Is Dickey’s BBQ Franchising’s Next Quiznos? 28% Systemwide Churn

Photo of a shuttered Dickey's by Blue MauMau

It is not easy to forget the Quiznos saga. Once a darling of the franchise industry, Quiznos grew through franchising to nearly 5,000 locations. But today, it has just under 400 restaurants in the United States. 

Many franchisees lost everything (investments, savings, their home), and as stores closed. Eventually, the franchisor filed for bankruptcy protection. Yet, has the industry learned any lessons?  Quiznos did not fail because of consumer issues, but internal issues that made the business model unprofitable for franchisees.

Another brand may be following in the footsteps of Quiznos.  Dickey’s BBQ.  Although smaller, it has scary similarities to Quiznos, especially from a franchisee's perspective.

I have reviewed the Franchise Disclosure Documents (FDD) dated September 1, 2017 and September 4, 2018 and have been in contact on this matter with 26 current or former Dickey’s franchisees, representing 50 units.  What I have read and been told leads me to the conclusion that the Dickey’s system has some serious issues, much like the Quiznos system had before its implosion.

In fiscal year 2017, they opened 88 Dickey’s franchised outlets, but some 70 (the 2017 FDD actually reported 73) ceased operations, according to its FDD.  For almost every location added, one closed.  The brand ended up with 562 units.  To put it mildly, it’s not healthy to see over 10% of your stores cease operations.  But 2018 made 2017 look good.  In the latest year, the brand opened 72 new franchised units, but had 89 terminations and 24 ceased operations, for a net store loss of 41 units.  I suspect most of the terminations were likely an abandonment by franchisees, essentially a ceased operation.  If you add in the transfers of 44 locations, that’s a total churn*, also referred to disorderly attrition, rate of 28 percent of the brand – in just one year. 

Bluntly put, that is alarming.

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Many franchisees felt that the financials on revenue and costs given, formally and informally, were less than truthful, and these were often used on applications for loans (including SBA 7(a) loans) that later defaulted. They also felt many of the system changes implemented made the presale disclosures no longer representative of the business. What makes failure worse for Dickey’s franchisees is the fact that their franchisor is often enforcing a liquidated damages clause in which the closed franchisee must pay projected future royalties to the franchisor for up to 60 months, despite having left the failed business. Many said they were unprofitable, and should close, but had to weigh the decision of whether they would lose more money staying open or being sued for 5 years of royalties.

It needs to be argued that the liquidated damages provision is unconscionable when such a high percentage of the brand is failing.  Think about it. At a 28 percent churn, the entire chain is turned over in less than 4 years yet the franchisor requires 5 years of liquidated damages.  If the outlet had $500,000 in sales, the 5 year liquidated damages clause would cost $125,000.

So why are so many outlets unprofitable, forced to close, or operate at a loss? 

Franchised restaurants have an estimated average unit volume (AUV) in the mid $500,000’s per year (since Dickey’s dares not supply franchise-level earnings in Item 19 of the FDD, it has been extrapolated from FDD financials using advertising revenues and from the input of the franchisee contacts).  With the pressures from today’s increased labor and rent costs, that level of AUVs makes for extremely narrow margins. 

The added common thread seems to be the continued escalation of product costs, that appear to be far and above normal market prices.  In this case, the franchisor fully controls the distribution channels.  Like Quiznos, continued markups seem to contribute to increased revenues into an “affiliated” company.  For example, the FDD states that in fiscal 2017, their “affiliate, Wycliff, received a total of $22,119,583 from indirect purchases by franchisees of certain paper and food products.”  This was up from $15,407,160 in 2016. Why the 43 percent increase when the number of units barely rose and AUVs remained relatively flat?  If purchases by franchisees were flat year to year, this could represent an increase of approximately $12,000 per store.  That alone is a 2.4 percent increase in costs against revenues, going to an “affiliated” company of the franchisor. 

Can someone tell me how that is any different than increasing royalties by 2.4 percent?  

I’m not saying this action by the franchisor is illegal; however, being legal does not always make a franchisor’s decisions ethical.

Franchisees have expressed concern over the lack of transparency of the marketing funds, which is paid by franchisees. These franchisees are not happy about continued rising product costs, and new fees for “services” by the franchisor or one of its affiliates. Plus, constant changing of menu formats, logo and branding designs, and new menu recipes have cost franchisees customer loyalty.

Most of all, franchisees have expressed concerns about the risk of speaking out against bad moves by the franchisor, for fear of falling victim of Dickey’s retaliation.

What disappoints me most as I watch the problems with Dickey’s unfold, is how the industry leaders put their heads in the sand and ignore the problems.  Unfortunately, franchising focuses only on the sale of franchises, and so many in the industry are only rewarded when a franchise agreement is signed.  It creates a moral hazard that often forgets about the individuals put at risk when signing the agreement.  Of course, we saw the same reactions with Quiznos. And while most of the press will concentrate on franchisor issues, and the loss of company equity to shareholders, it will ignore the losses to the biggest and most vulnerable stakeholders of the brand, its franchisees. 

It’s time the industry, the press, regulators, and our elected representatives stand up and protect the biggest investors in the franchise industry, the franchise owners.

Why is all this important?  In addition to the number of closures reported in the FDD Item 20, Dickey’s also shows 78 additional franchise agreements signed, and that they plan on opening a total of 139 units in the next fiscal year. So, while the franchisor continues to collect franchise fees and have a strong balance sheet, franchise owners lose their investments at a record pace.  Prospective franchisees need to have the knowledge to make informed decisions and need to know the performance of brands with a higher likelihood of failure.  If you are considering purchasing a Dickey’s BBQ franchise, please refer to the Resources listed at the bottom of the article.


Resources:

This article is my opinion based on contacts with current and former franchisees, and after reviewing the last two years of disclosure documents.  I welcome the franchisor of Dickey’s BBQ correcting any errors in my statements.  Interested current or former Dickey’s franchisees can confidentially reach me at [email protected].

Photo above of a shuttered Dickey's Barbecue Pit restaurant was taken by Blue MauMau

Profile picture for user Keith Miller

Comments

Franchisee bill of rights says no to liquidated damages

It is not just Dickey's that mandates ex-franchisees pay liquidated damages. Many franchise systems require this of former franchisees. 

Activist franchisees have created the Universal Franchisee Bill of Rights in which they say "no" to franchisees having to pay liquidated damages. As I understand it, franchisee groups fight to keep such provisions out of not only contracts but also from being enforceable by law. For example, the tenth and eleventh amendments of the Universal Franchisee Bill of Rights specifically declares no for franchisees having to pay liquidated damages (see below).

Universal Franchisee Bill of Rights
10th Amendment

Ample Notice of Significant Change; Franchisee Termination Rights: Notice of significant change to the franchise system shall be given in a reasonable time prior to required changes. A franchisee may terminate without penalty, or liquidated damages, if a change to the franchise system would cause substantial negative impact or if the franchisee is experiencing substantial financial hardship. Under such termination any non-competition covenant shall be void.

11th Amendment

Default; Franchise Termination Rights: Prior to franchise agreement termination, the franchisee shall be given detailed reasons for alleged default and reasonable time to cure. Termination shall not occur without good cause, and termination shall not compel payments of liquidated damages, and or early termination fees. All franchise agreement rights shall remain in full effect for any franchisee not in default or that cured a default. A default under one franchise agreement shall not constitute a default under a different franchise agreement.

Thanks for shining a spotlight on a bad actor!

I thought your research and insight were exceptional, Keith.  Dickey's BBQ should be ashamed.  They're destroying their own franchise "ecosystem" with unsavory behavior.