Children's Orchard Prunes Franchises To Spur Growth

When Taylor Bond acquired resale clothing chain Children's Orchard Inc. in 2004, he set out to grow the company, oddly enough, by closing nearly half of the 80 franchises under agreements he'd inherited from the previous owner.

Some were struggling or not paying the royalty fees they owed. Others were held by "hobbyist owners" who weren't focused on growing the business or whose vision for the company didn't dovetail with his, Bond said.

As a result, Children's Orchard didn't renew franchise agreements for many, and other outlets closed of their own accord. After a few years, Bond was ready to expand the Ann Arbor-based chain once again. But then the recession hit.

So he spent the past five years strengthening the Children's Orchard brand and operating model. With banks beginning to lend again, the chain has set a goal to open 10 new Midwest franchises this year.

Children's Orchard is also expanding into name-brand resale for teenagers, men and women. It plans to open a second corporate-owned location of a name-brand resale store chain, Style Trader LLC, aimed at teenagers and adults, late this month or early in March.

The 2,500-square-foot store at Ann Arbor's Colonnade Shopping Center will feature used clothing. The items stocked include brands like Banana Republic, GAP, DKNY, Ralph Lauren, Aeropostale and Abercrombie & Fitch. Bond expects four other Style Trader locations to open across the Midwest this year.

Children's Orchard decided to launch the new stores after customers repeatedly asked if the chain would sell items for teens and adults, as well as children, Bond said.

"Getting new customers is a lot of work; you're better off keeping the ones you've got," he said.

Other organizations like Plato's Closet have expanded in the same way with good success, Bond said.

The recession strengthened the nation's bargain-hunting mentality to an all-time high, and that has remained intact even as the economy steadily improves, he said.

The National Association of Resale Professionals estimates the resale industry is a $13 billion segment that's growing. For the past two years, the industry has seen 7 percent growth in the number of stores selling used items.

Value-conscious consumers and an increasing interest in recycling are driving that growth, according to the association.

New store model During the past five years, Children's Orchard has taken advantage of lower rents, relocating many of its franchises to larger, more visible locations, said Bond, 52. That has improved merchandising and increased the amounts of time and money customers are spending in the stores.

The company, which employs 20 at its Ann Arbor headquarters, also introduced tent sales and instituted a guarantee that people coming in to sell items will have an offer within 20 minutes or get a $5 store credit. That's replaced purchases made by appointment only.

"It's been an enormous success. Walk-in buying drives inventory and grows sales, and customers love (it)," Bond said.

The 34 Children's Orchard stores operating in 2012 reported average sales of just under $353,000, according to the company's franchise disclosure statement.

Franchisee changes Children's Orchard also increased the net worth requirements for its owners to $500,000 from the earlier requirement of a net worth of $250,000-$300,000. There's a relationship between a person's net worth and their business experience, Bond said.

Most of the company's franchises launched with financing secured through home equity loans, and that disappeared when home equity lines of credit began to dry up in 2007-08.

Total startup costs for a Children's Orchard franchise range from $146,200 to $297,000, according to its franchise disclosure document.

Bond said the Children's Orchard stores that remained open during the recession saw average sales growth of nearly 5 percent per year compounded over the past five years.

Gross margins for resale can be 65-70 percent, generally. So if an item is priced for $1, the store paid about 35 cents for it, he said.

Systemwide sales for the chain are about $12 million, and the corporate parent's revenue is more than $1 million, Bond said. He projects that revenue will rise 5 percent this year and even more as new franchises come online.

Adult and teen stores Children's Orchard launched Style Trader stores for teenagers and adults in June 2012, through a company-owned store at Middlebelt and Plymouth roads in Livonia.

"In order to be a good franchisor, we need to be operating a store," to test ideas before rolling them out, Bond said.

It's too early to make claims about revenue for the Style Trader franchises, he said. But most resale businesses have revenue of $250,000 to $500,000 per year, and the corporate-owned Style Trader location is operating within that range.

The total investment required to launch one of the franchises is $330,000 to $450,000, according to the company's franchise disclosure statement.

When Children's Orchard originally tested the Style Trader format in Livonia, it offered items for children at the location, too, Bond said.

"But one of the things we learned is the shopping psychology when you're shopping for children and women's things is different. ... When mom is shopping for kids, she's not necessarily shopping for mom." Children's Orchard is following the path of competitors like Winmark Corp. (Nasdaq: WINA), which introduced women's resale stores under the Style Encore banner last year. It also operates Plato's Closet, Once Upon a Child, Play It Again Sports and Music Go Round.

Minneapolis-based Winmark operates 12 Once Upon a Child franchises in Michigan and 14 Plato's Closet locations, said Pete First, director of franchise development. On average, its U.S. stores under those brands generate $900,000 to more than $1 million in annual revenue, and sales have increased each of the past 10 to 12 years, he said.

"The popularity of recycling and sustainability today is increasing. You've got a younger generation, and that's how they've grown up," First said.

Winmark launched Style Encore for women last year to capitalize on the growing segment and already has 40 franchise agreements signed, including five in Michigan. The first, in Utica, began buying used items in early February to bolster its inventory and is expected to open in early April, First said.

By mid-to-late summer or early fall, Winmark expects additional Style Encore stores to open in Saginaw, Portage and East Lansing. Michigan has a good customer base and affordable retail spaces that enable Winmark to set its franchisees up for success, he said.

"Michigan is a good market for us, and the franchisees are great," First said.

Sherri Welch: (313) 446-1694, [email protected]. Twitter: @sherriwelch

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