In a previous article I wrote concerning Jamba, Inc. (NASDAQ:JMBA), I shared a brief overview of its recent history. Among the topics I covered was its international expansion, starting with its partnership with the SPC group to open stores in South Korea.
This past March 5th, Jamba announced an agreement to enter Mexico, its 4th international market. This agreement provides for 80 stores to be opened over the next 10 years, with the first store expected to open in late 2013. Please take the time to familiarize yourself with this press release (linked above) before moving on with the rest of this article.
All done? Good. Let's move forward. I have seen this move questioned. Some ask the question "why Mexico?" I can understand the viewpoint that Mexico might be a difficult environment in which to work. A key, though, to evaluating this move in the proper framework is to understand both how the Jamba franchising agreement works as well as the quality of the partners it is selecting as it does so.
Jamba Franchising - An Overview
Jamba's latest 10-K provides these details concerning how its franchise agreements work:
Our current traditional store franchise agreement provides for an initial 10-year term. The agreement is renewable for two consecutive 10-year terms, subject to various conditions and state law. The royalty rate in the current franchise agreement for domestic locations is generally 5.5% - 6% of revenue. Franchisees are also required to contribute an additional percentage of store revenue, not to exceed 4%, to a company-administered advertising fund. Throughout 2012, we typically charged 2% of revenue as the marketing contribution for both our traditional store franchisees and non-traditional stores in shopping malls. Franchises for traditional stores and stores located in shopping malls are also expected to spend 1.5% of sales on local marketing efforts. There is typically up to a one-mile geographic radius restriction for traditional stores in non-downtown areas. The royalty rates and marketing contributions for non-traditional stores (excluding those in shopping malls) vary depending upon type (transit hub, college or university or supermarket) and format (standard or "blending station" utilizing pre-portioned ingredients). Franchisees typically pay an initial fee of $20,000 or $25,000 for traditional and shopping mall store locations and an initial fee ranging from zero to $15,000 for non-traditional stores. We generally do not provide any form of financing to our franchisees.
And . . .
Area developers typically enter into a separate franchise agreement for each store opened. Under typical development agreements, upon execution of the multi-unit development agreement, the area developer generally pays, as a development fee, one-half of a $20,000-$25,000 initial fee, or $10,000-$12,500, for each store required to be developed. Area developers are obligated to finance their own build-out of each store location according to our specifications. (Italics mine, for emphasis)
The key takeaway here? While Jamba's decision to grow the company largely via the franchise model as opposed to company-owned stores lowers its overall gross revenue, it involves virtually no cash outlay for the company and thus is, as CEO James White has referred to it, an "asset light" model. In fact, not only does it not drain Jamba's cash reserves, as can be seen above it actually contributes to Jamba's cash flow.
But there is a second key concept that is important to understand. Particularly when it comes to international expansion, Jamba is very picky about the quality of its partners. Let's discuss that next.
Quality Partners - A Key Ingredient
In South Korea, its first international market, Jamba partnered with the SPC Group. This company operates some 5,000 stores in South Korea, most of them involving its Paris Baguette subsidiary, but also including other chains well known to Americans such as Baskin Robbins and Dunkin' Donuts (NASDAQ:DNKN). The company's chairman, Huh Young-In, is listed by Forbes as the 34th wealthiest individual in South Korea.
In the Philippines, its second international market, Jamba partnered with Max's Group of Companies. As of 2011, its lineup included the Max's Restaurant casual dining chain (122 outlets), originally established in 1945, the Max's Corner Bakery chain (112 outlets), as well as Krispy Kreme (KKD) (24 outlets).
In these three examples, Jamba selected a partner with extensive experience and existing ventures in its respective market. However, I featured concerns regarding Jamba's latest expansion, into Mexico. What can we find out about its partners for this venture?
You likely recall that Jamba's press release identified its partner as Casa Operadora de Franquicias MAV S.A.P.I de C.V ("MAV"). It went on to list the principals of MAV as Mario Conzuelo Betancourt and Manuel Saba Ades. It next says this about Mr. Betancourt:
Mario Conzuelo serves as CEO of the newly formed venture, and has previously launched and successfully developed a major international franchise beverage brand in Mexico. (Italics mine)
So, what can we find out about Mr. Betancourt? Very quickly, we can find that the "major international franchise beverage brand" appears to be Teavana. Doing a little further research, we find that Teavana has 16 locations in Mexico. In his spare time, Mr. Betancourt has also participated in both marathons and triathlons, contributing to his interest in the Jamba brand and what it represents.
Manual Saba Ades is identified as the Chairman and CEO of Grupo Casa Saba. Again, with just a little research, we can quickly find that this company's history traces back all the way to 1892. Its strength appears to lie in its distribution network, which currently focuses on pharmaceutical, health and beauty, general merchandise, and publications; covering both Mexico and South America.
Since Teavana was recently purchased by Starbucks (NASDAQ:SBUX), this venture in some ways establishes linkage between the two companies in Mexico. Further, the executive team for this venture reflects a group that knows and understands the Mexican market very well, and has apparently decided that Jamba offers good potential in that market.
(Authors Note: In a spirit of full disclosure, while researching Grupo Casa Saba, I did discover that this company recently delisted its ADSs from the NYSE. However, I do not think this alters my basic thesis that Mr. Ades's knowledge of and experience in the Mexican market in connection with Grupo Casa Saba makes him a valuable part of this venture.)
Summary and Conclusion
Jamba's international expansion is still in its relative infancy. According to its latest 10-K, as of January 1, 2013 Jamba had 35 international franchise locations. In its four already-established markets, Jamba's agreements call for a total of 400 locations (200 in South Korea, 40 in the Philippines, 80 in Canada, and 80 in Mexico). On page 20 of this recent presentation, Jamba states its belief that potential exists for 1,000 international locations.
Just for fun, let's put all this together and extrapolate some numbers. Let's assume an Average Unit Volume (AUV) of $500,000 for a Jamba location. That number is supported by information contained elsewhere in the above-linked presentation. Next, let's assume nothing more than the 400 locations already contracted for in the current agreements. Finally, let's assume the lowest royalty rate featured above, namely 5.5%. What sort of revenue would Jamba receive annually?
|Number of Stores||400|
|x Revenue Per Store||$500,000|
|= Total Gross Revenue||$200,000,000|
|x Royalty to Jamba||5.5%|
|= Net Revenue to Jamba||$11,000,000|
Admittedly, these are not earth-shaking numbers. But considering that these dollars drop more or less directly to Jamba's bottom line, one can begin to see how this element of Jamba's expansion could contribute to them becoming significantly profitable over time. Further, the actual numbers could turn out to be much better than my conservative estimate.
Clearly, should all go according to plan, investors are "getting in on the ground floor" with respect to Jamba's international expansion. In its efforts, Jamba takes on minimal risk and is clearly working with quality partners; people who are already well established in their respective marketplaces, are willing to commit to a significant investment, and who are clearly excited about the potential for Jamba.
Disclosure: I am long JMBA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.