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Thanks for the review of the Same Store Sales Metric. I agree with your analysis.
I am often confused by Wall Street’s use of Same Store Sales (SSS) metric as it relates to a franchisor's value. SSS makes sense for a chain that is 100% owned and operated such as Chipotle or Starbucks. A 2% rise in same store sales is indicative of a 2% increase in sales and an increase in profitability as well as an indication that the brand value is growing. We all get that.
However, when applying the SSS metric to a franchisor like Dunkin’ Donuts, which is 99% franchised, the metric gets significantly watered down. A 2% increase in SSS for Dunkin’ Donuts relates to a .1% increase in royalties for Dunkin’ Brands (DNKN). It shows an indication of a rise in brand value, but that is not very relevant. If same store sales are static for Dunkin’ but they increased distribution in number of units that is a more appropriate indication of increased brand value.
The SSS metric is not as suitable for a franchisor as it is for wholly owned retail companies.
Wall Street’s focus should be on free cash flow and unit economics. That is the way you evaluate the health of a franchise system. If unit economics are strong, then that brand will continue to grow and prosper. If unit economics are decreasing, then that brand is headed for troubled waters.
And who said that you needed franchisor management employees to agree to anything? They are slightly more than irrelevant to the discussion, even though they won't like a new valuation metric for the system. They SHOULD like it if they want to stay, because it is an easy measure.
Their board members are only slightly more relevant.
For a publicly traded Zor, Wall St analysts are the most important constituency to convince that a system's value should be based on the profitabllity of its franchisees where the system is "asset light."
If the Zees' profitability is shrinking, the system is doomed and the money should flow out of that stock immediately. It is only a matter of time before investors lose their money. If Zee prfits are growing, they will be paying more royalties, even if they don't expand. They WILL expand if they are making money, because replicating what you are already an expert at doing is easy money.
This is the new paradigm. Watch and see.
This will never come from the franchisor.
Profitability is always the result of the business owner who needs to take control of their business by understanding it and executing sound business practices.
Asking a franchisor to share in the failure of franchisees is unreasonable and unenforcable.
If you have given the right to control your pricing and/or product mix when it does not work through a franchise agreement, that was a bad business decision. It is by no means illegal (so far as I know). Looking to legislators and "business partners" to protect against bad business decisions is unreasonable and will result in disappointment.
The fact is, publicly traded firms are under constant pressure to increase EPS. This country faces a far greater threat from publicly traded healthcare providers. Some large hospital chains like HCA have cheated the taxpayers and possibly put patients at risk. As Vito Corleon said: " This is the life we chose" Publicly traded companies are an inherent part of our system.
There is a way.....but it will not come from franchisor because zor will not want it to affect share price...there is no legislation or any complicated required....
One way to change the discounting behavior of frantic management team as of publicly traded CEOs is to tie their stock option amounts and bonuses to franchisee EBITDA increases.
Profitable franchisees grow, and create more royalty revenue streams. Squeezed franchisees eventually run out of juice.
Can CFA propose some sort of measure to promote and ask publicly traded Zors to adopt it in exchange for an endorsement?
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