When I first read about the Burgerim franchise disaster in Restaurant Business, it prompted me to look up the difference between a pyramid and a Ponzi scheme. Let me share what I learned: Pyramid and Ponzi schemes are similar in that initial investors obtain money from the investors that follow them, not from the actual investment. Eventually, the amount of money received from new investors is unable to keep up and the house of cards comes crashing down. The difference is that people in a pyramid scheme know the game and understand that they must continue to find new participants in order to keep the cash flowing.
So, what does this lesson in investment schemes have to do with Burgerim and Oren Loni, its President? Let’s take a closer look at their rise…and fall.
The Franchise Business Model
The franchise business model is the path that many an aspiring entrepreneur takes to get to the American dream of owning their own business and being their own boss. For many, it is a model that has created great wealth, for others it is an unregulated nightmare filled with broken promises. In the best of circumstances, those that choose this business model will have a brand that stands behind them and incorporates training, accountability, structure, marketing, and the benefit of lower costs through group purchasing. Unfortunately, many franchisees that invested in Burgerim are now finding that this business model has failed them.
Burgerim’s roots are in Israel where it was founded by Donna Tuchner, a U.S. trained chef. The restaurant concept is a good one—mini burgers made with about 11 different types of patties that include Wagyu, spicy beef, chicken, turkey, salmon, lamb, and several plant-based versions, served in an upscale, modern setting. Oren Loni, who has been involved in multiple franchises, bought the rights in 2011 and started selling them in Israel. In 2014, he sold the Israel franchise rights, along with 50 open units, and, in 2015, moved to Los Angeles.
In the U.S., the concept exploded from 0 locations in 2015 to as many as 200 units in 2019, plus more than 1200 signed franchise agreements. Burgerim’s own website still states, “Our projections show that we will be operating nearly 500 stores in the United States by the end of 2019.” Yet many in the industry, as early as 2018, saw a storm brewing on the horizon for Burgerim and their franchisees.
An article published in Franchise Times, quoted Jeff Lefler, CEO of FranchiseGrade.com, a franchise research and consulting firm, “A franchise system can make money selling franchises and collecting franchise fees yet not open any units. This can be a significant risk for new franchisees who pay a franchise fee but cannot get their units built or opened.”
Other warning signs, besides sold but not opened units, included Burgerim’s marketing strategies. According to Loni, they did not use franchise brokers but rather advertised via social media, particularly Facebook and Instagram, where they obtained 200 to 300 inquiries a day.
According to Restaurant Business, franchisees needed just $50,000 to open a restaurant with no experience required. In the beginning, there was no requirement for net worth or liquidity.
Currently, Franchise Gator reports that a Burgerim franchise costs $50,000 in cash, requires a net worth of $100,000, and that the total investment will come in anywhere from $150,000 to $400,000.
This calling card for little down and no experience prompted those that had never been in the restaurant industry to cash in their savings, retirement accounts, and even their homes in order to go after the dream of restaurant ownership.
John Gordon, a restaurant consultant and analyst, spoke with Franchise Times in 2018, stating, “It’s shocking that a system this complicated, with 11 different patties and a variety of sides, will take someone with no restaurant experience. The better burger space is filled with competitors…Burgerim is selling itself as a low-cost alternative and instead of developing logically, it is selling units all over the country. I worry that many will fail.”
John Gordon either knows the business well, or has a crystal ball. As of mid-December, 2019, there were approximately 150 locations that were open or in the process of, as well as 100-plus locations that had closed, and hundreds that never opened.
Despite the fact that, from 2016 to 2018, the company generated $45 million in revenue, in December of 2019, franchisees were informed that the company was considering filing for bankruptcy.
When the money ran out, so too did the business’s founder—Orin Loni left the country and, some believe, is residing in Israel.
What Went Wrong?
Unlike other franchise models, Loni chose to not collect royalty fees—the prime profit making strategy in the franchise business model. Instead, income came from new franchise fees and large vendor rebates which, ultimately, drove up the cost of food for franchisees. And, like any other business model that is dependent on a continuing influx of new investors to keep the business afloat, the ship began to sink.
The sales strategy brought in franchisees with little money available to get them through the hard times. And while the total investment, including buildout, was estimated to top out at around $400,000, the actual figure for some franchisees was anywhere from $550,000 to $683,000.
The business now faces about 90 lawsuits and is being run by Michel Buchbut, the current CEO, who has invested some of his own money and believes they can right the ship without going through a bankruptcy court.
Orin’s Other Franchises
You may wonder about the state of the missing president’s other franchises. According to Franchise Times, Siciliano, an Italian fast food chain, which at one time had 50 locations, is now down to 12 open units. Bandora, a shawarma chain, filed for bankruptcy in 2015. Thirty individuals were reported to have paid franchisee fees.
Franchisees Current Status
Restaurant Business recently reported, on January 24, 2020, that a small group of franchisees have formed the Independent Association of Burgerim Franchisees in the hopes of preserving their investments and the investments of other troubled franchisees. Should the business go ahead and file for bankruptcy protection, the group may be able to, according to Robert Purvin, chairman of the American Association of Franchisees and Dealers, take over the brand.
Loni’s intention may well have been to create mass wealth for himself and others through the franchise business model. It was believed that the reason he did not collect royalty fees was to give franchisees time to get on their feet and become profitable. What this left, however, was only one road to income for the company—selling the dream of restaurant ownership to new franchisees—which sounds oddly like the definition of a pyramid scheme.