In February, Montreal-based franchisor Foodtastic completed its $54.5 million purchase of Freshii, taking the better-for-you fast casual private and into a new era. But deep scars remain from U.S. franchisees who spent years suffering from depressed sales, high expenses, and lack of communication from ownership.
In late 2017, there were nearly 170 shops in the U.S. Now, there are fewer than 30. In November, Freshii, which has a bigger footprint in Canada, reported an 11 percent drop in North American same-store sales in Q3 year-over-year and a 7 percent decline in system sales. Foodtastic CEO Peter Mammas said the brand’s comps were trending at negative 35 percent compared to 2019. Following third-quarter results, Freshii’s stock hit record lows. There were 90-plus percent declines in share price since the company began publicly trading in early 2017.
Freshii owes its beginnings to founder and former CEO Matthew Corrin, who started the chain in 2005 in Toronto. But some operators would attribute the chain’s downfall to the executive as well. Corrin, currently serving as a consultant for Foodtastic, did not respond to requests for comment via email.
When Freshii went public, it had 250 stores systemwide. At the time, the goal was to double the footprint. Almost five years later, the brand stood at 343 restaurants in North America, well short of its objective.
Corrin was a marketer by trade, completing a series of stunts to give Freshii publicity, like appearing on “Undercover Boss” and writing open letters to McDonald’s and Subway outlining their failures. In 2019, when Freshii wasn’t performing well, he told investors he was firing and rehiring himself as CEO to signal a metaphorical change. According to the Toronto Star, Yogen Früz, a Canadian frozen yogurt chain, sued Freshii for $10 million over a trademark issue. Years before, franchise development company Fransmart filed a lawsuit claiming Corrin stopped paying a share of revenue under contracted terms, the Toronto Star said. Freshii was eventually mandated to pay more than $500,000 with interest to Fransmart.
In May 2022, Corrin stepped down as CEO. The announcement came more than a week after the Toronto Star released a report that Freshii was outsourcing jobs to Central America via Percy, Corrin’s virtual cashier company.
One former Florida-based franchisee’s first impression of Freshii was an emerging brand with young blood. To him, Corrin appeared “really tenacious and didn’t mind stirring the pot.” His reach was broad, and he was growing fast. The operator was introduced to the brand through an acquaintance who had a seemingly successful store on Florida’s West Coast. He remembers the marketing of locations as top-notch.
“But unfortunately, that was about the only thing that was top-notch with the brand,” the former operator, who asked to remain anonymous, says. “It was polished, very forward, and it was very enticing for us and we took the bait.”
Admittedly, he ignored certain red flags. He remembers having difficulty getting ahold of other franchisees. He looked at past emails and saw one where he communicated with the director of franchising, who told him it was commonplace for that to happen. Under agreements, partners are not to speak with any prospective franchisees until they’ve completed internal due diligence. But because of his operational experience, the franchise executive gave him a contact list. Everyone was happy, making money, and opening stores, but few were in the U.S.
When he visited the headquarters in Toronto, the facilities were beautiful and the training was efficient. “And then we get the store open and I started to notice very fast that there was something wrong,” the ex-Florida franchisee says.
The industry veteran opened in July 2019. He understood at the beginning, stores were overstaffed and over-ordering. Logically, costs would be inflated. During the first month, he went through the process of trimming things down, but he noticed food costs were still high. He reached out to a Freshii executive and relayed his food costs were over 50 percent. The former franchisee was told to “tighten it up” and that when sales increase, things will level out. But as time progressed, costs still loomed.
In 2020, when franchisees began to get in touch with each other in the U.S., he learned many others had food costs soaring above 40 percent. “Which is not sustainable for a restaurant. I've never heard of that,” he says. “And the averages that they would pitch to you was that your food cost is going to be maybe somewhere around 28 percent just because of all the fresh product. I mean, I never got there.”
A lot of it was because operators had to partner with specific vendors. For example, there was one salad on the menu that had apples, but he was only able to purchase a case of 72. The reason? Freshii was getting a rebate on everything operators would buy.
The former franchisee was promised a multi-channel revenue plan, with meal plans, brokers who would go around selling juices, and a CPG line. He was told these things in late 2018. By the time he opened, none of it existed. The former owner closed in July 2021 when he was losing $20,000 per month with a bare-bones staff.
“I think I was pitched a pipe dream and it was just Matthew brainstorming out loud in front of people,” he says. “They're about to invest hundreds of thousands of dollars to open up a location that were just ideas. They weren't real and they never happened and if he would have never done that type of thing, then we would have never been a franchisee in the first place.”
