Is the Franchise Model doomed?

[ClownLoach]

With today's sad news about Jack in the Box acquiring Del Taco, likely to milk the system dry by selling the restaurants to franchisee owners - and the obviously negative impact similar decisions have made on Panera, Coffee Bean, Baja Fresh, Pick Up Stix, Jamba, Peets, Carl's Jr., various Bagel places like Noah's and Breuggers, and more - is it possible that the franchise model is in trouble? With margins declining due to the rising costs of labor - a franchisee adds "another mouth to feed" to the business model. It seems that when this happens unless the owner is directly involved in hands on management/operations of the restaurant the conditions deteriorate severely. It's like having to pay for a Store Manager and an "Executive Store Manager" I.E. the franchise owner. In this scenario the owner has to cut labor to extremely low levels resulting in bad brand standards, inconsistent food and high employee turnover due to the stress of one person doing the job of 3 or 4. Plus some regulated areas such as HR functions are duplicated between the parent brand and the franchisee adding cost. The only time it seems to work now is if the franchisee is a large corporation that owns all the locations across a large market. The only other way is when the Store Manager is the pseudo-owner which is the way Chick-fil-A works - really the company runs everything and just has the proposed SM franchisee "buy in" so they get company stock instead of a true ownership of their building - this sometimes results in the "owner" being "transferred" to other stores. But in complex and difficult times like these - direct company ownership seems to drive better sales, consistent operation, lower turnover, higher wages and happier employees.

[storewanderer]

Del Taco refranchised the Reno market right around the time COVID hit to someone called "Del Taco Northwest." Aside from some price increases the operations have remained stable and consistent. They have been reliably open during COVID at times when surrounding chains are closed but have cut back on late night hours. At this time nobody else is a corporate op in Reno (McDonalds, Wendys, Burger King, Carls, Taco Bell, Arbys) all franchised.

In the Sacramento market in the past 10 years, we have seen many fast food chains that were running corporate operations in the market refranchise the market. This included Wendys, Burger King, and Carl's Jr. Can't speak for Burger King but in the case of Wendys and Carl's Jr., the refranchising looks to have created lower volume units, prices have increased very drastically (especially with Wendy's- that Sacramento franchisee has prices 10-20% higher than the bay area locations), and the locations are not staffed as well as they were as corporate operations.

The irony is how the Sacramento market came to be corporate in the first place for these chains. It all came to be due to franchisee issues. In the 80's or 90's the Wendys franchisee around Sacramento went bust and many of the locations real estate was sold- to Carl's Jr. who ran them as corporate Carl's locations. Wendys response was to get some corporate locations in newer parts of Sacramento to try and get the market back. Burger King ran into a similar issue in the 90's or maybe early 00's in Sacramento where their franchisee was involved in embezzlement or something and many of the locations just closed suddenly and the real estate went to various parties including McDonalds; some did reopen as Burger King and then that market became a corporate Burger King market.

When I look at the Sacramento market the Carl's units were quite a bit better operated, staffed, and maintained as corporate units. They aren't noticeably bad under the franchisee, but they were outstanding as corporate units. The Wendys units aside from the major price increases this franchisee in Sacramento area has taken, are operated just fine.

However just like with franchisees some are better than others at running units and corporations are no different. I have been disappointed to see chains like Carl's who I thought did an exemplary job running corporate operated units refranchise those units. At the same time McDonald's who I can't tell if a unit is franchise or corporate until I see my credit card statement (franchise units say McDonalds Fxxxxx as merchant and corporate say McDonalds Mxxxxx as merchant), seems to have the same inconsistencies with cleanliness, odor, and operations at corporate and franchise units but the corporate units do seem to have lower prices.

There are some networks that have, in an effort to stem closures from failing franchisees, started to run more corporate units in recent years. Arby's, Long John Silvers, and Five Guys come to mind as chains that were basically 100% franchise but as franchisees have been going bust, they started to run a network of corporate op units again.

The worst franchisees I see are the ones who are, how do I put it, "investment groups." Typically you look at their website which will look absolutely fantastic, and you see they are based in San Francisco or some other major city and have been in business for less than 10 years but currently operate hundreds or thousands of franchised units across multiple brands. Also they typically have few or no locations within 100 miles of their main office. Then you go to, or try to go to, one of their locations and reality hits: they are not open posted hours, they may not open at all some days. If a point comes you finally do get to go to one of their units, their prices seem unusually high for the given concept (compared to other surrounding franchisees), staff seems sloppy and inefficient, and food is below average for the chain.

