Franchisees of the fast-casual chain I Heart Mac and Cheese have a problem: the cheese.
Specifically, the sauce they use to make the macaroni and cheese bowls on which the brand is based is too expensive. And sometimes they can’t use the cheese in the first place.
“Don't send us expired product,” a group of operators told the company in a letter obtained by Restaurant Business. “Don't send us moldy product.” Multiple franchisees say they’ve received expired cheese, typically from nearby stores that closed down, which they cannot use.
In response to a series of questions from Restaurant Business, I Heart Mac and Cheese, or IHMC, acknowledged the problems with the quality of the sauce, blaming it on “shipping challenges faced by our food purveyor post-COVID.” The company blamed labor shortages at the distributor.
“These issues have since been resolved, and the quality of the cheese sauce has been restored,” the company said. “Franchisees are always advised to return any product that does not meet our quality standards, and they are credited for such returns.”
“Since our purveyor acknowledged their internal challenges, all subpar products were credited to the franchisees,” the company added.
But the issue illustrates continued problems at the once fast-growing franchise. IHMC cannot franchise in multiple states, largely over disclosure issues. Many of its stores have closed, and those franchisees that are left say nearly all of them are losing money.
“After much collaboration amongst ourselves we do not have a single profitable I Heart Mac and Cheese open anywhere,” the franchisees said in their letter. “Given the dire financial straights your franchisees are in, we are requesting an immediate abatement of all royalty and brand fund payments for all franchisees in the system for a period of six months.”
I Heart Mac and Cheese sold franchises aggressively across the country just before the pandemic and by the fall of 2020 it had sold its 100th franchise.
The brand attracted a lot of people who liked the idea of a concept based on macaroni and cheese. Its menu features mac and cheese with short ribs, lobster, chicken or even tater tots.
But it had problems almost immediately. Some of its early operators struggled, filed for personal bankruptcy and sued the company.
More recently, the brand began running into problems with state regulators. Last year, the state of Indiana told the company to stop selling franchises in the state and then in April filed an administrative complaint against the company.
Most of that was over disclosure issues, including what the state said was misrepresentations about the profitability of the chain’s locations and a “lossmaking business model.”
“It’s very serious,” said Josh Brown, a franchise attorney in Indiana. “It’s important for anybody who is part of the brand, as a franchisee or who is contemplating being part of the brand, to look at this matter.”
California, meanwhile, cited IHMC for similar disclosure violations and required the company to pay for an independent monitor to ensure that it complies with franchise rules.
The company’s right to sell franchises has also expired in both Wisconsin and Minnesota.
IHMC said that it is working “within our normal process each year of renewing them.” Wisconsin’s registration expired in 2020. Minnesota’s registration was canceled in 2022.
“We are not restricted from registering and then selling franchises in California if we choose to do so,” the company said. “We are actively working with Indiana and looking forward to a mutually beneficial agreement with them.”
The brand has traditionally been good about selling units, and its website lists a lot of locations as “coming soon.” In Georgia, for instance, the company’s website lists six locations, but only one is open and the others are “coming soon” either in 2024 or the “winter of 2024.”
The brand currently operates 37 restaurants, but franchisees in their letter say the company has sold more than 200 locations. “There seems to be a definite focus on the part of [IHMC] leadership to sell units but not support units, also evidenced by the sheer number of closed locations nationwide.”
One franchisee we spoke with said their store generates only about $5,000 to $6,000 per week. “I’m losing $7,000 to $10,000 a month,” the operator said, noting they are about two months from closing. Another one we spoke with said they generate only about $4,000 per week.
Yet operators say even stores that do make money struggle to make a profit. Many blame their food costs. Cheese sauce costs vary per franchisee, with some paying $246 for a five-gallon bucket and others paying $320. In 2022, some operators were paying $125.
“You could make it for $60 or $70,” one franchisee said.
“If [IHMC] can’t get the cost down to something affordable to franchisees, such as below $75 for a five-gallon unit, then maybe we need to switch to a different packer,” operators said.
IHMC acknowledged that some of its franchisees are struggling, blaming it largely on the economy.
“While we do have profitable restaurants, like many in the industry, some locations might not be showing profits,” the company said. “The industry as a whole is facing significant financial pressures, which has led to a number of established signature concept restaurant closures in the past months.”
In an email to franchisees, obtained by Restaurant Business, IHMC told operators that its efforts to help them were met with resistance. “With certain franchisees, our attempt to help or improve his/her franchise has been met with a lack of cooperation with the intent to blame someone else despite our efforts to assist him/her,” the company said.
“As we continue to always be the best in this relationship,” IHMC added, “we hope that this desire to be the best is shared by you and all our franchisees.”