Financing

Burger King is making some big changes in its franchising strategy

Facing more store closures, the fast-food chain will only allow its better operators to expand and wants more smaller franchisees. “In an ideal world, I’d like it if they could drive to all their restaurants.”
Burger King franchisees
Only the better Burger King operators will be allowed to expand in the future. / Photograph: Shutterstock.

Burger King is intensifying its push to improve operations in its restaurants, with plans to toughen rules on expansion to favor only better operators with a smaller number of locations, while encouraging franchisees that don’t meet brand standards to sell their stores to other operators.

Executives with the Miami-based burger chain, speaking to analysts on Tuesday, detailed the changes while admitting that the brand expects a higher rate of closures this year. Sales weakness in recent years, coupled with soaring costs for food and labor, have led to a pair of high-profile bankruptcy filings by the chain’s franchisees along with several dozenclosures in recent weeks.

Burger King has closed a net of 124 restaurants over the past year, or about 1.7% of its U.S. restaurants. It now operates fewer than 7,000 restaurants domestically.

That rate of closure is not done. Kobza told investors that the company expects to close 300 to 400 restaurants—before accounting for new restaurant openings—which is about double the typical number of closures in a given year. Most of the locations are expected to be low-volume units.

“One of the most important factors is the willingness of our franchisees who have troubled restaurants to work with us and commit to implementing the changes necessary,” Josh Kobza, CEO of Burger King parent Restaurant Brands International, told investors on Tuesday. “If they can’t, we have operators ready to step in and do what’s required.”

That was a theme among executives on the company’s first quarter earnings call. Burger King believes that most of its franchisees are good operators willing to do what it takes to operate good restaurants, executives said. But it clearly sent a message to a percentage of operators it believes need to make improvements. There were multiple suggestions on the call that Burger King has people ready to step in and take over restaurants from its weaker operators.

“Our focus is on helping this very large majority of franchisees be better and grow,” Executive Chairman Patrick Doyle told investors. “There will always be a minority who aren’t dedicated, enthusiastic operators. And that’s OK. We’ll work with them to leave the system and move on to do something else.

“There simply is no room for franchisees who are not willing or able to work hard to operate restaurants that are better than the system average over the long term.” But, he added, “we’re talking about a small number here.”

Burger King has focused for much of the past two years on making operational improvements, believing that is key to improving its sales and profitability over the long term. The company tapped Tom Curtis from Domino’s to head North America, believing that his operations background will be important for the chain going forward.

On Tuesday, company executives said that franchisees’ performance on operations metrics will be a determining factor in their ability to expand. Executives said that only franchisees rated “A” or “B” on a four-point scale will be approved to build new locations or acquire existing restaurants.

Those “A” operators had store-level earnings before interest, taxes, depreciation and amortization, or EBITDA, that was 65% higher than system average, Kobza said.

“We feel this is a logical evolution to make it clear that, to have a right to grow, you have to be operating at an A or a B level,” Kobza said in an interview. “It’s clear that has a pretty big impact on operational performance.”

At the same time, the company is also emphasizing smaller operators with 50 or fewer locations, while giving favor to those operators who are in their restaurants on a regular basis. The company also wants operators with stores in contiguous regions that do not hop geographies.

“If people start having portfolios in far-flung geographies, say if they’re in Georgia and have restaurants in Colorado, it’s tough to manage that distance,” Kobza said. “That’s a long plane flight. It’s harder for them to manage that. It’s clear that has a pretty big impact on operational performance.”

“In an ideal world,” he added, “I’d like it if they can drive to all of their restaurants.”

That’s a potential issue in Burger King, which features some of the country’s largest operators, notably Carrols Restaurant Group, which operates more than 1,000 restaurants. Another is the Dhanani Group, which according to Franchise Times is the second largest franchisee in the U.S., and which operates 500 Burger King restaurants. Those locations are in Houston, the Midwest and New England.

Kobza said the company would continue to support existing operators with non-contiguous restaurants. “Some are really good,” he said. But in cases where operators have locations in far-flung states and operations are weak, “we’re going to have conversations with the operator” on potentially selling some of the locations.

Once again, however, Kobza said it would not be a “huge amount” of franchisees.

“We want partners who take an ownership and an operator mentality,” Doyle said. “Partners who set the culture, visit their restaurants regularly, get to know their team members and customers and who are hands-on as an operator, whether they have one restaurant or hundreds.”

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