Fast Company has a piece suggesting that the fast food franchise model, which has defined so much of the American commercial landscape for decades, may be in trouble.
“On Tuesday, a major Wendy’s franchisee – Florida-based Starboard Group – sought debt protection for 73 restaurants,” Fast Company writes. “In its Chapter 11 filing, Starboard wrote that both its estimated assets and liabilities were in the $1 billion-to-$10 billion range. Starboard’s CEO, Andrew Levy, faulted his Wendy’s corporate overlords for mandating that they undertake extensive remodels requiring ‘substantial capital expenditures’ with ‘modest or no equivalent returns.’ But he also noted what seemed to be a string of bad luck for fast-food operators collectively: a ‘combination of post-COVID consumer habits, ever-increasing costs to do business, and significantly higher interest rates’ that have ‘placed many QSR [quick service restaurant] franchisees in similar situations nationwide.’
“Last week, an even bigger franchise operator, Premier Kings, which has 172 Burger King outlets, and which brought in $223 million in sales last year, also declared bankruptcy, blaming ‘various macroeconomic factors,’ including ‘the national impact of the COVID-19 pandemic on restaurant operations, high inflation, increased borrowing rates, and an increasingly limited qualified labor force.’ (It also didn’t help that the owner, who acted as Premier Kings’ sole manager and stockholder, passed away unexpectedly months earlier.)
“Both developments reinforce an increasingly worrying pattern for America’s other 100,000-plus franchise owners: A spate of sudden bankruptcies is inarguably roiling the fast-food industry.”
The reality that these and other franchisees are facing, the story says, “is that costs have soared for restaurant operators, whose margins are notoriously thin. The pandemic left many hobbled. Inflation followed, as did the labor force’s demands for better pay; rising interest rates; and the need to update, or at minimum, digitize the customer experience. Many restaurateurs were squeezed by heavy debt levels already, and now they’re reaching the point where even the industry Goliaths with economies of scale are seeking federal aid to reorganize debts.”
Fast Company also notes that “franchisees’ corporate partners are finding new ways to make up for it: McDonald’s just announced that starting next year, it will hike the fees that U.S. franchisees pay by 25% – from 4% of their annual revenue to 5%. Wendy’s similarly increased its take, leading it to report in November’s earnings statement that operating profits had climbed 3.6% the previous quarter ‘primarily from higher franchise royalty revenue,’ coupled with crafty declines in other corporate-level expenses.”
KC’s View:
Sounds like a great definition of partnership – when franchisees are suffering and sales are down, the corporations protect their margins by raising fees.
By the way, it is amazing to me that at no point in the story did anyone suggest that what many fast feeders really ought to do is serve better food.
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