For some Craft Beer Cellar franchisees, it’s a bitter taste after jumping in
For nearly a decade, the Craft Beer Cellar in Belmont has been a beer lover’s paradise. Its founders, Suzanne Schalow and Kate Baker, placed a shrewd bet on craft beer just as it hit the mainstream and set about creating the country’s first national chain of specialty beer stores. They now boast 30 locations across the country.
“Our trinity,” Schalow said, is “amazing beer, hospitality, and education.”
But that early business acumen hasn’t translated into success for many of the franchise owners who were persuaded to buy into their brand. A number of franchisees say they raised money from friends and family, gave up a job, or sold a house to cover the costs of opening their own stores — only to now find themselves facing mounting financial pressures that may cause them to fail.
Aggravated relationships between the founders and some of their franchisees have boiled over into sharply worded e-mails and online screeds. The aggrieved franchisees accuse the owners of providing them with overly rosy financial projections, and of belittling them instead of offering guidance when the numbers didn’t pan out.
Last spring, the owners went so far as to sue 20 unnamed franchisees in US District Court for defamation for posting anonymous complaints on the website Glassdoor.
“The best advice I can give prospective franchise owners is to run,” said one of the postings, according to the federal court filing. “Most franchises are not profitable, and the majority wish they had never signed on.”
The Glassdoor lawsuit was dismissed, and in December, after a second attempt in court to stop franchisees from criticizing them online, Schalow and Baker, who are married, asked members of the Massachusetts Brewers Guild to contribute to a GoFundMe campaign to raise a $125,000 legal fund. Their request implied that some of their detractors were motivated by homophobia.
The fund-raising site had raised $2,480 when it was shut down after a Globe inquiry. But the owners have continued their criticism of franchisees on their blog, casting them as mostly white men “fueled by their own internal rage and hatred of women and sexual orientations that are different from their own.”
Franchisees say the discrimination claims are false, noting that anyone who signs on as a franchisee is aware of Schalow and Baker’s relationship. The owners of the Fort Point, Fenway, Swampscott, and Winchester stores, in a joint statement issued to the Globe, called the assertions of misogyny and homophobia “astounding and unfounded.”
The majority of franchise owners interviewed for this story who raised concerns about dealing with Schalow and Baker would not allow their names to be used, fearing that speaking up would violate nondisparagement clauses in their franchise agreements and land them in court.
“We all need help,” said one franchisee. “But we’re all small businesses barely scraping by, so if we get sued it’s a big, big deal.”
In an interview, Schalow and Baker said that certain stores are “damaging the reputation” of the brand by not following the founders’ philosophy and business model and neglecting to build their beer expertise. The duo said they provide guidance as needed but don’t believe in micromanagement.
“We give them the model,” Schalow said, and those who’ve followed it, she said, are succeeding. “My goodness, we have such a proven model.”
They did not identify specific instances of discrimination. But Schalow said: “There are a lot of straight white males that have made their way into our lives that do not, and cannot, handle that a woman owns this franchise. And that the same woman is also a lesbian.”
Baker said: “If we need to own up to anything, it’s that we are real, hard-working people.”
A successful start
Craft Beer Cellar managed to capture lightning in a bottle when it opened in 2010.
Schalow and Baker were two beer lovers working at Cambridge Common when they spotted the growing demand for unique brews taking off across the country. They opened a storefront in well-heeled Belmont, which had just ended its 148-year history as a dry town. With a selection of 1,000 craft brews and the ability to create mixed six-packs, it became a destination for beer geeks.
“It you were a serious craft beer drinker, you would go out of your way to go there,” said Rob Vandenabeele, an author of the Mass. Brew Bros. website.
Their timing was right. When the first store opened, there were more than 1,700 craft breweries in the United States. Today there are more than 7,000, and the craft beer industry tallies $27 billion annually, about 24 percent of the total $114 billion in annual beer sales, according to 2018 numbers compiled by the Brewers Association.
Getting in early helped Craft Beer Cellar wield influence in the local brewing market.
“They were in a position to help some really small breweries get a foothold,” said Vandenabeele.
By 2013, Schalow and Baker had expanded to five stores in Massachusetts and were making plans to become the first national chain of specialty beer stores.
The brand now has a presence in more than a dozen states, and Schalow says she has plans to be in all 50.
The CBC website, until recently, promised potential franchisees support with “social media and marketing, real estate, ordering and sales projections from the moment you join the team until . . . forever!”
Some franchise owners, like Andy Bajaj, co-owner of the Westford store, say they’re thriving. Bajaj, who owns several liquor stores in addition to the shop, said Schalow and Baker’s communication with him, while limited, has been supportive.
“Beer is their religion,” Bajaj said. “The numbers and revenues they told us — that’s what we experienced after we bought it.”
But many others are foundering: Seven Craft Beer Cellar stores have closed in the past three years, and three others no longer operate under the CBC name. The Newton store sold to a new owner earlier this month, and at least one other store is on the market. Another five stores — in Swampscott, Winchester, Fort Point, Roslindale, and Columbia, Mo. — announced they were closing in rapid succession over the past five weeks.
Stephen Spinelli, president-elect of Babson College and cofounder of the Jiffy Lube franchise, said the turnover rate for the stores far outpaces national averages for franchising. “It’s several degrees south of normal,” he said. “It is almost breathtaking.”
Some of the financial strain is surely related to major shifts in the beer market.
“Bottle shops may be somewhat a victim of craft’s broader success,” said Bart Watson, chief economist of the Brewers Association.
Grocery stores now carry pallets of craft brews, and brewery taprooms are siphoning off bottle sales.
