Small restaurant franchisees endangered?

Small restaurant franchisees endangered?

Private equity firms and other large investors are taking over more and more franchised restaurants, contributing to a shift toward larger operators that may threaten the future of smaller and even medium-sized franchisees.

Franchise Times reported in 2015 that the country’s largest 200 restaurant franchisees operated over 23,000 restaurants, or an average of 116 units. Ten years ago, franchisees in the top 200 owned 78 units on average. In other words, the big restaurant operators have gotten bigger by nearly 50 percent over the period.

As larger operators grow, some smaller franchisees leave. Rick Ormsby, co-founder of investment bank NDA Inc., which specializes in the sale of YUM! Brands units (Taco Bell, KFC, and Pizza Hut) reports that 25-30 percent of YUM! operators with 10-15 units or fewer have left the system over the past four or five years.

Even medium-sized franchisees are losing ground, according to Franchise Times: “Many of the franchisees on the Restaurant 200 are getting bigger not by purchasing these mom-and-pops, but because they’re buying out mid-scale operators with 10 to 20 locations. These franchisees are retiring or simply getting out of the business.”

According to Nation’s Restaurant News,

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McDonald’s Ever-Changing Customization Plans

mcdonald's arches sign

In the latest of a series of customization reversals, McDonald’s launched “Taste Crafted” burgers in over 600 Southern California restaurants in December. The move comes barely two months after the company announced it would retool and rename the program “Chef Crafted” because “the original name ‘TasteCrafted’ did not resonate with consumers.”

Both Taste Crafted and Chef Crafted offer consumers a limited selection of buns, toppings and proteins to mix and match. In late September the company said it would test “Chef Crafted” in 200 stores while “a few locations” would still offer Taste Crafted.

The fate of McDonald’s more ambitious burger customization scheme, “Create Your Taste,” is unclear. It offers dozens of ingredients and hundreds of combinations of bun, meat and toppings, ordered on a kiosk screen and delivered to the table. McDonald’s has implemented Create Your Taste throughout Australia and had announced plans to introduce it in up to 2,000 U.S. stores in 2015. Many franchisees balked at the $125,000 price tag and additional operational complexity of Create Your Taste. McDonald’s backed off the goal of 2,000 Create Your Taste locations, saying that “we’re not going to set a specific number in the U.S.

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Major Carl’s Jr./Hardee’s franchisees file for bankruptcy

carls jr sign

Two franchisee groups owning over 160 Hardee’s and Carl’s, Jr. fast-food restaurants have filed for bankruptcy, listing nearly $2.5 million in debt to their franchisors on their court filings.

Three grandchildren of Carl’s Jr. founder Carl Karcher own the bankrupt Arizona-based franchisee entities, Frontier Star LLC and Frontier Star CJ LLC. The 160-plus Frontier Star stores represent over 5 percent of the Hardee’s/Carl’s Jr. U.S. store count. Carl’s Jr. and Hardee’s – burger chains with similar menus owned by franchisor CKE Restaurants – have a combined total of nearly 2,900 U.S. units.

Mandatory major capital investments could have contributed to Frontier Star’s troubles. As the Arizona Republic observed in its coverage of the Frontier Star bankruptcy: “The fast-food restaurant business is highly competitive and … franchisees often are required to undertake expensive remodeling costs that can burden them.”  For example, McDonald’s turnaround plan could require franchisees to make up to $125,000 in new investments, and Wendy’s is suing to terminate one of its largest franchisees for allegedly refusing to renovate restaurants.

Has your franchisor demanded expensive investments? Are they eroding your ability to make a profit? Share your story.

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Low point for McDonald’s franchisees: will all-day breakfast help?

McDonald’s franchisees more worried than ever

A quarterly survey of McDonald’s franchisees shows operators are more pessimistic than they were three months ago, when the same poll found McDonald’s operators had the worst outlook in the survey’s 12-year history. And McDonald’s recent announcement of its plan to serve breakfast all day could make things worse.

The survey, conducted by industry analyst Mark Kalinowski and released last week, recorded its lowest-ever ratings, both on franchisees’ financial expectations and their relationship with McDonald’s corporate.

The survey also revealed skepticism about McDonald’s CEO Steve Easterbrook’s ’s turnaround plan, announced in May, which calls for streamlining McDonald’s corporate structure, cutting menu items to speed up service, and removing antibiotics and complex ingredients from food items.

But what about recent news that McDonald’s may soon roll out breakfast all day?

An all-day breakfast menu will require additional equipment and investment from franchisees whose coffers have been drained by corporate-imposed capex projects in recent years. One franchisee noted, “All the re-investments over the last five years with MRPs [major remodel projects], rebuilds and kitchen and lobby remodels – not to mention the McCafé and blended ice machine remodels – have absolutely killed the operator’s equity in their business.”

A former McDonald’s franchisee and current industry consultant argues that that all-day breakfast will only work if the current rest-of-the-day menu is significantly reduced.

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