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Sign of Recovery: Franchise Restaurants Selling off Company-Owned Units

If you’re looking for a quick economic barometer, one good indicator is to watch the moves of the major franchise chains. When times are hard, many of their franchisees flounder, and the big franchisors end up having to buy back stores to keep them running.

When times get better, though, the folks back at headquarters usually remember that running scores of their own restaurants can cause a lot of problems.

For one, it puts the parent company in direct competition with its own franchisees, something franchisees tend to dislike. Second, it draws resources and attention away from the core purpose of a franchisor, which is supporting franchisees.

When the climate improves and sales trend up — and more entrepreneurs are able to swing the financing to buy in — the chains swing back the other way, selling company-owned stores off to franchisees. That’s the point we’re at now, as evidenced by recent announcements from three restaurant franchises that are now selling company-owned units:

  • DineEquity, owner of Applebee’s and IHOP, will pocket $25 million selling off 39 Applebee’s eateries in Virginia
  • YUM! Brands, owner of Taco Bell, Pizza Hut, and KFC, sold off 126 company-owned stores — mostly Taco Bell restaurants — netting $96 million. The company also announced its intention to sell off another 7 percent of all its Taco Bell units to reduce the percentage of company stores to 16 percent.
  • Domino’s Pizza netted more than $1 million in the past year as its base of company-owned pizzerias shrunk by 40 units.

Another prime reason for selling off restaurants: The sales lower corporate expenses and generate quick cash that can be useful for turnaround or growth initiatives.

On the down side, selling off company stores tends to reduce revenue, as Domino’s recently saw. That’s because the franchisor is back to just collecting a royalty on the franchisee’s sales instead of keeping the whole take.

In the short term, this tends to piss off investors, who see revenue shrinking. Domino’s investors weren’t pleased that first-quarter revenue shrank to $77.6 million from $82.7 million in the same period the prior year, for instance.

In the longer term, though, the chains often see a payoff in increased focus on the franchisees that can drive growth in existing-unit sales and in adding more new franchised stores. Expect more big chains to kick off refranchising initiatives in the months to come.

(Forbes, by Carol Tice, Contributor)