[veteran+]

With today's sad news about Jack in the Box acquiring Del Taco, likely to milk the system dry by selling the restaurants to franchisee owners - and the obviously negative impact similar decisions have made on Panera, Coffee Bean, Baja Fresh, Pick Up Stix, Jamba, Peets, Carl's Jr., various Bagel places like Noah's and Breuggers, and more - is it possible that the franchise model is in trouble? With margins declining due to the rising costs of labor - a franchisee adds "another mouth to feed" to the business model. It seems that when this happens unless the owner is directly involved in hands on management/operations of the restaurant the conditions deteriorate severely. It's like having to pay for a Store Manager and an "Executive Store Manager" I.E. the franchise owner. In this scenario the owner has to cut labor to extremely low levels resulting in bad brand standards, inconsistent food and high employee turnover due to the stress of one person doing the job of 3 or 4. Plus some regulated areas such as HR functions are duplicated between the parent brand and the franchisee adding cost. The only time it seems to work now is if the franchisee is a large corporation that owns all the locations across a large market. The only other way is when the Store Manager is the pseudo-owner which is the way Chick-fil-A works - really the company runs everything and just has the proposed SM franchisee "buy in" so they get company stock instead of a true ownership of their building - this sometimes results in the "owner" being "transferred" to other stores. But in complex and difficult times like these - direct company ownership seems to drive better sales, consistent operation, lower turnover, higher wages and happier employees.

I believe that the franchise invention is, for the most part, disgusting.

It dilutes the brand, employees and customers suffer, execution of quality is inconsistent and the list of inconsistencies from one store to another is beyond the pale.

Franchisees, IMO, are incompetent and unqualified to run a business and absolutely inept at customer relations and employee relations.

I can only hope that this style of business will go away but I know it will not. Corporations love the franchise model because it creates the prefect alibi for deferring accountibility and responsibility on all levels.

[veteran+]

Del Taco refranchised the Reno market right around the time COVID hit to someone called "Del Taco Northwest." Aside from some price increases the operations have remained stable and consistent. They have been reliably open during COVID at times when surrounding chains are closed but have cut back on late night hours. At this time nobody else is a corporate op in Reno (McDonalds, Wendys, Burger King, Carls, Taco Bell, Arbys) all franchised.

In the Sacramento market in the past 10 years, we have seen many fast food chains that were running corporate operations in the market refranchise the market. This included Wendys, Burger King, and Carl's Jr. Can't speak for Burger King but in the case of Wendys and Carl's Jr., the refranchising looks to have created lower volume units, prices have increased very drastically (especially with Wendy's- that Sacramento franchisee has prices 10-20% higher than the bay area locations), and the locations are not staffed as well as they were as corporate operations.

The irony is how the Sacramento market came to be corporate in the first place for these chains. It all came to be due to franchisee issues. In the 80's or 90's the Wendys franchisee around Sacramento went bust and many of the locations real estate was sold- to Carl's Jr. who ran them as corporate Carl's locations. Wendys response was to get some corporate locations in newer parts of Sacramento to try and get the market back. Burger King ran into a similar issue in the 90's or maybe early 00's in Sacramento where their franchisee was involved in embezzlement or something and many of the locations just closed suddenly and the real estate went to various parties including McDonalds; some did reopen as Burger King and then that market became a corporate Burger King market.

When I look at the Sacramento market the Carl's units were quite a bit better operated, staffed, and maintained as corporate units. They aren't noticeably bad under the franchisee, but they were outstanding as corporate units. The Wendys units aside from the major price increases this franchisee in Sacramento area has taken, are operated just fine.

However just like with franchisees some are better than others at running units and corporations are no different. I have been disappointed to see chains like Carl's who I thought did an exemplary job running corporate operated units refranchise those units. At the same time McDonald's who I can't tell if a unit is franchise or corporate until I see my credit card statement (franchise units say McDonalds Fxxxxx as merchant and corporate say McDonalds Mxxxxx as merchant), seems to have the same inconsistencies with cleanliness, odor, and operations at corporate and franchise units but the corporate units do seem to have lower prices.

There are some networks that have, in an effort to stem closures from failing franchisees, started to run more corporate units in recent years. Arby's, Long John Silvers, and Five Guys come to mind as chains that were basically 100% franchise but as franchisees have been going bust, they started to run a network of corporate op units again.

