Whatever problems Hardee’s has had over the past decade, breakfast is not one of them, particularly in the Southeast where the bulk of the fast-food chain’s 1,600 restaurants are located.
It’s a different story when the chain shifts from biscuits to burgers. And it’s apparently so bad that the 76-unit franchisee Paradigm Investment Group opted to close some of its restaurants in Alabama at 2 p.m.
It’s just one of the reasons that Hardee’s terminated the operator’s franchise agreements earlier in the year, along with its refusal to accept delivery or digital orders or participate in the loyalty program. Paradigm is fighting the termination with an extensive takedown of the Hardee’s system.
Closing a restaurant at 2 p.m. is certainly not without precedent, as a generation of daytime dining concepts like First Watch have generated strong volumes by focusing purely on what they are good at: Breakfast. But fast-food chains with drive-thrus and franchise agreements almost never do this.
Documents filed in Paradigm’s lawsuit show just how severe the dropoff is once those restaurants move from breakfast to lunch. That dropoff is steep, and the number of customers that come in after a certain period becomes “shockingly low.”
In March, for instance, Paradigm locations that were open all day saw sales decline from a peak of $280 from 9 a.m. to 9:30 a.m. to $14—and one customer—from 7:30 p.m. to 8 p.m. It then shows an average of zero customers from 8 p.m. to close.
Generally speaking, customers are a prerequisite for a business to be profitable.
But Paradigm argues that it performs better at peak hours when it does close at 2 p.m. That’s because the restaurants are then able to fully staff the locations and provide speedier service, known as Hardee’s “Instant Service Policy.”
Restaurants open modified hours in March of this year peaked at $364 from 9 a.m. to 9:30 a.m. The following graphic shows the average morning sales of stores open all day, compared with those open just for breakfast.
In Hartselle, Alabama, according to court documents, average daily sales in August 2021 were $2,758 on 379 average daily transactions.
It then went to modified hours, closing at 2 p.m. In August of last year, that restaurant averaged $3,699 on 406 average transactions.
Faster service does indeed translate into better sales. Hardee’s own franchise disclosure document features data showing that the highest-grossing restaurants have speedier drive-thrus and get better Google ratings.
And many companies have long proven that restricting hours or even days does not hurt long-term success. The aforementioned First Watch, open for only one shift, generates $2.2 million in average unit volumes. Denny’s, where many stores are open 24 hours, does just $1.9 million.
Chick-fil-A, open six days a week, averages $7.5 million in revenue per unit, more than just about any other fast-food chain. It would probably not do any more if it did indeed open on Sundays.
According to Paradigm, following the company’s rules would take the company from profitable to near bankruptcy. In 2023, Paradigm generated $12.4 million in EBITDA, or earnings before interest, taxes, depreciation, or a margin of 14.6% of sales.
If it remained open all day and accepted digital and delivery, its EBITDA would have been just over $5 million, or 5.74%, a $7.4 million reduction in profitability. That would not be enough to cover its debt service, capital expenses and overhead, the lawsuit said. The result “would cause unsustainable cash losses and inevitable bankruptcy,” the lawsuit said.
Hardee’s has yet to file a response to the lawsuit and has refused comment, citing unresolved litigation, so we only have one part of the story. One wonders whether the brand would be willing to overlook the hours situation if Paradigm agreed to accept digital orders and loyalty and pay a regular tech fee.
At the same time, the story is indicative of just how difficult a situation brands like Hardee’s are in, not to mention their franchisees.
For Paradigm, profitability in the system it operates is so bleak right now that it risks termination—and the company-threatening damage to its valuation that comes with it—to remain afloat. It could find a buyer, sure, but not at a good enough price to justify such a move, particularly with relatively few lenders willing to loan money into the brand, and not with interest rates where they are.
Hardee’s is also stuck. It has a rogue operator not following the same rules as the bulk of the other restaurants in the system. Terminating that profitable operator will likely result in Hardee’s buying more restaurants, which it has a track record of doing. Or it could accept closure of a number of otherwise profitable locations in the name of consistency.
But this is where the brand is today. Its unit volumes haven’t grown. Profitability is down. The company has cycled through chief executives and watched franchisees steadily close units, all because it can’t convince enough customers to come in after breakfast is over.