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The difficult nature of the restaurant franchise business life is about to hit again: Wendy's has rolled out a $4 combo meal of small bacon burger, 4 chicken nuggets, a drink and french fries. The first report of how all-day breakfast is faring in McDonald's from Nomura and Mark Kalinowski is out today.
The fact is franchisors that are publicly traded have a pass or fail bumper sticker placed on them by the investment community. Investors look at how high are same-store sales? What is their ascending or descending nature: higher than last year, higher than a two-year rolling total, higher than a five-year "stacked" prior year accumulation? Same-store sales (SSS) shows up in mergers & acquisitions marketing pitches too. Buyers are willing to pay more for a brand with higher reported same store-sales rates.
On the other hand franchisees live on free cash flow, that is to say store EBITDA, which is to say income less taxes, overhead, debt service (principal and interest) and future remodeling capital expenditures (CAPEX).
Franchisees truly live off the very bottom line.
The problem of course is that same-store sales gain is not necessarily profitable sales. Where there is heavy discounting involved, cash is pushed down the standard, higher priced sales mix. This is especially true in the overloaded QSR space in the United States, where discounting is the easiest way out for marketing efforts of weaker brands, and the only way that some brands know how to stand out.
Many chains (Subway, McDonald's, KFC, Pizza Hut, Burger King, Applebees, IHOP, Denny's, Wendy's, among others) are more than 90 percent franchised in the US. Unfortunately, there is little to no accountability by franchisors to investors or franchisees in reporting. Franchisee profitability results are not reported, except regularly by Popeye's (PLKI) and mentioned sometimes by Domino's (DPZ). This is no way to run a railroad for Wall Street, or for the real direct investors, the franchisees.
The old saying that we learned years ago is true — you cannot manage what you cannot measure.
A lack of reporting is one thing. Another is a lack of looking ahead. This is especially important in the restaurant space, which has ever demanding upward wage pressures both regionally and nationally and demanding customers who expect ever higher quality products.
At some point, the math just does not work. Remember your old marketing professor who said that price sends out an important value signal as to the worth of a product?
What to do about these problems? I suggest that you talk about it with your peers, your friends, your business partner, the press, your franchisee association. Find ways and tools to agitate your brand to change — to NOT do things the same old way.