A Trend that has recently become more popular among franchise companies called ReFranchising or Retro-Franchising, essentially means flipping corporate-owned stores into franchised ones. Refranchising has gained appreciable fame in recent years and there have been many franchise companies which are converting not just one but a significant number of units into franchised Locations. Large Franchisors like Mcdonald, Burger King, Hardees, Baskin Robbins, Coca cola, Pizza Hut, KFC, Taco Bell, Applebee’s Wendy’s, TGI Friday, Jack in the Box, Arby’s, Papa Murphy’s, Jamba Juice, Denny’s, Panera Bread, Sonic have already shifted to this strategy to improve their capital efficiency and focusing on more Franchise locations as well as Brand Management.
Reasons to ReFranchise
There are multiple reasons that can trigger a Franchise company to ReFranchise their units:
- Training facilities – Sometimes franchisors may buy units for training facilities that can offer hands on training as opposed to classroom training – Especially for global Franchisor when expanding in new territories.
- Capital Gain – Franchise companies invest excess capital often to open new franchise locations on their own and then may eventually decide to sell those Franchise units to New Franchisees.
- Operational Experience – Some franchisors acquire / build units so that do not lose their operational experience and helps them stay in touch with the issues and details of owning a franchise location. Once the specific market stable, they offer those store to ReFranchise.
- First Right of Refusal Purchases – Franchisors may acquire units from an existing franchisee in order to re-sell them to a new franchisee that is more effective for their specific franchise system.
- Market Shift – Franchisors expand into new market and recently found another market more lucrative or nearby, so they may change their development plan keeping in view opportunity and offer the store’s for ReFranchise.
Why ReFranchising is Essential?
Many chains have concluded that new thinking is needed to address today’s environment, with ReFranchising initiatives becoming an important brand strategy.
So can ReFranchising be a “Win/Win” strategy for Franchisors and Franchisees? In our experience the answer is YES—if designed and executed correctly, with benefits for both franchisor and franchisee.
Franchisors gain in several ways, Specific benefits include:
- An excellent way to Increase working capital to focus on Market Growth / New Products / Deliver value to shareholders.
- Result in reduction in capital expenditures (General, administrative, sales or Interest costs) at the corporate level.
- Earn a higher percentage profit margin from franchisee royalties.
- Selling corporate-owned stores provide capital for neglected stores which has potential to boost / set footprint in new market through New Unit development.
- In many cases, some of the less profitable Stores are Refranchised.
- Franchisors can concentrate on brand management, Innovation, Comp sales growth through more focus on menu, marketing, technology, re-image initiatives, etc.
- Entrepreneurial/growth opportunities for brand employees / Existing Franchisees who is passionate about the brand and don’t need the training and Pre-support which a new, single-unit franchisee would need.
- Sometimes it makes sense to refranchise an isolated store because it fits with an existing franchisee’s development plans.
- Sometimes investor interest to run a running business.
- Running a parent organization, plus Stores—that’s hard to do, Refranchising reduces the worries about daily operations.
Franchisees, most often larger ones, also benefit from refranchising initiatives, as seen in the increase in large-scale deals described above. Specific benefits include:
- Economies of Scale – Improved financial metrics by leveraging existing overhead
- The opportunity to pick up additional locations and continue to grow, because they use the same back office to support their expansion.
- Enhanced career paths for their people, from GMs and managers to front-line employees
- Generally these stores perform better because franchisees tend to focus on operations full time as opposed to corporate owned stores.
- Ability to improve unit-level profits
In 2012, for instance, Carrols Restaurant Group bought 278 restaurants from BurgerKing. These restaurants were in poor condition with weak sales / bad profits, which improved considerably under the franchisee. In 2015, restaurant-level earnings were more than doubled at those locations.
There’s was nothing wrong with the franchises operating restaurants. But when running restaurants is done simply as a franchising strategy, then operations become secondary. Meanwhile, Franchisees are determined to run stores and earn profits so they can make their money. That ultimately helps sales and improves the health of the system.
- For publicly traded companies or Private-equity groups, that prospect can be very attractive to investors and stakeholders.
For instance, Greg Flynn was a good franchisee of Applebee’s in 2008. As Applebee’s refranchised, Flynn bought up large swaths of those locations at low prices. He then bought into Taco Bell, and then acquired Panera Bread locations when that system, pushed by an activist, refranchised some restaurants.
Flynn Restaurant Group is now the largest franchisee in the U.S. And Flynn himself was named as 2016 Restaurant Leader of the Year. One of his investors is the Ontario Teacher’s Pension Plan. In other words, teachers are making money for their retirement from refranchising.
- In fact Franchisees / Investors have done as much as the franchisors; to fuel the refranchising trend by eagerly purchasing stores being sold. If they felt franchisors needed more skin in the game, why are they buying the locations?
- Franchised stores generate a lot of cash. So franchisees have been able to buy the stores cheap, improve operations and generate even more cash—making many of these operators quite wealthy.
So, REFRANCHISING encourages partnership with strong players, whether new or existing franchisees, creating a stronger overall system and growth opportunities for all involved.
The professionals at Franchisingkey have expertise and assisted one of Regional Franchisors in Pakistan in Refranchising Programs. Through this programs, company had raised Millions in capital and have experienced improved sales performance through expenditure on marketing, training, new equipment, and/or other facility upgradation.
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