We’ve been covering the downfall of former McDonald’s executive Eduardo Diaz’s franchise empire for the past two years. It has included the closure of 26 Burger King locations in Michigan, the closure of 25 KFC locations in Illinois, Indiana and Wisconsin, the closure of some 65 Pizza Hut restaurants along with the sale of 77 others.
Add to that the closure of 15 Panera Bread locations, leaving his company, EYM Group, with only Denny’s locations in Florida.
In the process, it served as another reminder that bigger franchisees aren’t always better. And nor are they necessarily more stable.
Restaurant franchises, particularly legacy franchises, grew enamored with large-scale franchisees in the early part of this century, but particularly during and after the Great Recession.
With lending difficult for many franchisees, brands shifted a lot of their attention to larger-scale operators with more access to capital. Some operators bought up large swaths of stores—at low prices at first—to become mega franchisees.
That helped fuel the rise of mega-operators with huge businesses that span across states and regions.
Many of these are good operators. Brands for a long time loved them because they often had the financial wherewithal to spend on remodels or build new units or add equipment. Many have eagerly sold territories or approved sales of restaurants to some of these operators, believing they would provide some stability. Companies like Subway explicitly want more larger franchisees.
Yet for every one of these massive franchisees there are more stories of companies that grew too big with too much debt and too much risk that crumbled once the operating environment grew shaky. NPC International, which at one point operated nearly one out of five Pizza Hut locations in the U.S., filed for bankruptcy and was later absorbed into Greg Flynn’s empire.
Large-scale franchisees have an insatiable need for financing. They may take on private-equity partners, as NPC did, which use too much debt to acquire the company, which then puts the company into a risker position. But a lot of large operators that have no such financing take on excessive debt financing themselves.
When the environment grows challenging, these companies can struggle—especially if the financing environment grows more difficult. The post-pandemic period has been brutal on operators, driving up food and labor costs followed by a value war that is devastating profitability.
When brands struggle, these large-scale franchisees can have real problems that exacerbate challenges for franchisors and make it more difficult for them to compete in a tough U.S. market.
Burger King, which had a slew of franchisees file for bankruptcy, has closed 9% of its U.S. locations since 2019, according to data from Restaurant Business sister company Technomic. That company is now shifting to smaller-sized operators unless franchisees really prove themselves.
Pizza Hut, which has dealt with plenty of struggling operators, has closed more than 10% of its locations since 2019.
KFC, too, has closed about 10% of its units since 2010. Each of these three brands have lost massive ground to competitors over decades in large part because of a combination of brand struggles and risky, large-scale franchisees.
EYM Group at one point owned each of those brands. Panera Bread, which has added locations, has seen declining unit volumes over that period. No wonder the company has had problems.
Many of the large-scale franchisees also operate stores in far-flung locations that are tougher to manage. Several of the operators that have filed for bankruptcy over the past few years had stores in several states, with little concentration in individual markets and often far from headquarters. EYM is based in Texas. But it had restaurants in Florida, up the East Coast and then into the Midwest as far north as Wisconsin.
None of this is to say that franchisors should avoid large-scale franchisees. Many of them clearly operate well. But brands need to pay close attention to the type of operation they’re allowing into their system, including the other concepts they own, the location of their restaurants and their financial risk. Because the result can be ugly.