Why are the Large Fast Food Franchisors Refranchising?

An article in the Wall Street Journal reports on a refranchising move by a number of food franchisors.

Weaker sales following the recession are prompting many big fast-food chains to adopt leaner business models by unloading company-owned outlets to franchisees.The latest example is Burger King Holdings Inc., which is in the midst of a turnaround and counting on a bigger appetite for restaurant ownership among people like Vince Eupierre of Corona, Calif.

Its been my experience that franchisors sell off corporate stores for one of two reasons: 1. they need the income and/or cash 2. They can't make money operating the units. Otherwise, it doesn't make a great deal of sense to franchise profitable corporate units.

"The franchisee has more skin in the game," says William Ackman, a hedge-fund founder who is soon to be one of Burger King's newest investors through his fund's interest in Justice Holdings Ltd., a U.K.-listed investment vehicle. "He's going to put his heart and soul into it."But Robert Zarco, a Miami-based franchise attorney, says unloading most or all company-owned locations to franchisees could signal that the franchiser lacks "confidence in its own brand."

Zarco makes a good point. On the other hand Ackman isn't telling us anything we don't already know

Burger King was taken private in 2010 by 3G Capital, a New York-based investment firm, and will soon become publicly traded through a merger with a shell company. John Gordon, a restaurant analyst in San Diego, believes that the company-owned Burger King restaurants expected to go on sale in the coming months are likely to be poor investments."The problem is that the unit economics are so bad," he says. "Because of bad store management over the past 40 or 50 years, you got all these beat-up stores."

Gordon is probably on the mark. In any case I can recall when investors placed a high value on profitable corporate locations. The franchisors aggregated the revenues and brought all profits to the bottom line. Unless of course the corporate units were not profitable. This article has lots of content to stimulate various opinions.

Many Existing Franchisees Feast on Buying Franchisor Run Units

Franchisor run units are very often a great opportunity for well financed and well managed multi-unit franchise owners.

First of all, the well managed franchisee has significant leverage in negotiations. also, well managed multi unit franchisees often have the existing infrastructure that will gain economies of operations with more units. The best part: the franchisee knows that poor service, high employee turnover, and dirty operations often can be turned around quickly. Customer count increases take patience but if you build good operations "they will come".

The franchisor can turn cash draining operations to immediate positive cash flow through royalty collections.

I have no worries in the Burger King case that they lack "confidence in its own brand." They just paid something like $4 Billion dollars for it. They are in turnaround mode. Shedding the poor performers will allow them to focus on the winners and brand equity. From an outsider point of view, I must say I like the things they are doing. They have certainly created some positive buzz.

There is no doubt in my mind, particularly in food service, that the franchisor needs to operate units; to stay close to operations, franchisees, vendors, and the guests.

My only concern to franchisors shedding units is when those units are profitable, unless there are very good operational challenges (geographic issues, etc) that is more of a sign of the concern that Zarco points out, or a sign of future problems to come with the franchisee/franchisor relationship.

Please be sure to endorse the Universal Franchisee Bill of Rights