Another former franchisee who planted his flag in the Western U.S. and also wished to remain anonymous, quickly discovered his buildout costs were nearly triple what he was told during Discovery Day in 2015. After hiring a contractor and architect and looking at matters like workman’s comp insurance and so on, he was at $506,000.
When the pandemic hit, he was part of weekly meetings with Corrin to talk about the next steps. Freshii’s suggestion was 50 percent off coupons based on a philosophy of “disrupt sales.”
“We all came to learn as owners what that meant was, franchisors need the royalties to fund their corporation,” the former West Coast operator says. “So if you close your doors as a franchisee and you don't get any business, revenue to the franchisor dries up to a trickle, right? So what they started doing was saying, ‘OK, we're going to disrupt your sales by doing these huge discounts and driving business in through the door.’”
In response, owners banded together to form an association to confront Freshii about what they felt was poor leadership behaviors and decision-making. But the operators were rebuffed, the former franchisee says.
At one point, he hired a forensic accountant to explore his P&L and discovered he was losing 30 percent based on the price point of all menu items. The ex-West Coast franchisee opened in October 2017 and shut down his unit in 2021.
“Do you think Freshii would ever tell me that? No? Why? Because can you imagine if they publicly came out and said our price point is too low for the cost of goods, your labor, and your extraneous costs like rent and power and water and insurance?” The former operator rhetorically asks. “They would never tell us that. So basically, they lied. They were lying to all us franchisees.”
Foodtastic, wanting to enter the healthy food segment, conducted market tests and found Freshii to be at the top of the category. The company made a successful bid, and after completing the acquisition a few months ago, much focus has been directed toward integration. Foodtastic found that between the start of COVID to about six months ago, there was “barely any supervision at the store level,” Mammas says. The franchisees were essentially left to their own devices.
However, the CEO assures Foodtastic believes in operations and that it’s going to rebuild Freshii’s team and get franchisees the support they need. One of the biggest issues, according to Mammas, has been a disregard for marketing. And Foodtastic has a track record of fixing that department. Mammas used the example of Second Cup Coffee, which it purchased in 2021. At the time, 20 percent of the brand’s marketing fund was spent on direct media and same-store sales were declining 60 percent. Now, direct media is 75 percent and in recent weeks comps are growing above 15 percent.
Additionally, Freshii essentially had no one on its culinary team full-time, while Foodtastic has nine corporate chefs. These culinary leaders have already been tasked with finding new menu innovations.
“We have a lot of experience in looking at a brand and analyzing how we can fix parts of it and how we could get the better results and a lot of it has to do with operations, the culinary side, and the marketing side,” Mammas says.
Equipped with the ability to handle marketing in-house, Foodtastic is planning for more billboard campaigns, social media pushes, and targeted marketing in the next 45 days.
“I think they have a really good branding. I think people resonate with the brand,” Mammas says. “I think it's been forgotten in the sense that—alluding to the marketing opportunity there—right after COVID, the brand went into basically a major slump. They started bleeding money. They were public. They had the other problems that we don't have, and they just didn't stay relevant. They didn't stay top of mind. There are some menu items that we're going to tweak as far as the taste profiles and some more current ingredients. But the main thing is actually getting our name back out there.”
Mammas recognizes building trust will be important. He adds Foodtastic believes franchises have to make money. If operators are happy, they open more stores and spread the word to others in the business. Maybe the franchisee even decides to operate another brand under Foodtastic’s portfolio. Mammas also emphasizes the company is willing to invest X amount of dollars to start a turnaround effort. He notes that, unlike public companies, Foodtastic isn’t beholden to quarterly results or concerns about stock declines. The brand thinks longer term and has goals of tripling in size via M&A and organic growth.
In terms of domestic development, Mammas says Freshii mistakenly sprayed across the U.S. and “opened anywhere that they would get a franchisee.” That won’t be Foodtastic’s approach. The company has met with the U.S. development team to discuss what markets make the most sense. He anticipates that within the next six months, Freshii will start seeing new store openings in the States.
“Looking at the U.S. strategy, we're going to concentrate on certain areas and try to build a good core there,” Mammas says. “We want a proper operations teams. We want proper marketing to be done in that area. We want to know the real estate and make sure we're opening in the right spot. We’re not going to open one store in L.A. one store in New York, one store in Miami. That’s not something we're doing. We're going to concentrate on a few areas we're identifying and grow within those areas, build all our system properly, and then go outwards.”
Regarding past leadership, Foodtastic said it doesn’t comment on anything related to Corrin. But looking ahead, Mammas is confident in building sustaining change for Freshii.
“I think it's a big task,” he says. “I don't think it's going to be done overnight, but systematically we're going to be moving forward to get it done.”