of small start-up franchisors followed by the media so closely from their beginning days until the end. But Cuppy's has been a small chain with big stories that touch on huge issues in franchising. Blue MauMau has reported on this coffee shop concept from when its Java Jo’z founder Roy Snowden went to prison for tax fraud. From the ashes of Java Jo’z, the chain was reborn as Cuppy’s Coffee.
This is part one of a three-part series that aims to understand management decisions of a franchise chain that has now essentially gone by the wayside.
BMM: The Cuppy's Coffee franchise system seems to be essentially dissolved. When you took over Cuppy's Coffee a year ago from previous owner Robert Morgan, it looked like a ship going down. What were you thinking in taking it over?
Nabors: I had spent seven or eight months working with Cuppy's as a consultant. I saw there were a lot of franchisees that were having a very difficult time getting their build-outs done and being successful once open. I felt that with a change in management philosophy that the chain could be successful. It's kind of like the impulse of running into a burning building to save the folks. You do it without much thought, and you hope to save everybody but the fact is that you may not save everyone. You may not save anyone.
But I had a game plan. The company had far too much overhead. I felt like we could reduce the overhead and bring finances over so that we could bring more projects forward.
Unfortunately, there were already a lot of disgruntled franchisees as I decided to relocate the company to Muscle Shoals and lay that plan out in right-sizing the company. A lot of employees became upset. Franchisees were upset. The former ownership and management were causing issues. As we made changes in our store construction philosophy we had a large lawsuit filed against us [by the construction company Supreme Building Technologies], which caused additional problems with credit lines and vendors. As all of this was happening, we hit the economic crisis, where banks were tightening up [credit]. Franchisees who had signed franchise agreements were unable to receive funding in part because of the bad economy and in part because of Elite's inability to move projects forward in a timely basis. [Elite is the building arm of Cuppy's Coffee under the Medina umbrella.]
I was unable to right-size the company fast enough and we could not sustain our momentum.
In moving forward, we still are looking at how Cuppy's can survive and the franchisees that are open can receive the support that they signed up for, and how a franchisee that signed up for a coffee shop can fulfill that. It's a very difficult road right now. We are exploring all options.
BMM: You talk about how you can save the Cuppy's system. This optimism reminds me of the “Believe and Succeed” tagline of your firm FranSynergy that you often use as a sort of management mantra. What do you think of that management philosphy now? Did the believing blind you to some of the problems of Cuppy's Coffee or did it help?
Nabors: Fair enough. I tend to be a fairly positive and optimistic person.
I certainly went into this venture with a positive and optimistic attitude in thinking that the revenues that were coming in. If we could reduce the outflow of cash and continue to maintain the income level, we'd be able to succeed and Cuppy's could fulfill its potential.
Cuppy's could have been a very good and strong company. It had a good product. It had good franchisees and it could have fulfilled its potential. We knew we had to make a lot of changes, including how construction was done. And I banked on having a little more time and not as much third-party interference as we did.
I was mistaken.
BMM: How did Cuppy's Coffee, under your leadership, get off course?
Nabors: One of the first decisions I made was to cease and desist franchise sales. We did not continue to sell franchises or sign franchise contracts. It's the old adage that when you are in a hole, quit digging. Unfortunately, the hole was pretty deep by the time I stepped in. We have yet to be able to climb out of it.
No revenues have been received by any of the entities since June or July of last year – any revenues, whether it be through SBA loans, construction, royalties. No dollar has been received since July.
BMM: My understanding is that Cuppy’s received very little in franchise royalties. Most of your revenue was through build-out money (e.g. franchise sales). Is that right?
Nabors: Because of the way the transition occurred between Java Jo'z and Cuppy's, the incentive that was used by former ownership and management to have the Java Jo'z licensee convert to a Cuppy's franchisee was to grandfather out royalty payments. The company had received little or no royalty revenue up until the point that I acquired the company. The time that I acquired the company, there were maybe two or three people paying royalties, which totaled approximately $300 a month.
There were a lot of folks who had come on board that had three to four months in their contract of being royalty free. So I was able to see that come October and November of last year, there could be a small amount of royalty revenues beginning to come in. If companies had been able to complete the build-out, get the stores open and operational, there would have been approximately $9,000 a month coming in as royalty revenue – if we were able to get everyone who was supposed to pay royalties to pay royalties, which they had never done.