The worst franchisees I see are the ones who are, how do I put it, "investment groups." Typically you look at their website which will look absolutely fantastic, and you see they are based in San Francisco or some other major city and have been in business for less than 10 years but currently operate hundreds or thousands of franchised units across multiple brands. Also they typically have few or no locations within 100 miles of their main office. Then you go to, or try to go to, one of their locations and reality hits: they are not open posted hours, they may not open at all some days. If a point comes you finally do get to go to one of their units, their prices seem unusually high for the given concept (compared to other surrounding franchisees), staff seems sloppy and inefficient, and food is below average for the chain.

Just because someone has the money to qualify as a franchisee does not make a good business person! I believe this is proven overwhelmingly, every day. It is not easy to hold to account these difficult to reach owners.

At the very least, corporate owners of the brand are more high profile, and perhaps it is more difficult for them to hide.

[BillyGr]

Some of it may be the companies involved as well.

Look back at the early McDonald's. They franchised the locations, but the company still held control over them. There were several places where franchisees opened one location and never another, if they refused to follow the standards the company set. The company was willing to not expand in that particular area for years, until the franchise contract ran out and then they didn't renew and either took over or more likely found a new franchisee to run that store.

They also quickly cut contracts from an area down to a specific store, so that if they hit one of these "bad" franchisees, they could just get others to open in surrounding areas who were better, and make the original either follow along or wind up closing due to lack of business.

Those who were willing (and able) to follow the rules the company set wound up making huge amounts of money (many eventually sold back the franchises to the company for millions, after making that much and more running, in some cases 20 or more locations), while those who didn't know how to (or weren't willing to) follow and keep standards up wound up losing everything (or most of it).

One other thing is that they (after a few issues at the beginning with friends) started trying to find those franchisees who would be totally involved - not just investing in the business and hiring people to run it, but actually working at the restaurant. Obviously in the larger groups that eventually became impossible, but those people were the type who found others like themselves so that each location would have a manager that was as close to an owner as possible, and could work for them as though they actually did own the place.

Not that this is exactly still the way they work now, but it gives a good study to show how it CAN work well, if both sides work to make it happen.

[storewanderer]

I believe that the franchise invention is, for the most part, disgusting.

It dilutes the brand, employees and customers suffer, execution of quality is inconsistent and the list of inconsistencies from one store to another is beyond the pale.

Franchisees, IMO, are incompetent and unqualified to run a business and absolutely inept at customer relations and employee relations.

I can only hope that this style of business will go away but I know it will not. Corporations love the franchise model because it creates the prefect alibi for deferring accountibility and responsibility on all levels.

I think franchisees who actually want to operate their business are fine. The problem is many franchisees buy a franchise as an investment and a "side job" and that is where things get a little funny. Basically the attitude is their bank put up the money and now this franchise can run itself with minimal effort.

The one I've also seen which is very painful to watch is when you have franchisees who have a unit or a couple units and do a good job and stay close to the operation, but then decide they can make more money by owning 5-10 units so they expand their unit count but don't do nearly as good of a job with 5-10 units as they did with 2 units (have seen this firsthand).

The other problem I see is many of these franchisees have to go into significant debt in order to buy and start up the franchise which cases various other pressures on the operation.

If you look at how some of these chains are run in other countries, they seem to be run much better than in the US. Yet they are still on a franchise or licensed based model. Yet for whatever reason things are much more strict. Wages paid are dictated from corporate, pricing/promotions are dictated from corporate. Yet in the US the franchisees have sued franchisors saying the corporate cannot dictate those sorts of things and those are all up to the franchisee since the franchisee is an independent business. So is the problem the franchisee concept, or the way the concept works in the US?

[Romr123]

Excellent topic.

By way of explanation, I was a field auditor (mystery shopper) for KFC in 1987-1989, and worked at General Motors (franchise model for dealers) for the last 12 years of my career). At KFC, corporate job, HQ employee, traveled the US (others in the group got to go international too). We hit all corporate locations 1x a month (which were generally at the time concentrated in bigger cities) , and would focus occasionally on a geographic blitz of a franchise market (which were shopped by a shopping service monthly--we were the calibrators, essentially). Generally, in those days, the system was roughly 1/3 corporate, 2/3 franchise (total sales were more evenly split 50/50). Corporate stores were generally more consistent and "clustered" around the bell-curve, but the best franchise store was better than best corporate store. Worst--was a toss-up. Some of the best corporate stores were clustered in specific markets (and were truly phenomenal), but there needed to be a certain volume before a store got good and consistently performing. For financial reasons, Yum has re-franchised nearly all stores (believe that they're only about 5% corporate at this point) in the US. The model can be good, but the current financial incentives within the QSR space prevent that.

