Flynn Group Acquires 368 Arby’s Restaurants after Chain Shrinks

Flynn Restaurant Group announced last week that it had acquired 368 Arby’s restaurants from franchisee US Beef Corporation for an undisclosed amount. The deal will add an estimated $400 million in sales to Flynn from the newly acquired Arby’s branded restaurants. This makes the firm, already the nation's largest restaurant franchisee, also Arby’s largest franchisee.

The Arby's acquisition brings the multi-branded franchisee of fast casual and casual dining restaurants to a total of $2.3 billion in annual sales. Flynn Restaurant Group’s holdings include Apple American Group, the largest Applebee’s franchisee; Pan American Group LLC, the second largest Panera Bread franchisee; Bell American Group, the third largest Taco Bell franchisee; and now US Beef Corporation, the largest Arby’s franchisee.

Flynn Restaurant Group obviously likes to have a big voice with its franchisors, big enough as one of its top franchisees that if things should become so bad that it leaves, the franchisor would keenly and cripplingly feel the pain.

Greg Flynn, founder of Flynn Restaurant Group and Flynn Properties, is no stranger to business, real estate or franchise leadership. His father owned Burger King restaurants when he grew up. He worked at Goldman Sachs and now serves on an advisory group of its West Street Capital Partners VII, a private equity fund that specializes in buyout and distressed investments. He discovered that buying the right franchise at the right price can be lucrative. 

FRG presently has 1,245 restaurants.

Regarding its acquisition, US Beef chairman Jeff Davis said, “When we decided to sell US Beef, it was critical for us to find a true restaurateur with a similar family culture who has a penchant for growth and offered opportunities for our people. Greg Flynn and his company have a stellar reputation for diversified expansion and they ideally fit our criteria for the brand’s growth.”

Robust franchise financials seem to attract big investors

Arby’s produces one of the most transparent franchise-level financial performance disclosures for franchise buyers in the industry.

Is it a coincidence that Flynn seems attracted to a franchisor that stands out in the robustness of  its restaurant unit economic disclosures? Indeed, Arby’s strength in revealing unit economic metrics indicates that restaurant margins and money—disclosures by not only the existing franchise that is being acquired, but also by the franchisor for the franchises in the system as a whole—are factors that help drive the interests of major franchise investors such as Flynn.

Granted, Flynn is dealing with a single multiunit franchisee that has its own books and financial numbers; still, Arby’s financials, albeit sometimes murky and confusing in places, is noteworthy. For example, Arby’s is one of the few restaurant chains that reveals EBITDAR for its restaurants in its franchise disclosure document, albeit only for its "affiliate" covered restaurants, that is to say company-owned units.

Earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) is a key financial tool that investors use to measure a business’s bottom-line earnings performance.

Quick service restaurant competitors Domino’s Pizza and Popeyes are other rare big chains that have revealed EBITDAR, the gold standard of franchise-level financial performance. Most franchisors dare not provide such key information.

The good news for Arby’s company-owned restaurants is that their annual EBITDAR margin (EBITDAR÷Revenue)  increased from 2013 to 2017, with a drop in 2017 (see chart).

Does the rise of restaurants' bottom lines in covered areas translate to a rise for franchised restaurants?

“It should,” answers consultant John Gordon. Stand alone franchises are not company food court eateries or even 4,000 square foot boxes. “Still, the EBITDAR margin trends that are apparent on such company-owned restaurants should generally track to franchises as well, even though there are obvious differences,” says Gordon. He also points out that a growing EBITDAR margin is still insufficient. It should be pointed out that royalties and franchise fees need to be put back into the franchise costs of EBITDAR to be able to begin to compare these with franchised restaurant performance. Actual EBITDAR earnings need to be sufficiently large in dollar amount to at least cover capital expenditure requirements, debt service and taxes.

Flynn likes best of a niche

One thing Flynn Restaurant Group looks for is uniqueness. That is to say it searches for an almost uncontested brand niche, a best of their market segment. “Standing in a category of its own, the Arby’s brand aligns perfectly with our preference for brands that are truly differentiated and ‘best in breed’ in their segments,” says Flynn.

In the hoagie sandwich sector, which excludes hamburger or other quick service restaurants, or what some analysts just call “sandwich chains,” Arby’s, with almost 3,300 locations, comes in second behind the 25,000-plus Subway sandwich eateries in the United States. Arby’s isn’t quite a Subway sandwich shop, Jimmy John’s or even a Wendy’s hamburger joint. It has its own niche.

The big franchisee investor also zeroes in on smart brand management. “Benefiting from very strong leadership, the Arby’s brand has achieved great momentum these past few years and we are truly excited about the opportunities that lie ahead,” says Flynn of the franchisor, Arby’s Franchisor LLC.

Right before Roark and subsidiary Arby’s Restaurant Group, which later became Inspire Brands, went on a buying binge of brands in 2017, the privately held Arby’s made a rare public announcement. It wanted the world to know that it had turned a troubled system around. It had its magic back.

“Arby’s outperforms industry as first quarter same-store sales grow 1.6 percent,” declared Arby’s press release of April 2017. It quoted Paul Brown, CEO of Arby's: “I’m proud of what we’ve accomplished in the first quarter, and I’m confident that we have the team, the product pipeline and the vision to continue to deliver strong results.”

The industry took notice and passed the message around. This journal heard well-read multiunit franchise owners repeat that same publicly disseminated message that Arby’s was doing well and had turned its franchises around.

After its announcement in the spring of 2017, Arby’s and its parent company, Inspire Brands, went silent about same-restaurant sales. Since then it has gone on a buying spree, buying Buffalo Wild Wings, Rusty Taco and Sonic Burger brands.

However, its latest franchise disclosure document shows that same-store sales have dropped since Arby’s bold announcement. This year competition among quick service restaurant brands has heated up even more.

“I’m not surprised that Arby’s same-store sales are down,” observes John Gordon, restaurant unit economist and principal of Pacific Management Consulting Group. “Ideally, you would like to have same store sales up 2 or 3 percent to at least cover inflation.”

Gordon notes that Arby’s frequent advertisements show how hard it is to bring customers back to restaurants in this environment. “If a chain is not a giant Wendy’s, KFC, Burger King or McDonald’s, it does not have a big enough advertisement fund to make a dent in consumer mindshare to compete,” says the restaurant consultant. Gordon thinks Arby’s is trying hard to stand out from the pack with its James Earl Jones voice of “We have  the meats” and its ads that feature comedian H. Jon Benjamin, who points out in the commercials that Arby’s has more than roast beef sandwiches. Benjamin is the voice of Bob Belcher in the animated sitcom Bob’s Burgers.

Arby’s has shrunk in U.S. franchises

Besides same restaurant sales being down, Arby’s in the U.S. is a smaller system in franchise units than it once was. After Arby’s left its troubled merger with Wendy’s in 2011, its franchised restaurant count in the United States peaked one year later at 2,343. That has since trended down (see chart).

Restaurant unit economist Gordon thinks that might be a good thing. “Many of Arby’s restaurant buildings are old and are in need of an upgrade,” he observes. The consultant points out an important trend: the average unit volume of Arby’s restaurants is increasing.

“The average unit volume for Arby’s restaurants is trending higher,” says Gordon (see chart). “Having a few lower volume stores disappear can be a plus for the system.” He elaborates that shrinking location numbers, leaving healthier stores that can upgrade their buildings, is a good development for the system. “When average unit volume of Arby’s restaurants was low a few years ago, its franchisees were not in a position to update their restaurant image,” says Gordon. “They are now.”