Franchisors getting more pushback from franchisees? Boohoo

Blame it on refranchising, a phenomenon that favors investors at a serious cost to operators and guests.
peter romeo blog

A committee here at Restaurant Business is trying to get our colleague Jonathan Maze committed. I’m the sole member at present, but participation will undoubtedly surge if he keeps hammering out stories on franchisees’ disagreements with brand owners, as if the trivial matter of their livelihoods still matters. As our man on the finance beat, he should know better than anyone that today it’s all about the investors, and to hell with franchisees, employees or guests.

They’ve arm-twisted franchisors to overturn the long-standing and well-founded tradition of owning much of the chain, a reassurance to franchisees they’re thinking like operators and focusing on the bottom line as much as the top one. The formula until recently was to keep a third of a system company-run. Now, if a franchisor holds onto more than a unit or two for training purposes, they’ll have a Bill Ackman or Mick McGuire banging on the CEO’s door, demanding the occupant sell those stores or turn the office over to someone who will.

Their argument is that money shouldn’t be tied up in real estate or an operations team; those dollars could be freed up, ideally for the further enrichment of shareholders. Why not let franchisees put up the capital and take the risk, and just enjoy that nearly all-profits stream of royalties?

A visit to any chain restaurant would hammer a stake through that argument, particularly in today’s traffic-challenged environment. Our research sister, Technomic, has yet to verify this with quantitative research, but we’re pretty sure that at least 99.9% of the guests in any given dining room are not there because the brand has happy shareholders. And that’s with a 0.0% margin of error.

Contrast that with the clear benefit to guests of having operational or menu tweaks tested at company operations before they’re introduced on anything close to a noticeable basis. Misfires can be aborted early, before the brand is tarnished by one social media post of an embarrassing experiment that becomes a viral phenomenon.

And nothing starves a system of rejuvenation and innovation like a franchisee community struggling to survive. If profits are elusive, the licensees just don’t have the money to reinvest and reinvigorate, a problem avoided when the franchisor also has skin in the game. Profitability matters in that situation, so the game isn’t a thinly veiled attempt to bolster the top line, margins be damned.

That’s why we champion operators such as Arby’s, part of franchising fanatic Roark Capital, but still a system with a large number of company-run stores. Paul Brown, CEO of parent company Inspire Brands, says that commitment is strategic, helping the brand sell franchises and convince the franchise community that a new idea is sustainable.

And it’s not a coincidence that Ron Shaich, an executive committed to operating as well as franchising restaurants, is our 2018 Restaurant Leader of the Year. He’s proof that the mixed-portfolio model works.

So we’re not pulling out a hankie and dabbing our eyes when we read one of Jonathan’s stories about a franchised chain being convulsed by a dispute with franchisees over pricing or other margin factors. If the franchisor cared as much about franchisees as it did about its shareholders, it likely wouldn’t be in those straits.

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