Franchisors, like all businesses, constantly look for ways to grow their revenue and, therefore, profits.
This takes them into new markets, leads them to create new lines of business, or even develop new concepts. In the worst cases it leads them into finding ways to make money off their franchisees, by selling them technology or taking control of the supply chain.
This drive routinely gets companies to expand their hours of operation. To the franchisor, this is a no-brainer. By expanding hours, restaurants generate more overall sales, which in turn generates more royalties.
They often argue that the extra sales are more profitable, because they leverage existing the fixed costs associated with operating a restaurant.
But expanding hours isn’t so simple. Case in point: Recent companies that expanded into breakfast, notably Taco Bell and then Wendy’s. Both made big pushes, using their unique marketing strengths. And both have since pulled back on the daypart, by giving franchisees an out based on their profitability.
While Taco Bell has emerged from that move relatively unscathed, Wendy’s breakfast pullback has worsened a steep sales decline that could take years for the brand to recover from.
This is an important lesson given Subway’s demand that its franchisees expand their hours and accept delivery orders. The company started requiring operators stay open later in the day, and it now requires them to accept orders from all major delivery providers.
The company, without making a statement to Restaurant Business, simply referred us to multiple operators who all gushed about the performance of their own expanded hours.
We have no doubt that expanded hours into late night can work for some locations. Indeed, our own, first experience at Subway was late in the evening, in the late 1980s, during college. We were thrilled.
But expanded hours may work well for some locations and not as well for others, and this is especially true when it comes to late night and breakfast.
Wendy’s, Subway, and Taco Bell are all legacy restaurant chains. They were conceived, built, and developed based on a certain set of hours.
It’s therefore not a given that all stores in such brands can achieve the same level of success on expanded hours.
McDonald’s, which enjoys the best breakfast performance of any major fast-food chain, has been able to do that because it is an exceptional real estate company that purposely develops restaurants along corridors that make a breakfast stop more convenient.
Wendy’s did not develop that way, and so some stores are just not placed well enough for breakfast to work. The same is true for Taco Bell, and for Subway years ago when it tried breakfast.
“If you’re on your way to the city in the morning and you want to open early for breakfast, it’s probably a good idea,” Mark Wasilefsky, head of restaurant and franchise finance for TD Bank, said on this week’s episode of my podcast. “If you’re on your way back from the city on the other side of a divided highway and you want to open late for dinner, it might not be such a good idea.”
The same holds true for late night. Many Subway locations are in smaller towns or quiet suburbs where late-night traffic isn’t that big. “If you’re in a small, quiet suburb, it might not make much sense,” Wasilefsky said.
Franchisors tend to overrate the concept of “fixed costs,” which are a relatively small part of the overall equation of operating a restaurant. Operators that expand hours still have to pay people to work there. When it comes to late-night hours, there are additional issues such as security.
At Subway, which can operate with a single person if it’s not busy enough, there is another challenge: Many workers don’t want to do that, especially late at night. So many franchisees will either need to be in their store with them or have two people on board.
Breakfast, likewise, doesn’t work if it’s not fast and efficient, which requires a certain number of employees.
And then there’s this: When brands expand hours, some of the customers they get during those hours will shift the spending from other times of the day. So if they get a Wendy’s breakfast, they may not get a Baconator at lunch. If they get a sub at midnight, that may remove the Subway consideration at lunchtime the next day.
It doesn’t help that marketing funds are diverted away from the other times of day to build business during these hours.
If the dayparts aren’t operated the right way, that can damage a brand’s overall reputation. And if franchisee profits are damaged, then that damages the overall health of the restaurant chain.
The revenue from expanded hours may be attractive. But it’s not always worth it in the long run, both for the brand and its franchisees.