John Mihranian, owner and manager of Baskin-Robbins in Encino, California. l Mihranian like many other small business owners around the country, is seeing his dollar diminish and his profits wither away. Due to the increasing costs of oil, rising wages, and the growing number of general expenses, small businesses are having increasingly difficulty to run while creating a worthy profit.
“Small business is no longer small and intimate anymore,” says Mihranian, who has been involved with Baskin-Robbins in some fashion for over twenty years. “Increasing regulations, control, and costs have pulled the franchise away from the franchisee.”
Times have certainly changed since Mihranian bought his first Baskin Robbins location in Beverly Hills back in 1992. Dunkin’ Brands, which also holds famed donut chain Dunkin’ Donuts, had owned Baskin-Robbins since 1978. “You used to be able to get away by paying your royalties, paying your fees, and that’s it.” Mihranian said. This hands-off approach was welcomed by franchisees, because they didn’t feel compelled to be pushed into corporate tedium or countless marketing schemes that weren’t considered viable. However, in 2006, Dunkin’ Brands was sold to a group of private equity firms including Bain Capital and The Carlyle Group, and as a result, franchisees now have to answer to the interests of corporate investors rather than those of the consumer.
“Before, you were actually dealing with people. Even though Baskin-Robbins was a large corporation, they strived to produce for the consumer as well as take care of the concerns of franchisees. And the corporation would understand different nuances in the business like drops in sales due to weather. Now, if you’re not up to date with royalties and payments, they’ll get on you because all they care about is their money.” Mihranian said with obvious frustration. He also said that the transfer of control from Dunkin’ Brands to these big corporate firms was the final nail in the coffin for what he dubbed “the personal relationship between a local franchise and their consumers.”
An example of this cutthroat mentality is seen with Togo’s Sandwiches, which was also owned by Dunkin’ Brands. According to an article in QSR Magazine from December 2007, Dunkin’ Brands sold Togo’s to Mainsail Partners, a private equity firm based out of San Francisco. QSR Magazine is a periodical magazine, which chronicles stories regarding the quick service restaurant industry.
So what is meant when he says that rising costs have driven his profit margin down over the years? Profit margins when Mihranian first owned his Baskin Robbins would vary anywhere between 25 and 30 percent. Mihranian adds, “Because of rising costs and increased expenditures, we’re lucky to see a profit of 10 to 15 percent.”
Baskin-Robbins began contracting their ice cream production out to Dean Foods in 2001. This move affected individual franchisees because the Baskin-Robbins Corporation no longer cared about the individual amount as well as the quality of ice cream tubs they were selling. “They were going to get their money either way,” said Mihranian. “There was no incentive to care about how the franchisees were doing. It was either put up or shut up. We had to raise prices to keep up.” Royalties collected by the corporation were increased from 5% on the dollar to 11% after the deal with Dean Foods.
One of the main culprits of rising costs to the business owner is the level of minimum wage, which has risen in California dramatically over the years. According to California’s Department of Industrial Relations website, the minimum wage has increased $3.75 over the last twenty years. These wages have risen so that workers can pay their bills, but Mihranian says that minimum wage has put a real constraint over the flexibility and profitability of his small business.
“People want cheap labor, but the minimum is too high. And you’re not getting much for the minimum, because these teenage kids are lazy and incompetent for the most part, ” says Mihranian. “The bang for my buck is not there anymore, forcing me to cut down my workforce.”
Mihranian has a contingent of workers who get paid well above the average Baskin-Robbins employee, but he claims that if it weren’t for these workers, his business wouldn’t be profitable in any way. Instead of hiring ten or twelve people to cover various shifts throughout the week, Mihranian has cut his labor force down to cut his own costs. “Now, I have to turn to the people that I really trust, instead of hiring people who won’t give me my money’s worth.”
Rising dairy costs are another factor in decreased profits for small businesses. For Baskin-Robbins, the price of dairy is especially important. These rising costs in dairy could be seen as far back as 2001. A news feature in the New York Times from July 2001 discussed the struggles that ice cream makers were having. The cost of milk fat rose 50% in 2001, and ice cream makers had to raise their prices 4% as a result. The price of dairy has gone up even more since then. This phenomenon wasn’t just in the US, however. According to an article in Gourmet Retailer published in October 2007, international dairy prices went up 46% between November 2006 and April 2007, an extraordinary rise for such a short time span.
On top of wages and dairy, the well documented rise in oil prices have driven production as well as transportation costs up. The price per barrel reached an all-time high on May 13th, 2008, capping out at $126.98. A chart documenting the rise of oil prices per barrel from 1994 to 2008 shows a steep increase even in the last few years. As recently as 2002, the cost per barrel hovered stably around $20. Because of the sharp rise in oil costs, everyone has had to compensate somehow.
Mihranian referred to the whole climate as a “vicious circle”. His claim is that rising costs are turning the consumer off. “We have to raise prices because if we don’t, it won’t cover our costs. But there comes a point where the consumer won’t pay anymore. There’s a breaking point.” Mihranian contends that because more money is needed to cover basic costs like food, gasoline, and housing, there is less disposable income to spend on luxury items such as ice cream.
Mihranian owned two stores at one point, but sold one in May 2007 because of the decline in profitability. “The cost of running two stores was absolutely devastating on my profits as well as my own personal psyche. There used to be a time where I would be able to take a day or two off per week, but in cutting down my workforce to keep my payroll low, I found myself trying to be in two places at one time, and that just wasn’t possible anymore.”
What does the future hold for John Mihranian and small business owners across the country? With increasing economic turmoil and the growing real estate crisis, these quick service companies may feel a bigger crunch than many. Concerns about the economy have been a prominent issue in this election year, and we will all need to keep an eye on developments in the coming months and years to prevent a full-scale economic depression. Mihranian says, “We can’t turn back the clock, so we must be able to adapt to evolving economic conditions and just make things work as best as possible
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