Casual dining appears to be shifting away from the asset-light operating model that has been popular for decades.
Several large sit-down chains, including Chili’s and Texas Roadhouse, have bought back restaurants from franchisees in recent months in favor of operating more of their own stores.
“We're very forward in our belief that corporate ownership is the best way over time to drive returns in this segment,” said Joseph Taylor, CFO of Chili’s parent Brinker International, during the company’s investor day last month.
It’s a reversal of the so-called refranchising wave that swept the industry beginning in the early 2000s with IHOP and Applebee’s. Restaurant companies started franchising a lot of locations, shifting risk to operators and helping their margins in the process. But as casual dining has struggled, both before and during the pandemic, the pendulum is shifting back to ownership.
After acquiring 242 franchised restaurants over the past two years, the nearly 1,600-unit Chili’s is now 90% company-operated. It plans to add at least 37 more franchised restaurants stretching from the Great Lakes to New Jersey.
Texas Roadhouse agreed to buy seven franchise-operated stores last quarter and said most of its new restaurants will be corporate-owned going forward. In its most recent quarter, its 517 company-owned Texas Roadhouses outperformed its 69 franchised stores, growing sales 17.3% on a two-year basis compared to 14.8% for franchisees.
TGI Fridays has taken a similar approach. And even Applebee’s, the asset-light poster child that was at one time entirely franchised, bought back 69 restaurants in 2018.
“We much prefer to get what I would call strong unit economics and strong profit out of those restaurants rather than just take a franchise royalty.” —Chris Tomasso, First Watch
While franchising is seen as a way to grow quickly while limiting risk, the opposite can become true when franchisees struggle.
“They are [defranchising] to de-risk the investment,” said John Gordon, principal with the restaurant consulting group Pacific Management. “They don’t want to have a situation where they are messing around with a very difficult franchisee situation where the franchisee is either underwater or they have to get into very nasty, protracted litigation, which is emotional and costs a lot of time and money.”
Meanwhile, some smaller chains looking to grow are doing it with company-owned stores. Bradenton, Fla.-based First Watch, which has a goal of reaching 2,200 locations, initially used franchising to get into new markets. But it stopped selling new franchises in 2017, and 80% of its 423 restaurants are now company-owned.
That strategy seems to be working: First Watch’s same-store sales for the third quarter rose 19.7% vs. 2019 on a 5% traffic increase.
“It’s a compelling business model, and, frankly, we want to own it,” CEO Chris Tomasso said. “We much prefer to get what I would call strong unit economics and strong profit out of those restaurants rather than just take a franchise royalty.”
“All of the very needed tech investments, all of these must occur by direction of the franchisor.” —John Gordon, Pacific Management
Ownership also gives companies more control over their operations and their brand. And it allows them to make changes faster—particularly when it comes to technology, an area in which it can be challenging to get franchisees aligned.
“All of the very needed tech investments, all of these must occur by direction of the franchisor,” Gordon said. “As a result of that, tech makes for a more centralized approach.”
Of course, owning more restaurants means the company has to shoulder the costs of building, supplying and staffing them, not to mention re-staffing management and marketing teams in markets that once belonged to franchisees.
That’s one reason not everyone is abandoning the asset-light model. Applebee’s, in fact, is doubling down on it as it plans to start opening new restaurants again after several years of closures. And its franchisees are doing quite well: Same-store sales were up 12.5% on a two-year basis in the third quarter, Applebee’s best mark during its 14 years under parent Dine Brands.
“We have 30 great partners, and they like to grow and they like to develop, and so we can accelerate all of our objectives with our partners,” Applebee’s President John Cywinski said in an interview. “Having an asset-light model, perhaps it makes us a little more nimble. Perhaps it insulates us a little bit in an inflationary environment.”
There is no one right approach, and the pendulum will likely continue to swing back and forth.
“In some future era, maybe after the effects of the pandemic ... there might be a movement back toward more well-heeled franchisees in the future,” Gordon said.