Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / How Top Franchisees Use Private Label Products to Boost Margins
Transcript
- Lucas: If you walk into any Smoothie King in Florida right now, you might notice a small display near the register with a line of protein powders and supplements that doesn't say 'Smoothie King' on it. It says 'Tampa Bay Fuel.' That's a private label line owned by a 12-unit franchisee named Derek Vargas. Luna: Wait — a franchisee selling his own brand inside the franchisor's store? How does that work legally? Lucas: That's the first question everyone asks, and the answer is: it depends on the franchise agreement. Most agreements have a non-compete clause that bars you from selling competing products. But Derek's lawyer argued that a protein powder is not a smoothie — it's a separate category. The franchisor agreed, with conditions. Luna: What kind of conditions? Lucas: Number one: the private label product can't carry the Smoothie King logo or any trademark. Number two: it can't be advertised as part of the core menu. Number three: the display has to be clearly separate, like a branded kiosk, not mixed in with the franchisor's retail items. And number four: the supplier has to be pre-approved by the franchisor's quality team. Luna: So it's a carve-out. That makes sense. But why go through all that trouble? What's the upside? Lucas: The margin story is pretty compelling. On a typical third-party protein powder that Smoothie King sells at retail — say a Quest bar or an Orgain powder — the franchisee's gross margin is maybe 25 to 30 percent. On Derek's Tampa Bay Fuel line, it's north of 40 percent. He controls the pricing, the formulation, and the supply chain. Luna: Forty percent margin on a product that's already high-margin to begin with. That's significant. Lucas: Right. And he's not just selling in his own stores. He registered the brand with Amazon, set up a seller account, and uses a third-party logistics provider to fulfill orders. Last year, online sales accounted for about 15 percent of his total private label revenue — roughly $90,000 across the whole network. Luna: So now he's a manufacturer, a retailer, and an e-commerce operator, all while running 12 smoothie shops. That's a lot of plates. Lucas: It is, but he structured it as a separate LLC. He hired a brand manager who used to work at a supplement company, and they do batch production runs with a co-packer in Tampa. The co-packer handles the blending and packaging. Derek's team just manages the inventory and the marketing. Luna: I want to talk about the marketing piece because I think that's where a lot of franchisees trip up. You're now competing with established national brands for attention on a small shelf. What's the play? Lucas: Derek's strategy is twofold. First, in-store sampling. His staff offers a free scoop of the Tampa Bay Fuel powder blended into a smoothie. If the customer likes it, they can buy the tub. Second, he runs a loyalty punch card specifically for the private label products — buy five tubs, get one free. He says the sampling conversion rate is about 12 percent. Luna: Twelve percent is actually strong for an in-store demo. The typical grocery store demo converts at maybe 5 to 8 percent. Lucas: Exactly. And he's not spending a dime on digital ads for the private label. All the marketing happens inside his own four walls, plus word of mouth from the fitness community in the Tampa Bay area. He sponsors a local CrossFit box, which cost him $500 a month, and that drives a steady trickle of online orders. Luna: That's smart. Low-cost customer acquisition. But let's talk about the risks. What happens if the quality slips? If someone gets sick from a bad batch, that's not just a Tampa Bay Fuel problem — that's a Smoothie King problem. Lucas: That's the franchisor's biggest fear, and it's why Derek had to sign an indemnity agreement. If there's a product liability issue, Derek's LLC is on the hook, not Smoothie King. He also carries a separate product liability insurance policy, which costs him about $3,000 a year. Luna: So the franchisor is protected. But what about cannibalization? If customers buy the cheaper private label tub instead of the premium brand, the overall ticket might shrink. Lucas: Derek says the data shows the opposite. Customers who buy the private label tub come back more frequently — about 1.7 times more visits per month — and their average check is actually $2.50 higher because they tend to add a smoothie or a snack. So it's additive, not cannibalistic. Luna: Interesting. So the private label acts as a loyalty driver rather than a margin cannibal. That's a counterintuitive finding. Lucas: And he's not alone. I've talked