Refranchising in focus

The most noticeable benefits of refranchising transactions often involve the millions of dollars franchisors can earn selling their company-owned locations to other operators, but brand leaders typically tout the organizational focus that results from refranchising as well. Depending on how much a brand wants to gravitate toward 100-percent franchising, as restaurant companies like Burger King or Applebee’s parent DineEquity Inc. have done, the chain could unload the majority of its responsibility for day-to-day operations of locations to devote most of its resources toward product innovation, marketing and other brand functions. In many cases, brands keeping a higher percentage of their stores company-owned tend to concentrate their holdings geographically in strong markets where they can keep their marketing scale and pipeline of talent intact. In the case of the most recent high-profile refranchising move, TGI Friday’s announcement that it would seek to sell its 247 company-owned restaurants in the United States to franchisees. Executives said they sought to optimize the Friday’s brand by turning it into solely a franchisor, rather than divide its efforts between running restaurants and supporting franchisees. “We had to decide: Are we a franchisor or an operator of restaurants?” TGI Fridays chief executive Nick Shepherd told the Wall Street Journal at the time of the announcement. “When you do both, the franchisees worry that the parent company is focusing on its restaurants first.” Darren Tristano, executive vice president of Chicago-based market research firm Technomic Inc., said the trend toward refranchising in the restaurant industry has picked up steam in the past decade, especially in limited-service brands but also increasingly in full-service brands like TGI Friday’s. For many established brands, “it’s the way to go,” he said, because the benefits include reducing capital expenditures and forcing parent companies to think big-picture about the brand rather than get bogged down in operations. Most of the refranchising activity happens between brands and their biggest franchisees, which concentrates a lot of power within sophisticated operators, who in turn keep pressure on franchisors to run the brand in the right way for long-term success, Tristano said. “The franchise business is getting bigger because of refranchising, but there also are more companies focused on being true brand leaders,” he said. “The goal is to sell these locations to existing franchisees that can expand their portfolios and create a more efficient process of running the stores. It takes the weight off the parent company and creates a lot more leverage within the franchisee groups.” In many cases, refranchising has also accelerated much-needed initiatives like remodeling. Wendy’s tied the refranchising of more than 400 locations in the past year and a half to requiring that acquired units undergo the brand’s “Image Activation” remodel. The chain extended the effort to Canada, refranchising all company-owned locations in that territory in preparation for a new growth push. But an increase in refranchising generally has not dissuaded many franchisors from increasing corporate-store development, either through new stores or through acquisition. Buffalo Wild Wings, which operates 44 percent of its locations and franchises the other 56 percent, has both acquired franchised locations and sold some its own stores to operators, while also opening two locations of PizzaRev as a franchisee of the fast-casual pizza brand. In Minneapolis, take-and-bake pizza chain Papa Murphy’s bought nine franchised locations in September. The chain plans to expand rapidly in that 78-store market through both corporate and franchised development. “As we look to expand our presence in both existing and new markets,” chief executive Ken Calwell said in a statement, “we will continue to explore strategic opportunities that are in alignment with our growth strategy.” Mike Cooper, a nine-unit franchisee of Papa Murphy’s and the president of the Minneapolis franchise co-op for the brand, said franchisees were pleased that the parent company would invest side-by-side with them in an important market like Minneapolis. “The company’s commitment to operating stores well and partnering with the owners in the market on growth initiatives has benefited the entire market,” he said. Technomic’s Tristano noted that operating company-owned stores would always be appealing to franchise brands in places where steady profits provide a long-term income greater than what the brand could get from a franchise sale plus a royalty. “Where your restaurants are growing and profitable, why wouldn’t you want to own them?” he said. “If they’re not, you look to your franchisees who can improve how they’re run by taking them over. Sometimes corporate staffs aren’t designed to do that.”