Operations

Is today’s trend of refranchising the way to go?

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McDonald’s revealed last month that it’s a full year ahead of schedule in selling 4,000 company-run restaurants to franchisees, a key turnaround objective it now intends to hit by the end of 2017. The transformation of Applebee’s into virtually an all-franchised system was one of the few positives cited by parent DineEquity in reviewing the chain’s long list of challenges in its latest earnings call. Jack in the Box assured investors that rolling back company operations to just 10% of the chain will pay dividends in operational improvements and lower employee turnover.

Clearly, refranchising, or selling company stores to current or new franchisees, is a strategy of the times. But not every franchisor is singing from the hymnal. They’re not convinced a departure from what had been franchising dogma—keeping one-third of a chain company-operated to demonstrate a commitment to a concept’s bottom-line performance—is as antiquated as many investors contend.

“We are a net buyer of restaurants,” a reversal of the prevailing current, acknowledges Paul Brown, CEO of Arby’s. About 1,050 restaurants—or about one-third of the 3,250-unit chain—are company-operated, and will likely stay that way. 

“It’s important to be a significant owner-operator, because it puts us on the same basis as our franchisees,” says Brown. “It shows our belief in where the brand is going, and should go.” When the home office asks for investment, action and sheer trust, “it has helped us on the franchise side.” Plus, he adds, “it’s great to own restaurants” from a financial standpoint—with all of the sales, not just the royalty percentage, collected by the franchisor. 

Cheddar’s Scratch Kitchen bought its largest franchisee, 44-store Greer Cos., in January, raising the proportion of company-run branches to 85%. Going forward, it will grow through both corporate development and new franchise openings, the franchisor said.

Sonic has taken an approach somewhere in the middle. It announced in mid-March that it had completed a refranchising program that lowered the proportion of company-operated units to less than 10%. A few weeks earlier, it appointed a former franchising executive, Christina Bell Vaughan, as president of the franchisor’s corporate-run operations, which has been set up as a company within the company.

But investors continue to put pressure on the holdouts, noting that refranchising frees up capital and eliminates the need for an in-house operations team. Marcato Capital Management, for instance, is pressing Buffalo Wild Wings to reduce its portfolio of company-run restaurants to less than 10% of the system, a move that would require refranchising about 500 stores. Currently, about half the system is company-run.

Management initially rebuffed the demand. But it reversed itself in mid-March, alerting investors that the franchisor may sell 60 stores to move toward Marcato’s goal.

The pull of refranchising might be too strong to resist, suggests Darren Tristano, chief insights officer for Winsight. “To do all that you have to do to run a parent organization, plus run restaurants—that’s hard to do,” he says. “Restaurant franchise companies today are not very good at running restaurants. They’re focusing more on franchising restaurants.” 

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