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.
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.
John A. Gordon is Principal and founder of Pacific Management Consulting Group, which provides chain restaurant sales, profitability, earnings and economics research and special analytical projects to those in, or who need to know about the restaurant sector. Among others, we support franchisees and those supporting franchisees.
Gordon has a long background in chain restaurant operations and financial management roles, such as cost analyst, financial analyst, manager of planning and analysis and CFO, and has been consulting since 2000.
He is passionate in providing independent, creative, detailed and useful perspective, with no conflicts of interest. Email him or call (619) 379-5561.
Comments
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.
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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:
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.