This is from the weekly restaurant finance newsletter The Bottom Line. To get this in your inbox every Monday morning, click here.
Restaurant franchisees have a profit problem. Bankruptcies among operators have soared this year, including one involving the once-69-unit Moe’s franchisee Quality Fresca.
More of these bankruptcies are indicative of the franchisees’ inability to make money from their locations, rather than the debt overload that typically marks such filings. And it comes as chains like Jack in the Box and Wendy’s lament the profitability of their operators, while brands such as Subway continue to struggle with closed locations.
As Jack in the Box Interim CEO Mark King noted, franchisee profitability is vital for franchised chains to grow, because profits are crucial to the business of remodeling and expansion.
Many executives talk about franchisee profitability. But that talk often takes a back seat to other priorities, like aggressive unit expansion or complex new products or technology strategies that don’t do anything to make the business more efficient.
Many of the initiatives in recent years have cost franchisees money, in the form of new equipment, monthly technology fees, additional employees, remodels, and other expenses. Third-party delivery, which franchisors love, is particularly onerous on a franchisee base that pays for the lower-profit orders and deals with the day-to-day problems like food theft.
Franchisee profitability in a market like this one would always be tough. Beef and other costs are up. Traffic is down because too many consumers are cutting back. But franchisors’ own strategies could go a long way toward helping operators with their profit challenges. And if they don’t get operator profits up, their own results will suffer.
This week’s financial news
The shuttered Salad and Go is worth more dead than alive, thanks to the intense competition between Dutch Bros and 7 Brew for the locations. But are they paying too much?
A Subway promotion with the Moana movie had only 70% franchisee cooperation, which is what happens when you get years of weak sales, poor promotions, closing locations and fighting between the company and operators. The company is clearly tired of that, and they’re also tired of store closures.
Greg Flynn might help Nelson Peltz buy Wendy’s. That’s probably a big deal.
Chili’s is the best story in the restaurant industry over the past five years.
Bonchon’s seller apparently took the Pizza Hut route, selling the chain to two buyers.
Hot Ones were not so hot for Jack in the Box. More evidence that marketing partnerships have lost their luster.
Red Robin is getting some of its old customers back.
Cava isn’t having any issues with lost customers right now.
Number of the week
Chili’s same-store sales are up more than 70% over the past five years on a cumulative basis. That’s an impressive run.
Quote of the week
“It makes no sense. Sales are down, profits are low, and the answer is to be open more hours because third-party delivery will make you profitable for those additional hours.” -A Subway franchisee, to me, on the company’s late-night hours requirement.
On the blog
I wrote about complexity and the expense of the site competition between Dutch Bros and 7 Brew. Check out all my blog posts on The Bottom Line.
On the podcasts
On A Deeper Dive I spoke with the CEO of an 11-unit burger chain on the challenges of the current market. On The Week in Restaurants, we talked Subway, Salad and Go, and Chili’s.
For questions, comments or story ideas, send me an email at jonathan.maze@informa.com. And follow me on Twitter at @jonathanmaze. And also LinkedIn. And TikTok.