Franchisors and Numbers Reporting: It's Not What You Expect, but What You Inspect

Kudos once again go to Popeye's Louisiana Kitchen Inc. (PLKI) not only for a good Quarter One 2014 earnings results reported just last evening, but also for continuing the practice of being the only publicly traded restaurant franchisor that I'm aware of that reports its franchisees cash flow proxy number.

Popeye's reports franchisee EBITDAR--earnings before interest, taxes, depreciation and rent. It's only a semi useful metric, as it misses rent and related expense, but also debt service and capital expenditures (CAPEX). Depreciation expense is an inperfect proxy for CAPEX.

In the first quarter of 2014, Popeyes franchisee community had an EBITDAR of 21.3%, compared to a 20.1% for the prior year. Franchisee same store sales were up 4.3%. Many more costs and expenses need to be subtracted to arrive at franchisee real economic gain, but at least it is some number.

Popeye's EBITDAR number is about 3.7% percentage points better than the GE Capital QSR survey sample published earlier this spring. Of course, you have to look at both dollars and percentages, per store to analyze fully.

Other franchisors do not want to talk about franchisee numbers. They don't have them, or the numbers are not good. Sometimes, franchisors are afraid and don't want to know them. But in any case, they should have them or should care.

Compare the Popeye's treatment to that of an article published by The Street's Laurie Kulikowski last week timed for Small  Business Week. Titled "Looking for an Investment-- Here are Eight of the  Best Franchises". The Street collaborated with a franchise survey group that surveys franchisee satisfaction. Not a single point of "return on investment" data or quantification was listed, despite that the survey had a "financial return satisfaction metric".

Satisfaction is nice, but what about making money? Not a useful article.

Sloppy staff work perhaps. But the franchisor should have the numbers. You manage what you measure. Or, as my first boss in QSR operations drilled: "It's not what you expect, it's what you inspect."


Almost there.

Almost there. Agree, that it is useful information, and nice when franchisors publish what should be the most important financial information for current, and prospective franchisees - actual franchisee returns. Not a fan of EBITDAR however. Not sure how you can "not include" a major expense like that. Seems that Rent is a determining factor for a franchisee's success, and also the viability of some brands in certain regions or high rent markets.
Using EBITDAR is just one of the latest sales tactics brands are using. In the most innocent terms, it sounds better to say they earn "21% vs. 11%, but this tactic is also being used to push brands that should not be pushed (not suggesting that is the case with POPEYES) because adding rent numbers to all franchisees may show system weakness, or areas that should not be developed. Five, Ten years ago everything was sold,and marketed on multiples of EBITDA or ROI, now it seems those who can no longer sell on that have resorted to Sales to Investment Ratio, or EBITDAR. Big difference if a concept can push the same revenues out of 1500-2000 square feet vs. 3000-4000 unit. Sales-to-Investment is totally irrelevant; if you are not making money because your brand is broke or your franchisor is over charging on goods, who cares what you invested for sales.

Better info on franchises

Thank you, John Gordon, for continuing to beat this drum on providing unit level profitability info. Almost no one else is doing what you are doing.

I am a CFA member and we talk about this, and your efforts, frequently. We would love to see a best practice that franchisers can voluntarily can be hard for franchisers, especially newer ones, to determine an accurate or useful metric, but mature systems should at least try.

Kudos to Popeyes and Dunkin Donuts for at least trying to provide a useful number. As noted by Mr. Gordon, they aren't perfect numbers, bet at least these 2 brands stepped up to provide some guidance and a platform for serious franchisee candidates to ask more specific questions from ( like CAPEX for remodels, etc). It is a good, fresh start.

Given that franchisers To attract more sophisticated franchisee investors to grow, at least 2 brands are making a real effort to meet that demand.

Accurate Numbers Just A Start

The problem isn't just the numbers you're given as a prospective franchisee. It's getting contractural guarantees in the franchise agreement and investing in a system with controls in place, i.e food and advertising co-ops, to ensure things won't be changed at the whim of the CEO. For example, the costs of buying and running a Quiznos were always a little high, however, by conservatively applying the numbers we were given the return was inline with the restaurant's actual profitability. That changed in the early to mid 2000's as Quiznos found it could gouge current franchisees through AFD, use advertising money for non-advertising stuff, and eventually replace the owner when that owner could no longer afford to subsidize the restaurant or complained too much. Blaming franchisors for the crummy numbers they provide is just the top layer of why the franchise system needs to be overhauled.