Kennon-Green & Co. Fiduciary Financial Advisor, Wealth Management, Global Value Investing

A Brief Flirtation with a Cinnabon Franchise

Joshua Kennon reading the Cinnabon franchise disclosure document

I worked my way through the Cinnabon franchise disclosure document that the Focus brands company sent and the problem I’m having is two-fold: 1. It seems like the investment itself is a craps-shoot in the sense that there appear to be a few highly successful Cinnabon franchise locations but the others may not be (I can’t tell, obviously, without speaking to individual Cinnabon franchise owners), and 2. It probably isn’t worth the time investment relative to the potential profit payoff.

After graduating from college, Aaron and I had looked into putting capital to work by opening several franchises in our hometown back in Missouri.  We thought it would be a good place to invest the money we were earning from our other businesses without having to be involved on a day-to-day basis.  In other cases, we thought it might be a good way to structure companies so that our immediate family members could make an investment alongside us and, in some cases, run the companies as managers / minority-owners.

One of the companies we researched was Cinnabon, the maker of (what I consider) to be the world’s best cinnamon rolls.  The company’s owner, Focus Brands, sent us a franchise disclosure document and I began working my way through it.  I love the Cinnabon brand and the idea of owning a local Cinnabon franchise is appealing because it would mean I could grab a cup of coffee each morning from my own business.  It obviously wouldn’t be a large part of our holdings, but it would have a certain emotional appeal and bring jobs to the local community.

Here are our thoughts …

I cannot discuss what’s in the document itself, but suffice it to say that a quick Google search shows that the typical investment for a Cinnabon franchise ranges from $71,000 to $370,000 depending upon location and size.  Since virtually all Cinnabons are on leased premises, the lease expense isn’t included in this figure because it counts as an on-going operating cost.

We had one of our companies contact the leasing agent at the local mall, who quoted us a price of roughly $1,500 to $2,200 per month for the premises.  This particular mall is notorious in the community for attempting to charge higher rents than the market will bear (which is why a good portion of it remains vacant), so it’s possible we would have opened it in a neighboring community, instead.

Let’s presume that payroll costs and insurance would run $5,000 per month.  This gets us up to $7,000 in fixed expenses.  That is $84,000 per year.

Working the Cinnabon Franchise Numbers Backward, a la Jacobian Inversion

Here is where our Charlie Munger / Jacobian inversion comes into play …

If a Cinnabon franchise can earn gross profit margins of 50% (I’m not exactly sure what they are), break-even would require sales of $168,000 annually.  Furthermore, let’s presume that the average ticket is $5 (again, I don’t have exact figures so I have to estimate using what is available on the Internet).  This means that in any given year, our theoretical Cinnabon franchise would have to complete 33,600 orders.  If we are open 365 days per year, this is a bit more than 92 orders per day.  If we are open from 10 a.m. to 9 p.m., that is 11 hours each day, meaning we must sell 8.36 Cinnabon orders per hour.  That works out to one customer every 7.17 minutes.  (Just to break even.)

That means that if we sell less than $168,000 per year, or $14,000 per month, in Cinnabon cinnamon rolls, we will be running red ink.  I don’t do losses.  They aren’t my style.

The corollary is that anything above this figure is gravy (or, er … cinnamon roll icing, to be appropriate).  That’s where the investor profit originates.

To give you an idea of the way the math works, let’s imagine that I decided I could sell a Cinnabon cinnamon roll every 3 minutes (there is no way in the mall we were examining, but I want to provide you a contrast). Total revenue in this case would be $401,500.  As an investor, I would be left with $116,750 in pre-tax profits.  (The math: If we are open 11 hours a day, 365 days per year equals 240,900 “selling minutes” divided by one $5 ticket every 3 minutes = 80,300 total tickets – 33,600 “break-even” level tickets = 46,700 net tickets * $5 = $233,500 x 50% profit = $116,750 profit for owner / investor on total revenue of $401,500).

Side note: This is why it is so important to have the actual figures that matter – 1.) average ticket price, 2.) average gross profit margin, 3.) average operating profit margin, and 4.) expected conversion rate of customers walking by to Cinnabon customers who make a purchase.  The figures for the profit scenario I gave you are totally unrealistic; I wanted you to see how when you cross a certain threshold, everything falls to the bottom line.  In finance, this is called “operating leverage”.  The higher the company’s operating leverage, the greater the profit when it exceeds its break-even point but the riskier it is because if it falls below it, things get really nasty, really fast.

Now, to be fair, the point here is that the payroll expense that is a “cost” to us as investors is, in many cases, profit to an owner-operator. In other words, if someone were to use their money to open a Cinnabon franchise and served as the full-time manager with their kids working after school with them, that money is flowing into their household so that has to be figured into the equation.  For this type of person, a Cinnabon franchise is far more lucrative and offers better returns on capital.  We, however, are looking at it from the point of view of a pure investor.  It would not be a productive use of my time, for example, relative to the opportunity costs to put on an apron and make Cinnabon cinnamon rolls from customers all day.  I’d enjoy doing it, but the hidden expense would be all of the foregone profits from our investing operations.

It All Comes Down to Opportunity Cost

Thus, the problem that we now face is opportunity cost.  Let’s presume that in our market, the total expense of opening a Cinnabon franchise would be $250,000.  Our calculus for determining the appropriateness of this as an investment is different from everyone else on the planet because we own different assets and have different income sources.  (This is one of the reasons I don’t like when people ask me, “What is a good investment?” because so much of it comes down to what you own, the strength and diversity of your income sources, your own passions and interests, etc.)

In our case, if we were to put the $250,000 to work in our retail store, Kennon & Company and the online business, Kennon Home Accessories, we could expand into additional product lines and increase our selling square footage without a lot of additional cost structure.  Even if we only turned our inventory 1x per year, that would be an additional $107,143 pre-tax profit at 30% operating margins on a $250,000 investment.  Cash-on-cash, that is 42.8572%, a staggering figure.

In the end, our decision to reinvest in our own companies and not acquire a Cinnabon franchise had less to to do with the terms of the Cinnabon franchise itself and more to do with the relative returns available to us in our other businesses, which still have a lot of growth left in them before maturing and going into dividend mode.  For a working married couple who hate their job and want to be their own boss, while earning a decent living, a Cinnabon franchise may or may not be more appropriate.

Image Credit: Editorial Credit: Ken Wolter /