National Press Writes about Restaurant Franchising

On May 18th, the national press, both The New York Times and The Wall Street Journal, wrote about restaurant franchising. Some additional notes are warranted.

The New York Times article (www.nyti.ms/KLufUp) wrote about the travails of owning restaurant franchises and that one had better be prepared to "do it the the franchisors way". Or else. Example included a KFC franchisee in the mid-south as well as a former franchisee of the Pat N Oscar's chain in San Diego, that is struggling to reopen and rebrand the failed chain.

The NYT writer must have zeroed in on difficult situations. I won't go into here the struggles of KFC in the US in this piece except to say franchisee unit level margins are under 10% (probably 7-9%) and not throwing off enough cash to renew or expand stores.

Pat N Oscar's was a San Diego based 1990s/2000s era fast casual concept (pizza, pasta, wings) that was acquired in 2000 from the owner at a huge costly buyout ($50M plus, by Sizzler). It never made it to system profitability nor beyond 25 units and never made it north of the Orange County, CA  line. Pat & Oscar's (P&O) concept struggled with the debt service and parent corporate focus, and was caught up in the California recession that began really in 2007. By then, Sizzler was acquired by Worldwide Concepts out of Australia, and itself was sold to management via another fire sale. P&O got lost along the way. Sizzler unloaded it at a very large loss in 2008 to a investor group. They failed to get traction and filed Chapter-7 liquidation in 2011.

Of course, before the Chapter-7, in 2010, P&O's management refranchised  and sold company stores to franchisees. I contend that in the US, refranchisng is a cautionary signal. 

The existing P&O franchisees were left in the street and are now struggling to keep existing units open, debrand P&O's and reflag/rebuild via the name O's American Kitchen.

The Pat and Oscar's lesson: (1) debt levels and corporate owner sponsorship do matter (2) some chains can't make it outside their home base (see also: Rubios, Daphnes Greek Cafe)  (3) don't buy a franchise if the parent company is shaky (4) fast casual doesn't work everywhere.  

The Wall Street Journal (copy at www.twitter.com/56ZUpkHx)  wrote that big franchisees are getting bigger and are getting the prime attention of franchisors. Written by Angus Loten and Sarah Needleman of the WSJ Small Business desk, reminded how hard it was to be profitable with one restaurant. Bigger franchisees may have existing credit relationships which is critical in post-2007 crash US. 

This seems correct to us (although we don't like it). We'd note that some franchisors are helping franchisees via incentives and more (examples: Papa John's (PZZA), Marco's Pizza, Jack in the Box (JACK) and of course McDonald's (MCD) via leashold capital spending cost sharing.