Monday, August 11, 2008

Best of breed: franchisee or franchisor?

Did chain headquarters forget to tell franchisees we’re in a downturn? Maybe franchisors are just too embarrassed to gripe about the times when so many licensees are turning conditions to their advantage. Consider what happened recently within several of the industry’s oldest chains. Franchisees proved once again that they can adapt far more readily than the home office to changes in the marketplace, no matter how trying. Their pockets may not be as deep, but their street smarts often make them better.

S&A Restaurant Corp. went bankrupt in spectacular fashion, turning away employees and patrons in preparation for a fire sale of the 200 Bennigan’s and Steak & Ales it operated. And franchisees? As the Bennigan’s on Pittsfield Road in Lenox, Mass., boasted on a banner this weekend, “Locally operated and still open.” It may not be one of the licensees that are looking to scoop up the franchisor’s shuttered stores, but it appeared to be doing just fine, capitalizing on local events like the area’s fifth annual Zucchini Festival and Sunday morning’s crafts fair/pancake breakfast fundraiser in a local park. All told, Bennigan’s franchisees hope to turn S&A’s inability to stay solvent into a chance to swell their ranks by 40 to 60 properties, presumably at prices that would make Wal-Mart wince.

S&A’s franchisees weren’t the only ones to spot an opportunity amid what many brand parents portray as the third circle of hell. Pizza Hut, another greybeard of the business, saw franchisee NPC Corp. ink a deal to buy 99 of the chain’s units from a fellow licensee for $35 million—or roughly $354,000 per store. Pizza Hut seems to be gaining sales traction after some difficult years, thanks to a new pasta takeout line and the addition of a bolt-on chicken wing concept called Wing Street. But while the home office is getting on its feet, NPC is galloping.

To be sure, not all franchisees are finding the current market to be a time of opportunity. Papa John’s recently acknowledged to investors that it’s “subsidizing” franchisees by eating some of increased costs of items it distributes from its commissaries to the field, instead of directly passing along the heightened expenses. It also noted that it sometimes exercises patience with franchisees whose situations make royalties a tough nut to cover.

But, as executives stressed during a conference call with analysts, nothing keeps a system healthier than able franchisees. “We are very focused on keeping good franchisees healthy during these tough times,” said CEO Nigel Travis.

There are probably a lot of franchisees saying the same thing these days about their franchisor.

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