This week, the 90-unit Burger King franchisee TOMS King Holdings declared bankruptcy. Something like that was expected, given the chain’s weak recovery from the pandemic coupled with soaring costs. Challenges among the operator base are well-known.
But it may also be the first of what could be a substantial change to the company’s operator base. For this, we go to the statement Burger King sent out Thursday in response to the bankruptcy filing.
“Over the next year or so, we anticipate a few franchisees will likely leave the system,” the company said. “We will proactively manage those transitions. The restaurants will ultimately be owned by high-performing franchisees and other proven operators from the restaurant industry.”
Burger King is in the midst of a massive revitalization effort. The company is investing $400 million into marketing and remodels—though one investor we spoke with recently called that a “drop in the bucket” compared with the brand’s overall needs.
Yet, as the company indicated in its statement, not everybody within the system is behind that revitalization.
And while we may not necessarily see other bankruptcies in the Burger King system, it’s almost certain we will see other sale processes. Operators may opt to exit the business rather than invest in remodels and wait until the strategy bears fruit.
Many may not have a choice, anyway. High interest rates and overall uncertainty, not to mention Burger King’s overall performance, may make it difficult for some franchisees to get the financing they need to remodel locations or build new. Lenders have been tightening their belts of late, which typically leaves out weak brands, weak operators and certainly both.
What’s more, much of the company’s financial assistance will be targeted at stronger operators. Those that won’t qualify could be forced to sell their restaurants.
Changing a franchisee base can be a painful but sometimes necessary part of a brand revitalization. New, well-financed operators can inject energy into a concept by funding remodels and building new units that improve the overall look of a brand. And then there are simply fewer financially weak franchisees. Several Burger King operators have had credit downgrades and a number of them have broken debt covenants.
It's no secret that Pizza Hut injected some energy into its brand simply by replacing the financially struggling NPC International with the rather solvent Flynn Restaurant Group. And it helped that the process led to the closure of hundreds of locations that no longer fit with the Pizza Hut system.
That makes the next year or two so important for the Burger King system. The brand needs to get some sales momentum with its investments in marketing. Its remodel program must get some fancy, new upgraded stores up and running. But changing some of the franchisee base would help, too.
In some respects, the TOMS King bankruptcy is indicative of this process and an encouraging sign. It likely means there is a market for the restaurants by Burger King operators, or at least would-be Burger King operators approved by the brand itself.
Bankruptcy processes are glorified sales processes. Companies use the system to offload weak locations. Lenders take what’s left and sell the assets to get as much of what they’re owed as possible. Those lenders are far less likely to push a bankruptcy process if they are not confident the assets will be sold.
And, with some key exceptions, assets are likely most valuable under the brand name they operate under, in this case Burger King.
One unlikely but possible scenario, however, is a sale of the restaurants to someone other than Burger King. Courts traditionally sell restaurants for the highest amount possible, and outside bidders would likely be unable or unwilling to pay as much as buyers who want to run them as Burger King locations. And the franchisor can certainly take steps to ensure the restaurants are more valuable under that brand.
That said, someone that views the restaurant locations as potentially valuable pieces of real estate could theoretically outbid potential Burger King operators. And Burger King operates with low volumes and weak profits and many of the locations probably need remodeling, anyway, which could depress the valuation and make it easier for an outside franchise to outbid the company.
In 2010, McDonald’s looked into acquiring Burger King locations out of bankruptcy in Minnesota. But those locations ultimately went to another Burger King operator. That's probably what will happen here.
Regardless, the coming period will be important for the Miami-based chain’s long-term future.