For much of the past year, Burger King has been intent on shrinking the average size of its operator base.
A year ago, company executives declared that, in a perfect world, franchisees could drive to each of their restaurants. And in a series of moves since then it has sought to push that idea forward. It played a hand in sales of restaurants out of bankruptcy court, pushing for stores to be sold to smaller and closer operators.
It more than tripled its own store count as it bought large swaths of stores. And then it agreed to buy out its largest franchisee, Carrols Restaurant Group, which, uh, cannot drive to all its locations, at least very easily.
On Tuesday, after boasting franchisee profitability that soared 46% at the brand’s U.S. locations, parent company Restaurant Brands International made its strongest argument yet that its view is the right one.
For instance, company executives said operators with 50 units or fewer have 51% of their stores remodeled, compared with 46% for the system as a whole. And a typical restaurant in an operation with 50 stores or fewer generates $15,000 per year more in profits those in operations with 50 or more stores.
“Not surprisingly, they’re also better capitalized,” RBI CEO Josh Kobza said.
The data explains RBI’s push toward smaller operators, though it’s worth pointing out that a 50-unit franchisee is still a fairly large organization.
Generally, franchises’ strategy for operator size has run the gamut, with many promoting smaller, one- or two-unit operators, and others with a bigger-is-better strategy, and many with a variety.
And there are a few brands intent on shifting from smaller to bigger operators, notably the giant sandwich chain Subway that hopes larger operators will be better equipped to fund remodels or overcome an unprofitable store or two.
The challenge with large-scale operators, however, is two-fold: First, they’re often further spread out than they should be; and their funding demands can hamper some of the benefits they’re supposed to provide an organization.
For years, Burger King was almost hell-bent to get stores into the hands of larger operators. It sold corporate stores to large franchisees. It gave Carrols its right of first refusal in 40% of the country, enabling that operator to quickly buy hundreds of restaurants.
Yet when the chain’s sales struggled and costs increased coming out of the pandemic, those large-scale operators began having problems. Some of them had their bond ratings downgraded. Some filed for bankruptcy. Many restaurants closed last year as the company worked “to address the underlying issues of franchisees who have overextended themselves in the last few years,” Kobza said.
Large franchisees are great when things are going well. But amassing a large number of restaurants, and fueling remodels, takes a lot of capital. Many get it from private-equity firms. But many also borrow large amounts from lenders.
As profits thin, the debt becomes a burden. They can struggle to pay leases and the push to stop losing money leads to operational compromise. They certainly can’t remodel restaurants.
Carrols, for instance, slowed remodels as it shifted to cash flow generation in 2019. And Burger King’s post-pandemic problems kept the company from picking that back up again.
RBI is now buying Carrols and plans to remodel some 600 units before it resells all 1,000 to franchisees.
Remodels are important to aging brands because customers prefer visiting them. Early returns from Burger King remodels show a 20% sales lift. But when profits thin, it’s hard to devote funds to capital spending.
And slowing remodels ultimately hurt a brand’s perception and if the franchisees are large enough then it influences the performance of the entire system. It’s certainly not limited to Burger King, either.
In 2018 and 2019, problems with giant Pizza Hut franchisee NPC International kept that company from replacing many of its dine-in units.
The franchisee ultimately declared bankruptcy and was sold. But the operator’s weak sales were reflected in Pizza Hut’s weaker overall numbers during that era, one in which it lost its status as the country’s largest pizza chain to rival Domino’s.
Meanwhile, many of the franchisees that amassed large swaths of restaurants were spread pretty thin. Two of the three major Burger King franchisee bankruptcies were of operators with stores in large geographic regions with little concentration. Meridian Restaurants, which filed for bankruptcy nearly a year ago, operated over 100 restaurants from Minnesota to Utah. Many were in small towns not exactly close to large airports.
Such spread-out organizations are difficult to run for anyone, let alone for a franchisee. It’s hard to visit stores regularly when they’re so far away.
Suffice it to say, bigger isn’t necessarily better when it comes to franchisees. And that is why Burger King is going in the other direction.