Tom’s Foods, Inc., founded in 1925, was a Southeastern based salted snack food manufacturer with revenues of $250 million. The Company grew its distribution system by means of independent franchisees, a model that worked well for several decades. Beginning in the 1960’s, however, Frito-Lay began consolidating regional snack food companies and most importantly, amassing a 12,000+ company-owned route distribution system.
The Frito-Lay model effectively altered the competitive landscape by taking a three-margin model (manufacturer, distributor, and retailer) and compressing it into a two-margin model where the manufacturer’s margin was combined with that of the distributor so that only two margins comprised the supply chain: the manufacturer/distributor and the retailer.
Al Gaston,
FINANCIAL PERFORMANCE OPTIMIZATION EXECUTIVE | CFO
By the 1990’s, the Tom’s franchise distributor network was struggling to maintain previous margins which directly affected Tom’s corporately as the franchisor. Tom’s overall revenues had begun to stagnate, and margins compressed as franchisees aged and the interest of potential franchise successors (family or outside buyers) began to wane. To make the situation more complicated, there was no valuation methodology in place to support an orderly transfer of the franchisee’s business. As a result, some franchisees anticipating retirement began to starve their business of reinvestment capital by diverting cash flow into retirement rather than sustaining their business. The result was declining revenues through parts of the Tom’s distribution system with some territories losing coverage altogether.
A new investor group took control of Tom’s in 1993 and hired a new CEO who, in turn, hired Al Gaston as CFO. Together with their legal team, they crafted a new Franchise Distribution Agreement that included two new provisions. “First, I devised a simple crafted franchise valuation model based on cash flow that could be verified through a tax return, and one that rewarded distributors for reinvesting in their business and penalized a lack of reinvestment. The second new Agreement provision gave the Franchisor the right of first refusal for any potential sell of a franchisee’s business, effectively screening the qualifications of potential franchise buyers and creating an established market for an existing franchise.
Al Gaston was tasked with explaining the valuation methodology to the franchise network. The results were favorable by providing a franchisee a way to understand the potential value of their franchise and, through proper attention to the formula metrics, drive the value and financial health of their business. “Some franchisees were beyond rehabilitation, having bled their business of much needed cash flow for years and allowing revenues to shrink to the point of near failure.”
In conjunction with the valuation methodology, the second part of the strategy to create a viable “going concern” exit for franchisees was the creation of a corporately owned distribution unit. Al Gaston was assigned to run this operation. “This unit was tasked with absorbing failed or failing territories and creating a ready market for a franchise location when a qualified buyer could not be found. This effectively began the rehabilitation of the distribution network for the overall health of Tom’s as the franchisor as well as supporting the value of the brand for engaged franchisees.”
Under Al Gaston, the company unit grew to more than $32 million in annual sales produced by more than 300 distribution routes located in 18 locations. He successfully grew top line sales while reducing the bottom-line loss by more than 40% in just one year, as underperforming areas were reinvigorated.
When asked about the formula for success, Gaston replied, “I attribute it to much improved performance measurements, especially monthly P&L’s by location and the development of strong location managers. We had to drive a stake in the ground and that stake was our detailed P&L’s which we reviewed every month as a group. The team began to learn from each other and were quite willing to share successes and things that did not work quite so well. I am particularly proud of how our managers have not only grown our footprint, but improved the financial performance of every location, without exception.”
Watch full video interview below.
Contact Al Gaston via LinkedIn or his Career WebFolio.
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