Subway has made it a point that it wants more, bigger operators in its system, and has made the recruitment of them a key element of its U.S. comeback plan.
Meanwhile, Burger King in May said it basically wants smaller operators and plans to give favor to better operators with 50 or fewer units. In short, CEO Josh Kobza told me, franchisees can preferably drive to each of their stores.
Who is right? Well, both. The question of whether an operator is good isn’t so much dependent on size as it is about operations and corporate strategy.
For Subway, a roster of mostly small-scale operators has been a challenge for years. Because its stores generate a small amount of revenue—less than $500,000 per year, one of the smallest rates in fast-food—that typical operator has less financial room to maneuver. It makes it difficult for that franchisee to fund needed remodels or store replacements.
It can make them more susceptible to store closure, because a multi-unit operator in theory can offset losses at one location with profits at another.
Maybe more to the point, large-enough franchisees can power a brand in a market and can strategically open and close restaurants, which can help drive a brand’s reputation and fuel its growth. That might help a brand like Subway.
At Burger King, the situation is different. When Kobza made his comments in May, they raised a few eyebrows given that the fast-food burger chain has some of the largest franchisees in the country in its roster. That includes Carrols Restaurant Group, the 1,000-unit, publicly traded franchisee.
“The folks at Carrols, that’s our largest operator, asked after this last earning cycle what we meant by that,” Tom Curtis, president of Burger King in the U.S. and Canada, said on last week’s episode of my podcast. “What they were really looking for is some reassurance that through great execution and through having a great team that operated well, that they were going to be able to remain the size that they want to be.”
Carrols historically has had restaurants that outperformed the rest of the Burger King system. And Burger King was happy to allow them to keep expanding as a result. But it also demonstrates the potential challenges that come with such franchisees.
When large-scale franchisees have trouble, they really have trouble. In 2019, Carrols slowed capital spending to improve its cash flow. But that cash flow plunged to unseemly levels by last year, as Burger King’s sales struggled and costs increased, to the point that it considered a possible bankruptcy.
That’s no longer a danger, thanks to the brand’s and franchisee’s improvements. But a Carrols' filing would have been a huge problem for Burger King, given that it operates 1 of every 7 of the chain’s U.S. locations.
That sort of thing has happened before—NPC International, which at one point operated 20% of all Pizza Hut locations in the U.S., had major cashflow and operations problems and ultimately filed for bankruptcy. Large franchisees may have financial wherewithal, but they often take on too much debt, and when sales become a problem it can bring down an entire swath of locations. When large franchisees have problems, they really have problems.
And small franchisees do reflect the spirit of franchising. Franchising as a business was initially designed to put someone in the store whose livelihood was based on that store’s profits. They were better connected with customers and part of the local community. Huge franchises run by distant operators and financed by private equity groups do not necessarily fit with that ideal.
“Operators who know their team members, operators who are ingrained in parts of their communities is the right aspiration,” Curtis said. “Why do we want that? Because that generally drives the best culture, the best operations and the best outcomes for guests.”
But it’s also worth noting that NPC was bought out by the only company that, at the time, generated more revenue as a franchisee: Flynn Restaurant Group. The massive operator has been a success in multiple brands, in part through a system that empowers local management and gives them a financial incentive.
In reality, large franchisees, small franchisees and those in between can all work so long as the brand works well and has the right systems in place to support them, and as long as the operators do their jobs well.