to franchisees in other verticals — a 7-Eleven operator in Texas who launched a private label line of beef jerky, a Great Clips franchisee who sells his own shampoo and conditioner. The pattern is emerging. Luna: Before we go too deep, I want to pause on something. These conversations, whether it's Derek's protein powder or the 7-Eleven jerky — they're the kind of practical, on-the-ground stories that make this show useful. If you've gotten value from episodes like this, one way to keep it going is to support the show directly. You can buy me and Lucas a coffee at buy me a coffee dot com slash fexingo. No pressure at all — just a small way to help us stay ad-free and focused on the stuff that actually moves your business forward. Lucas: Appreciate that, Luna. And we mean it — every bit of support helps us keep digging into these specific cases. Now, back to the legal side. One thing Derek had to navigate was the franchisor's supplier approval process. Smoothie King has a list of approved vendors, and the co-packer he wanted to use wasn't on it. Luna: How did he get around that? Lucas: He submitted the co-packer's quality documentation — third-party lab tests, GMP certification, insurance certificates — and the franchisor's quality team did a site visit. The whole process took about four months. But once approved, that co-packer is now on the approved list, which means any other Smoothie King franchisee can use them too. Luna: So he essentially opened a door for other franchisees. That's a nice side effect. Lucas: Yeah, and a few have already reached out to him. He's actually considering selling the co-packing access as a white-label service — he'd charge a small fee to let other franchisees use his formulation and supplier relationships. That would be a whole new revenue stream. Luna: That's interesting. But let's zoom out: what does this mean for the average franchisee who's not in the supplement space? Can a pizza franchisee launch a private label sauce? A car wash franchisee sell a branded wax? Lucas: In theory, yes, but the economics have to work. You need a product with high repeat purchase frequency and a gross margin that's at least 15 points higher than the branded alternative. Otherwise, the complexity isn't worth it. Derek's protein powder has a 90-day repurchase cycle, which gives him predictable cash flow. Luna: And what about the scale threshold? Derek has 12 units. Could a single-unit franchisee pull this off? Lucas: Probably not. You need enough volume to justify a minimum run from a co-packer. Derek's minimum order is 5,000 units per SKU. That's about a six-month supply for his 12 stores. A single-unit operator would be sitting on inventory for three years. The cash flow math doesn't work. Luna: So it's really a multi-unit play. And even then, you need to be willing to invest in a separate entity, insurance, and marketing materials. It's not passive income. Lucas: No, it's active business building. But for franchisees who are already operating multiple units and have a management team in place, it can be a meaningful profit center. Derek says his private label line contributed about 8 percent of his total net profit last year, and he expects that to grow to 15 percent in 2026. Luna: Eight percent from a product that didn't exist 18 months ago. That's a strong ROI on the upfront work. Lucas: And it's a form of brand equity that's portable. If Derek ever sells his stores, he can keep the Tampa Bay Fuel brand and continue selling online or through other channels. It's an asset that's separate from the franchise business. Luna: That's a key point. Franchisees often talk about building equity, but it's usually tied to the real estate or the customer list. A private label brand is intellectual property — a trademark, a formula, a supplier relationship. That's something you can actually own. Lucas: Right. And as more franchisees look for ways to diversify beyond the royalty stream, I think we'll see more of this. The question is whether franchisors will embrace it or push back. Luna: What's your prediction? Lucas: I think franchisors will move toward a model where they offer a private label option themselves — a franchisor-owned brand that franchisees can opt into, with shared economics. That way the franchisor captures some of the margin and controls the quality. But for now, the early adopters like Derek are proving the concept works. Luna: So watch this space. I'd love to check back in a year and see how many more franchisees have launched their own lines. Lucas: Absolutely. And if you're a franchisee working on something similar, we'd love to hear about it. That's it for this episode of Franchise Conversations. See you next time.