6 Signs of a Weak Restaurant Franchisor

The Burger King going public transaction this week marked not only another organizational odyssey point for that storied brand--the fourth since 2002, and reminded us what's going in the restaurant franchising space.

A 1000 unit development plan for China and a 500 development plan for Russia were just announced as part of the Burger King pre-going public marketing.

This is somewhat reminiscent of the 1960s and 1970s era of US restaurant development, where big swaths of the country were sold off to area developers, and not all chains took the effort required to build and sustain the necessary brand and systemic business foundation.

On June 19, 2012, Hedgeye Risk Management, a Wall Street research firm, sponsored an experts call in forum focused on the quality of restaurant franchising. Hedgeye outlined six red flag indicators of weak restaurant franchisors, as reproduced below.

Weak Franchisors.jpg

The common denominator to all of the reg flags are: dysfunctional ownership, corporate and store level economics system problems.

It's said that potential franchisees are sophisticated investors, but here is food for thought during the due diligence phase before your next investment.

This article is cross-posted from the International Association of Franchisees and Dealers news site.

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The gulf between strong restaurant franchisors and weak

The following is related to John Gordon's article on the importance that private investors give to franchisee performance. It is a release to the media from Hedgeye, which makes the point that franchisee performance should be very important to private equity firms.The press release, titled Franchising: Fools Gold, follows:

Hedgeye Restaurant Sector Head Howard Penney hosted a conference call with industry expert John Hamburger on Tuesday to discuss the risks revolving around heavily franchised restaurants. The main takeaway is that franchisors are realizing that it’s easier to sit back and collect royalty payments than to own and operate a store, but areas of difficulty in the industry have arisen that plague weakly franchised companies.

They include, but aren’t limited to:

  • Poor asset quality: concepts that allow their asset bases to unduly deteriorate tend to fall behind and aren’t able to rectify the situation. Cash-hungry private equity firms do not help with the situation as they focus on the cash and not the subsequent consequences.
  • Franchisor/Franchisee disharmony: The disagreements between management and franchisees has been well documented over the years. Communication is more crucial than ever and when a franchisee goes “rogue” by going around corporate-directed rule sets, it raises concerns about the relationship.
  • Inconsistent unit performance: Management teams resorting to short-term, promotional strategies to “dress up” the numbers tend to produce choppy results.


The current turnaround strategy at Burger King and Wendy’s (WEN) have been particularly capital intensive as older stores remodel to comply with the new image management has created for them. To quote John Hamburger: “Half of the current restaurants operated by chains are not at the current prototype standard and it’s very capital intensive when remodeling.”

McDonald’s (MCD) will always be a top dog, but Burger King and Wendy’s have their work cut out for them over the next few years.

Wow.... Where does Quiznos go from here?

Poor unit performance, short term super aggressive promotions, severe cut backs at field and corporate level staff, and a new private equity ownership not making their "nut". Sounds like tough times ahead.