Low-investment models and "innovative" models (the BurgerIM disaster, for instance) don't let the franchisor have enough $$$ for product development or operational control (notwithstanding the crooked owners) The "low investment/high skim" model (ChickFilA) is having a moment now, but as unemployment declines, fewer people are going to be interested in "throwing it all in" to gamble on a franchise. Area licenses/master franchisees (nearly everyone else) have all the bad and very little of the good (they have all the negatives and bring very few positives to the table).

A part of this situation which no one has brought up is the state-by-state regulation of franchises...each of the franchisors needs to be approved to sell franchises in specific states. This may be why the companies have better luck overseas---their partners are often the ones with local knowledge (where master franchisees here in the US really don't have much to add).

[storewanderer]

Excellent topic.

By way of explanation, I was a field auditor (mystery shopper) for KFC in 1987-1989, and worked at General Motors (franchise model for dealers) for the last 12 years of my career). At KFC, corporate job, HQ employee, traveled the US (others in the group got to go international too). We hit all corporate locations 1x a month (which were generally at the time concentrated in bigger cities) , and would focus occasionally on a geographic blitz of a franchise market (which were shopped by a shopping service monthly--we were the calibrators, essentially). Generally, in those days, the system was roughly 1/3 corporate, 2/3 franchise (total sales were more evenly split 50/50). Corporate stores were generally more consistent and "clustered" around the bell-curve, but the best franchise store was better than best corporate store. Worst--was a toss-up. Some of the best corporate stores were clustered in specific markets (and were truly phenomenal), but there needed to be a certain volume before a store got good and consistently performing. For financial reasons, Yum has re-franchised nearly all stores (believe that they're only about 5% corporate at this point) in the US. The model can be good, but the current financial incentives within the QSR space prevent that.

Low-investment models and "innovative" models (the BurgerIM disaster, for instance) don't let the franchisor have enough $$$ for product development or operational control (notwithstanding the crooked owners) The "low investment/high skim" model (ChickFilA) is having a moment now, but as unemployment declines, fewer people are going to be interested in "throwing it all in" to gamble on a franchise. Area licenses/master franchisees (nearly everyone else) have all the bad and very little of the good (they have all the negatives and bring very few positives to the table).

A part of this situation which no one has brought up is the state-by-state regulation of franchises...each of the franchisors needs to be approved to sell franchises in specific states. This may be why the companies have better luck overseas---their partners are often the ones with local knowledge (where master franchisees here in the US really don't have much to add).

Any idea what the operator turnover rate is for Chickfila? My observation is their operator turnover rate is.. very low.

I am noticing quite a bit of franchisee turnover with McDonalds in the past 3-4 years. And the franchisee getting to take locations in my area over does a terrible job. I get the feeling they are having trouble finding franchisees.

KFC locations in my area recently changed ownership after the 45+ year franchisees decided to retire. Their former operations director was able to take ownership of most of the locations.

[pseudo3d]

Chick-fil-A franchises are one of the most expensive in the industry, but the stores are usually extremely tightly run and very popular.

On the other side of the spectrum, Subway was basically a pump-and-dump racket with some highly uneven stores and a lot of promotions that cut into already-marginal profits. Subway's heyday of rapid expansion (basically 2005-2015) focused a lot on the fact that the stores fit into a small footprint and didn't need the expensive equipment (huge ovens, deep fryers) of other restaurants.

Another franchisee with a notoriously high failure rate is/was Dickey's Barbecue Pit.

McDonald's is an interesting case as they were one of the first franchised stores to guarantee some of uniformity (pre-1950 Dairy Queen and A&W had all sorts of differences) and a way for the franchisor to make it big without starving franchisees. That was before, of course, they became big, and now they seem to still be big but somewhat lost their way. I could go into all sorts of how the modern McDonald's is effectively a failure, but I do dislike the fact that the local stores (I live in Texas) seem to be owned by some investment company out of Pennsylvania...only one store in town seems to not be connected with that and seems to be better run.

When I was in Waco a few years ago, the McDonald's stores were owned by an actual Texas company and still carried things like the bagel breakfast sandwiches, which I hadn't seen in years.

[jamcool]

Culver’s is all franchise and seems to be doing well, I understand they limit the number of stores per franchisor. And there is Dutch Brothers, which requires the franchisee to work at a DB site for a time period before offering them the franchise.