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Franchisees Buy A&W, Long John Brands from Yum

Sign outside of Yum Brand's head office in Louisville, Kentucky
Sign outside of Yum Brands headquarters, Louisville, Kentucky

LOUISVILLE, Ky. — In an unusual move, an independent franchisee association and franchisees will buy out their franchisors, hamburger brand A&W Restaurants Inc and fish chain Long John Silver's Inc. A&W will be acquired by the National A&W Franchisees Association, as well as franchise licensee A Great American Brand LLC. Franchising conglomerate Yum Brands at the same time announced that its Long John Silver's brand will be acquired by LJS Partners LLC, a consortium of prominent franchisee leaders and investors.

"We are pleased to announce that we have identified strategic buyers who are passionate about these two great restaurant brands and committed to their growth potential," said David C. Novak, Yum's chairman and chief executive officer.

It is an unusual turn of events to have franchisees run a franchise chain. Independent franchisee association leaders and franchisees of other brands are taking note.

Shrinking chain

The sell off of Yum's two domestic brands comes at a tough time for the franchising conglomerate in the United States and the developed world. Last month Goldman Sachs analysts showed that growth in China has come at the expense of American franchisees in Yum's core brands of KFC, Pizza Hut and Taco Bell. Goldman warned Yum that American franchises were closing at an alarming rate, with the number of franchises down 20 percent since 2003. It also estimated that the chain is dangerously close to the tipping point in which the remaining franchisees may bail en masse from the network. In what looks like a response to the Goldman report, Novak yesterday declared a renewed focus on the U.S. and its core brands: "As we continue to sharpen our long-term growth focus on international expansion and improving our U.S. brand positions in KFC, Pizza Hut and Taco Bell, Long John Silver's and A&W no longer fit our long-term growth strategy."

In 2002 Yum Brands bought Long John Silver's and A&W for $320 million. The fish chain has grown to roughly a thousand U.S. restaurants. A&W, one of America's earliest restaurant franchise chains, has 300 locations domestically and 300 abroad.

Restaurant economics researcher and consultant John Gordon of San Diego-based Pacific Management Consulting Group observes that the two brands were not easy to sell. "A&W and Long John Silver's were on the market since January," says Gordon. He believes the market responded with a low price for the brands. He thinks that is the reason A&W's franchisee association and Long John Silver's franchisees could afford to buy their brand.

The same deal looks unlikely for KFC franchisees. Restaurant analyst Gordon thinks the price for the KFC brand would be prohibitively high for franchisees to purchase. "Besides, many of the large KFC franchisees are coping with chapter 11 bankruptcies," he states.

Gordon believes that urgency is key in turning around the two newly sold brands. The analyst thinks A&W as well as Long John Silver's franchisee leaders "must find and recruit a turnaround CEO as soon as possible." Starting immediately, franchisee principals for the two brands have the expertise and should take over operational roles. As a somewhat egalitarian collection of franchisees takes over the chains, they'll need to take leadership and make hard decisions over some franchises. "Some buyouts, buy-downs, closure of underperforming units and markets will be necessary," admonishes Gordon.

KFC franchisees also not happy

According to insiders, KFC franchisees met in Louisville at the beginning of the month to contemplate what possible action to take with their franchisor and its leadership. A KFC insider and a trusted source for Blue MauMau thinks that the problems with the brand in America lie firmly at the feet of Yum Brands' CEO David Novak and KFC's chief executive officer Roger Eaton. Although the National Council and Advertising Cooperative (NCAC) are run by franchisees, franchisor KFC Corp has not been able to provide good strategic brand ideas that the franchisee council can enhance with advertisements. To make matters worse, the insider says that Novak and Eaton have been heavy handed with the board members of the ad cooperative, "putting guns to franchisees' heads telling them to vote their way or they won't be in business long.".

What the ad cooperative needs, and hasn't had for years, is for KFC Corp to fulfill its contractual role as the lead initiator of marketing strategy for the brand, says the source. Yum's responsibility is to come up with a coherent strategy that reflects consumer needs. Franchisees remember a series of unsuccessful initiatives by Yum Brands. They spent $100 million in an unsuccessful "unthink KFC" campaign, a corporate marketing strategy meant to deemphasize the brand's southern fried chicken roots while emphasizing its new, hip grilled chicken. Franchisees feel that customers did just that. They didn't think of KFC, deserting the brand in large numbers.

Franchisees are now quite concerned that the franchising conglomerate's CEO Novak has misinterpreted the company's own research and the direction of the market, determining KFC's main target as teenage consumers who want to buy 99-cent single items in the drive-thru lane, similar to sister brand Taco Bell. One franchise leader thinks Yum Brands' own market research clarifies what customers mean by "value." "KFC's customers want a quality assemblage of food items in a meal format at a fair price. KFC can establish a value price point at $10 or $20 that is very persuasive to consumers for quality group meal occasions," he says.

From the behind the scenes murmurings, the franchisor and franchisees appear to be at war with each other. Franchisees think that KFC too easily jumps from one thing to the next without thinking it through. That gives them little confidence in the leadership of KFC Corp. A franchisee leader says what is needed to solve the impasse is a resolute commitment by Yum to a disciplined marketing process. "You have to have research. You have to have an in-place procedure where any innovation goes through a testing process. Time after time KFC has overlooked practical red flags because they were implementing what seemed like an overarching doctrinal decision by Dave Novak," says the insider.

Restaurant analyst Gordon agrees that a change needs to take place at KFC Corp. "Many of the KFC restaurants were historically set up as fried chicken stores. As those old neighborhoods have hollowed out, KFC has become at war with itself between older KFC franchisees that have a strong fried chicken demand and newer franchisees with a stronger grilled chicken culture and demand." Gordon thinks the chain has to be very careful about reinventing itself at this dangerous crossroads. "Franchisees now just don't have the economics to upgrade like a McDonald's franchise would. KFC franchisees are financially stuck. You almost need a track A, track B and a creative marketing executive that can gently figure out the right way to grow both tracks without hurting the other."

The franchising conglomerate reassured stockholders that Yum did not expect the sale of two of its brands to have a material impact on its ongoing earnings or cash flow. Both transactions are expected to close in the fourth quarter. Investment bank Goldman Sachs advised Yum Brands on the strategic sale.

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