BMM: That's a pretty small amount of revenue.
Nabors: Extremely small.
The vast majority of stores in the pipeline to be built out in the future would have been full royalty paying franchisees, which could have accumulated – if all stores were open and stores were achieving the success levels that I would expect of a Cuppy's franchise system and at the level where franchisees could be individually profitable – it would have generated approximately $330,000 a month in royalty revenues.
We only needed twelve to fifteen employees if we focused on the franchisor (Cuppy's) and did not have all these other entities involved. We would have been able to not only to allocate the funds that were being received towards more construction projects, we would have had a lot less overhead and we could have made a small profit for the company. That's where I had hoped to get the company to.
How does anyone recover? The company has always had very little in assets. I have lost everything because of the business decisions I have made relating to it.
BMM: I've seen on the Web that Fransynergy, Cuppy's and all affiliated company websites are completely gone. I take it that this means that holding company Medina and its affiliated companies are now gone.
Nabors: Due to the economic situation, yes.
There is a plan being worked out that would allow the existing stores and the stores that are sold but not yet open to decide if they would like to remain and receive support from Cuppy's. Everything else would be gone. It would strictly be Cuppy's.
Franchise owners would be given the opportunity to basically opt in or opt out. I do not have the resources nor does the company have the resources to fight everyone and hold them to a franchise agreement that they do not want to be a part of. Or to force them to pay royalties that they do not want to pay. Not only do we not have the resources to do that but also I personally do not think it would be the right thing to do under the circumstances. But I do think that there are a lot of franchisees out there that came in under the system that would like to receive the support. They would like to have buying power. They would like to receive coaching and guidance. They'd like to have a brand they could be proud of.
BMM: But there's been so much grumbling, ill will and bad history with Cuppy's franchisees. And the few stores that are left now are virtually independent. Do you really feel that there are franchise owners that would say that they want to continue under Cuppy's?
Nabors: There are a few that would. There are a few that would but would have a high degree of skepticism. And there are those that absolutely will not come in. My position is that franchisees should not be forced to remain.
I have found some potential financial backers that would help Cuppy's survive if and when I'm able to totally clean up all the other liabilities associated with the past. That is really the only way that Cuppy's can continue as a national brand and that franchise owners can recover money that has been paid is if Cuppy's survives.
The franchise system is going to need to open communications again, which currently they have had to be shut down for a lot of reasons. It is going to require the communications channels to open back up, and everyone reaching a point to where they understand that we have to work together and not against each other. If I had the resources today I would have a meeting with all the open stores and all those who have lost money in trying to become a franchisee of Cuppy's together, so that everyone could vent.
I feel sorry for and pray for all the families who have lost money in this. It seems like anyone who has touched this [Cuppy's, Java Jo'z] has been harmed. Me and my family are no exception but I am not asking anyone to feel pity on me and my family.
BMM: Tell me about that. Are you in danger of losing your home?
Nabors: We are pretty much in danger of losing everything.
BMM: Are you filing for personal bankruptcy?
Nabors: There's not a lot left to bankrupt.
One of the reasons a lot has happened recently because of communications and things is because we received death threats. [Note: Mr. Nabors old phone, email addresses and websites have all been shut off. Franhcise owners complain that they have not been able to contact Cuppy’s or Mr. Nabors for months.] We did have people come knock at the door.
BMM: Employees? Franchisees?
Nabors: Franchisees for the most part. We've had disgruntled employees.
BMM: It looked to the outside world that employees were more aggressive in filing complaints with the authorities. Were Cuppy's employees much more angry and vocal than the franchisees?
Nabors: You had employees who were upset.
Everybody has been fighting with their own perspective and for their own self-interest. I'm no different. I've had to cut off communications and make business decisions to protect myself. But the objective and the goal is to make the best of a bad situation for everybody.
I would hope that Cuppy's can survive. I still have not totally given up on Cuppy's survival.
A Quick Guide to Cuppy’s Troubled History:
Click here for a list of all the Cuppy’s Coffee stories