A lot of restaurant franchises appear to be dusting off incentives to get franchises to build new locations again. Earlier this month, the sandwich chain Potbelly announced an incentive plan that gives large franchisees that agree to build 15 or more units breaks on franchise fees and royalties.
Marco’s Pizza, meanwhile, said certain multi-unit franchisees will pay no royalties for the first six months and then reduced royalties through month 18.
Plenty of other restaurant chains are doing something similar. Qdoba, Jack in the Box, Firehouse Subs and Papa Johns have implemented incentive plans in the past 15 months. Wendy’s is using incentives to encourage new-unit development.
It makes sense. Restaurant chains want growth. Most of these companies have decided that their best growth strategy is through franchising. But it’s not always easy, especially these days, to convince franchisees that the investment is worth it. So they give royalty and other breaks to convince operators to open new units. Theoretically, the breaks on royalty or franchise fees can improve the investment equation and enable operators to generate a quicker return.
Franchisors are traditionally reluctant to sacrifice royalties, but they will do so if they believe the result will lead to more units down the line. More units will ultimately mean more royalties, at least once the incentive period is over, which makes it an investment.
But it’s also a signal that franchise development for some brands has been more difficult than it would be otherwise. Most franchises don’t turn to this sort of thing unless they’re in one way or the other frustrated with their ability to convince franchisees to open new units. These days, getting financing can be difficult, particularly for some brands. And the cost of development isn’t exactly easy, particularly for fast-food brands, given the high cost of development.
But brands that want franchisees to open new units need to get operators more excited about doing so. And the best way to get those operators excited is to build sales.
To be sure, even that can be difficult. Potbelly’s average unit volumes increasedby more than $300,000 per location since 2019. But that hasn’t translated into unit growth. The company has historically focused on company development, rather than franchising. It also operates in a more challenged sector, sandwiches, where many brands have seen challenges lately, which could make some potential franchisees reluctant to pull the trigger.
Some have other reasons why franchisees may be reluctant. Marco’s, for instance, operates in a pizza sector that has also had more general challenges in getting franchisees to open new units in recent years, outside of market leader Domino’s—which generally gets its operators from within the system, anyway. Pizza Hut is shrinking, and Papa Johns has also turned to incentives after expressing frustration that operators won’t build.
But in many cases, brands aren’t getting the unit growth they want because they don’t have the unit economics to get franchisees to pull the trigger.
Both Jack in the Box and Wendy’s are eager to get franchisees developing units again. But both operate drive-thru concepts with all dayparts that have average-unit volumes of $2 million. By comparison, market leader McDonald’s does $4 million. A $2 million AUV may sound great, but when that comes with the cost associated with opening a drive-thru unit with all those dayparts, it isn’t that great. As such, the companies need to offer a sweetener.
All these chains want to build sales, of course. Wendy’s, for instance, has strategies it believes will build sales, and executives there fully acknowledge the importance of building unit economics to get franchisees to grow. “When restaurant profitability improves, franchisees want to build more restaurants,” CFO Ken Cook said on the company’s analyst day presentation earlier this month.
None of this is to say these companies shouldn’t offer incentives to get franchisees to build, particularly if they have seen sales growth and executives believe they have the right to add more units. But franchisees are not all that difficult to figure out. If the brand is a good investment, then franchisees will take the risk.