“Taprooms are changing the beer industry in an enormous way right now,” Schalow said. “Between breweries and taprooms, how does a store survive?”
Tatum Stewart, the co-owner of the Plymouth Craft Beer Cellar store, which just celebrated its fourth anniversary, said many of her fellow beer entrepreneurs got into the business because they love what they’re selling, “but they don’t have the 500 other skills they need to make the business work.”
But other franchisees contend that they bought into the franchise to learn those skills.
“Part of the thing you pay for with a franchise is ongoing support and training,” said Brent Bates, the co-owner of the Torrance, Calif., store. He said an employee from the brand came to his store for four hours in 2017, but he has never hosted either Schalow or Baker.
Schalow said someone from the brand team has “visited every location,” and they’ve hired an outside company to make anonymous visits to the stores for quality control.
Complaints have also arisen about the accuracy of sales projections provided by the founders, and about the founders’ failure to help when franchises hit trouble.
“The sales projections are off by 50% or more, and the costs are off by that much too. There is little to no support from ‘the brand,’ ” one franchisee posted to Glassdoor, according to the federal court filing. Another wrote: “Instead of ever getting help, you usually get an insult and then a reminder of how great she and her store are.”
One franchisee, who asked not to be identified because he feared retribution, provided the Globe with projected revenue numbers from the founders suggesting he’d make $1 million in revenue in his first year. Instead, he barely broke $500,000.
Another franchisee shared documents with the Globe created by the founders that set his projected first-year sales at $800,000. Instead, he saw just over half of that, and said he never took a salary. “I took a twenty from the safe once to buy a pizza,” he said. Several franchisees also told the Globe they paid more than double the projected startup costs in the franchise agreement, which put them deep in the red before they even opened.
Franchisee postings included in the owners’ suit against Glassdoor echoed these sentiments: One franchisee advised the owners to “be more honest with your investors.” Another posting warned that “low margins and long hours . . . make this a place to stay away from.”
Schalow said projections “may have been provided” to store owners, but franchisees decide how they run their business, and those choices can affect profits.
Franchise disclosure documents filed in California show that the projected startup costs in the franchise agreement increased by as much as 60 percent between 2016 and 2018, from a maximum investment of $182,000 to a maximum of $290,000.
The California franchise disclosure documents also confirm that the Belmont store is significantly outperforming the franchises, making nearly $2 million in revenues in 2018, while the other 29 stores averaged $532,000 in annual revenues.
But there may be reason to question the company’s financial health. The IRS has placed a lien on the Massachusetts-based parent company of the franchises for $46,000 in back taxes from 2016 and the parent company was operating at a loss of $218,000 in 2017, publicly available documents show. Documents filed earlier this month with the secretary of state’s office in Massachusetts show it took out a loan, with collateral against all its inventory, to pay off its lien.
Schalow said they’re “taking care of our obligations” with the IRS and the losses represent the legal expenses the company has incurred over the past year.
Troubles spur litigation
Those legal fees stemmed from troubled business relationships between the founders and the franchisees that erupted into litigation.
In 2015, the owner of a Framingham store, Patrick Loranger, protested to Schalow that she had a Craft Beer Cellar store opening less than 5 miles away in Sudbury, in violation of his franchise agreement.
“It’s a lonely road, Patrick, one you may not realize the enormity of,” Schalow wrote in response to Loranger’s queries about the close proximity of the Sudbury store, according to court records. “You are a three-week-old store and isolating yourself from #TheMothership, The Brand, and the rest of the members of the Craft Beer Cellar family by choosing to stand against us.”
Loranger sued in Middlesex Superior Court, and the case went to arbitration. Retired judge Isaac Borenstein sided with both the Framingham and Sudbury franchisees, writing that Schalow and Baker had attempted to “bully” the store owners. Schalow and Baker’s actions were “fraudulent, deceptive, and unlawful,” he wrote. “Their concern was, first and foremost, their profits.”
The judge ordered Schalow and Baker to pay $125,000 to the owners of the Sudbury store, and $150,000 to Loranger, whose store closed last year.
Schalow disagrees with Borenstein’s decision, but she said she regrets how things played out with Loranger. “We made a mistake. That guy was a good beer geek, and we screwed that up.”
The owners of the Fenway store have also been in a similar legal dispute with Schalow and Baker over the proximity of the Fort Point store.
As those cases were pending, other franchisees took to the website Glassdoor to voice their frustrations.
Last spring, Schalow and Baker filed the lawsuit in US District Court against Glassdoor asking to have the critical postings removed from the site.
But the US District Court judge dismissed the suit in October.
Later, the couple sued a franchisee in Maine, claiming that Craft Beer Cellar “suffered irreparable harm to its business and reputation” because the owner had made false and disparaging statements about them online. That suit was also dismissed by agreement in January.
But the legal troubles have left Schalow and Baker undeterred. They’re planning to relocate into an expanded new storefront in Belmont this summer, Baker said. Late last month, they sent out an e-mail to store owners acknowledging the recent closures and urging franchisees to take responsibility for their own success — or failure.
In an interview, Schalow and Baker said that they may have to step in and close some stores that are not following their model and “doing a disservice to the brand.”
“We’ve said yes to some of the wrong people,” Schalow said.
Meanwhile, for some franchisees, feelings of desperation are growing. The one who thought he’d make $1 million in sales his first year has had to use credit cards to finance his payroll, and his hopes of selling the store have diminished as the brand’s name has been dragged through the mud. The financial distress has pushed his marriage to a breaking point, he says, and he’s afraid he might have to declare bankruptcy and risk losing his house.
“There’s nothing in the bank account,” the franchisee said. “I have nothing.”