Last year, as you may have heard, Chili’s surpassed Applebee’s to become the largest traditional bar-and-grill chain in the U.S.
In reality it’s not saying much, because both chains were long ago surpassed by Olive Garden and then Texas Roadhouse. But it was a symbolic reconfiguration of the casual-dining sector.
Their differing performance last year has been discussed ad nauseum in these pages and many others. But we will point this piece from CNBC on the differing performance between the two brands.
One of the big points made is the impact franchising has on the two brands.
Applebee’s for the past 15-plus years has been all franchised, at least until a recent acquisition of 47 locations by the brand, which has 1,500 domestic restaurants.
It’s the opposite at Chili’s, which only franchises about 100 of its 1,200 U.S. restaurants.
Chili’s success last year was driven by a combination of operations, marketing and some luck. The company spent years improving its menu and fixing its stores. Then its own marketing efforts, along with the cheese-pull trend on TikTok, helped generate strong sales. Now you go into any Chili’s restaurant and it’s loaded with young people.
Applebee’s features some of the industry’s most successful restaurant operators, including Flynn Group and Doherty Enterprises, who have historically been willing to spend big to follow through with corporate initiatives, even when they haven’t worked.
And Flynn, for instance, has rules requiring its general managers fix simple problems in their stores such as ripped booth seats, rather than wait until there are more so they can get a better deal from suppliers.
But there is still the fact that, when Chili’s wants to improve operations, it can donate some of its own profitability to increase labor to accomplish that goal. In the time we spent with the brand, the company’s willingness to spend a bit more on labor, such as adding a busser during busy times, was made readily apparent.
What’s more, as the chain opts to make improvements in its kitchens, it can simply do so without going through the franchise community to accomplish that goal.
We’ve long felt, generally, that management quality ultimately drives success, rather than business model or ownership style. We’ve seen plenty of private-equity-owned franchises thrive, while privately-held, corporate-owned businesses struggle, based on decisions made at the top.
Franchising is great when brands are in growth mode. Wingstop was the best-performing restaurant chain on the Technomic Top 100 last year and it is predominantly a franchise business.
At the same time, the franchise model can put chains at a disadvantage, and that disadvantage makes itself more known when a company is struggling and needs to make changes to improve the brand.
To accomplish goals, franchisors need to convince franchisees to go along with improvements that usually take investment. But years of problems damages those franchisees’ financial wherewithal and thus their ability to make these investments. All this slows improvements and provides an opening for company-operated businesses such as Chili’s.
Because franchisees are paying royalties and ad fund payments—and whatever other charges and fees franchisors charge them—they are automatically working with a lower overall profit margin. And when brands start to struggle, pressure builds on those franchisees to find profitability. Ultimately, if those struggles persist, they may put off remodels because they cannot afford the cost.
That’s what happened in the Burger King system, which for years struggled with weak sales and profitability. The franchisor, which feared bankruptcy filings and closures—a legitimate concern—allowed operators to delay such remodels in the hope of building sales.
But that can only worsen problems, particularly when the brand’s sales do not materialize, which is what happened to that brand in 2021, leading to profit challenges in 2022 and bankruptcies and closures in 2023.
The solution for franchisors in these cases is to follow the lead of Burger King and put money into it, either by helping fund remodels or buying out large swaths of stores to do it yourself.