Financing

Struggling Clean Juice franchisees beg out of the system

Nearly 40% of the chain’s locations are taking the company to arbitration in a bid to get out of their franchise agreement, saying they’re losing hundreds of thousands of dollars.
Clean Juice
Nearly 40% of Clean Juice franchisees have either closed or plan to close. | Photo by Jonathan Maze.

More than 50 franchisees of the fast-growing juice franchise Clean Juice—more than a third of the restaurants the chain started the year with—have taken the company to mediation in a bid to get out of their franchise agreement amid falling sales and financial losses.

The potential mass exodus, which several sources confirmed to Restaurant Business, comes after the chain’s controversial decision to switch from the in-house-made juice on which the franchise was based to a pre-bottled option. Operators say it worsened profits at a brand where losses were common to begin with.

The company and franchisees are expected to keep talking after mediation sessions last week did not reach a conclusion, said Leon Hirzel, attorney for the franchisees. But operators are expected to file for arbitration and are demanding $22 million in damages.

“Nobody is making money,” Hirzel said. “Probably 90% of stores are losing money. It’s overwhelming.”

Franchisees of the 51 locations have closed or are planning to close pending the outcome of the discussions, representing 38% of the 134 locations Clean Juice started the year with. The company said that it now has 112 locations, suggesting a net decline of 22 restaurants so far this year.

Clean Juice’s website had listed 135 locations. The company said it has updated the site since a Restaurant Business inquiry. One operator said more than 60 locations could close in the coming months, all told.

“There’s no doubt this has been a remarkably challenging season for us, the Clean Juice brand, and our franchisees,” cofounder Landon Eckles said in a statement. “It’s been extremely painful to live through and lead through.”

“We continue to work through a thoughtful exit plan with some of our operators who wish to leave the system,” he added. “We are currently in negotiations with several store owners, and we have made some offers as early as last week to buy back stores or assume leases. Each situation is unique, and we will continue to work together on an amicable resolution.”

Eckles and his wife Caitlyn founded Clean Juice in 2015. It features a menu of sandwiches, wraps, acai bowls, smoothies and cold-pressed juices featuring organic ingredients. The franchise for most of its history boasted a line of freshly squeezed juices made on-site, and operators spent money on equipment and facilities to ensure their stores could handle the process.

In October last year, however, the company opted to switch to a bottled juice, citing the labor-intensive nature of making the juice on-site, coupled with high labor costs. Yet freshly cold-pressed juices were the chain’s primary selling point, operators say, and they were also the chain’s top-selling and most profitable items.

The pre-bottled juices, which Clean Juice buys and then sells back to franchisees using Sysco as the distributor, come in smaller bottles and are sold for lower prices. They also generate half the profit margin.  

(Read more here about the Clean Juice controversy here.)

The result, franchisees say, has been a decline in both sales and profitability. Sales are down 14% over the past year, sources said. Traffic is also down. Even some of the best stores are unable to make a profit this year. “Everybody is in the same boat,” Hirzel said. “The bottom stores don’t make money. The mid-tier stores don’t make money. The top stores don’t make money.”

The company acknowledged that its sales have been declining since July of last year and said the decline is “unrelated” and predates the shift in production method.

The typical Clean Juice location made $581,000 in sales in 2022, according to the company’s most recent franchise disclosure document. That FDD also shows a “gross profit” of $339,000, or 58%. But that gross profit is only sales minus cost of goods sold, in this case food and paper. It doesn’t include labor, rent or other expenses.

Clean Juice said information from the FDD’s disclosure of such data includes data on sales and gross profits “that were provided to us by our member franchisees.”

Angry at the juicing change and frustrated at not making money, a large group of franchisees banded together to take the company into mediation so they can get out of their franchise agreement and rebrand. The franchisees in the group have lost an average of $500,000 per store, Hirzel said.

While some operators are willing to walk away and eat losses, most of them want to rebrand to recoup what they’ve lost. They also want to avoid potential penalties if they were to break their lease. Many leases won’t allow them to operate anything other than a juice or a similar concept. But they also have the equipment to run such a thing, given the investments they’ve already made.

By doing so, however, franchisees could violate the company’s “non-compete” clause in their franchise agreement, which doesn’t allow them to create or join a competing concept. Clean Juice, as the franchisor, could go after the franchisees for liquidated damages—or royalties they would owe if they were to continue operating.

Franchisees argue that the company breached its franchise agreement by changing the juicing process. They have also accused the company of misusing the brand fund, which franchisees contribute to with a percentage of their revenues. That includes spending 29% of the fund for corporate overhead and spending more than the fund takes in. The brand fund is operated by a franchisee out of Greenville, S.C., the company said.

Operators also argue that they are required to do their accounting through the company, but that some expenses have been shifted to the balance sheet, rather than the profit-and-loss statement that shows a location’s profitability. That gives a misleading picture of a store’s finances, Hirzel said.

And operators argue that Clean Juice has taken out royalties for delivery fees that franchisees pay to companies like DoorDash or Uber Eats. The company has acknowledged that it should not do so, but franchisees argue that it also won’t go through accounting to rectify the overcharges, saying doing so would be cumbersome.

Clean Juice franchisees’ costs for food and labor increased to 42% of sales last year from 34% the year before, according to the FDD. Costs can be a challenge for the chain, given that it has stores all over the place despite its relatively small size. It also serves a menu of mostly organic products, which tend to be more expensive.

But the company last year created a subsidiary to run its supply chain, which brought in nearly $1.2 million, according to the company’s FDD. When it switched to a pre-bottled juice, Clean Juice began buying the juice itself from a farm in California and then sold it to Sysco, which ships it to the stores.

Clean Juice in the past would use rebates and other incentives from vendors in the brand fund, but the company’s most recent disclosure document no longer indicates it does that, Hirzel said.

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