Patrons at a McDonald's at Dubai International Airport. Franchisees are balking at the cost of upgrades including touch-screen kiosks. / Skift Table Patrons at a McDonald's at Dubai International Airport. Franchisees are balking at the cost of upgrades including touch-screen kiosks. / Skift Table

Restaurant Megatrends 2019: Franchisees Assert Their Power Over Chains

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We’ve just released our annual industry trends forecast, Skift Restaurant Megatrends 2019. You can read about each of the trends on Skift Table as well as download a copy of our magazine here.

While fast food chains pump money into upping delivery capabilities, completing store makeovers, and even rebranding, operators are losing patience; perhaps, rightfully so. A lack of cash flow and customer traffic continues to hurt franchisees’ pockets, even as average check sizes increase.

Many executives have publicly acknowledged ongoing growth strategies will not succeed without franchisee buy-in. That is to be expected. But operators are finding it difficult to stay quiet when returns from reported positive earnings haven’t yet trickled down. Training employees on aforementioned new technologies and workflows creates yet another gripe for them to hold.

In some cases, as in Jack In The Box, perceived ineptitude on the part of higher ups has caused storeowners to organize and call for CEO Leonard Comma’s head. Franchisees are also keen on the board of directors replacing a number of other individuals who have contributed to the restaurant’s lackluster performance in recent quarters. Same-store sales only just returned to plus territory in the summer, at 0.5 percent. The company reported the same figure for the period ending Sept. 30, while also missing on revenue. By comparison, McDonald’s, the world’s largest restaurant chain, has reported 12 straight quarters of positive comparable-store gains.

Jack in the Box was also hit with a complaint submitted by its franchisee association to the California Department of Business Oversight in November. In it, owners cited an Oct. 8 letter from the brand asking independent landlords to transfer their lease agreements from Jack in the Box Inc. into a newly formed subsidiary, Jack in the Box Properties LLC, Nation’s Restaurant News reported. Property owners who decline to do so will be subject to not receiving assets or payments for rent, franchisees said, citing the letter. Jack in the Box currently handles 1,800 master-lease agreements, which it sublets to franchisees.

“We appreciate the unwavering passion [franchisees] have for the Jack in the Box brand,” said Comma, on the company’s earnings call with investors Monday. “While we’re currently managing through some issues with the association regarding most of our franchisees, we believe our mutual interests are very much aligned. We understand their concerns about issues our industry is facing such as rising labor costs, traffic, and market share in a hypercompetitive environment. We know that Jack in the Box can’t be successful if our franchisees are not successful.”

El Pollo Loco, McDonald’s, and Papa John’s are just some of the other chains getting stick from store operators. Franchisees are really starting to take matters into their own hands to induce change, a trend we see continuing well into 2019.

In November, El Pollo Loco lost a lawsuit filed by a local franchise owner after the chain tried opening new company-operated stores near franchise locations. The plaintiff argued the new stores would hurt franchisee sales and won, Bloomberg reported. Under the court ruling, chicken chain cannot to sell new locations until it revises its franchisee contract. El Pollo Loco is currently 56 percent franchised.

Where Are the Sales?

McDonald’s store owners, representing nearly 20 percent of the company’s 13,000 domestic brick-and-mortar footprint, met in October to discuss the creation of an independent franchisee association. Brands, such as Burger King, KFC, 7-Eleven, Dunkin’ Donuts, and Pizza Hut have all contended with associations for years. So this is nothing new.

Their chief complaint is site improvements are not translating into sales quickly enough. Despite successful investments by McDonald’s into new ordering kiosks, its mobile app, and a delivery partnership with UberEats, both earnings and revenue declined in the third quarter, thanks to higher labor costs and employee training. On a recent conference call with investors, CEO Steve Easterbrook asked for patience from franchisees, citing that stores that have implemented said changes have far outperformed the rest.

“We still have hard work ahead, but we’re seeing an encouraging response from customers in restaurants where many of these improvements are already completed,” he said, in October. “As we have discussed before, the U.S. team and our franchisees are taking on a lot all at once. The U.S. is maintaining an aggressive pace of modernizing restaurants.”

The Customer Knows Best

The restaurant industry is finding quickly that not only are franchisee relationships more difficult to maintain in the digital age, so too is consumer sentiment about a company, particularly in the “woke” millennial era.

According to the American Customer Satisfaction Index’s (ACSI) latest 2018 annual survey, Chick-fil-A and Texas Roadhouse lead the pack in consumer approval ratings for limited service and full service restaurants, respectively.

Texas Roadhouse had an impressive fiscal 2017, ending in February, with a reported same-store sales growth of 5.8 percent in the fourth quarter, according to company SEC filings. Perhaps more impressive is that much of the boost was comprised of a 4.7 percent increase in customer traffic, at a time when many chains are still trying to crack that code.

Meanwhile, Chick-fil-A has won top honors as consumer’s favorite fast food chain three years running, according to the ACSI. The privately-held company beat out Panera Bread, Subway and Papa John’s in 2018.

Making Relationships Right

Papa John’s has since fallen out of favor with its customers and franchisees since ACSI’s report published last June. Dozens of the pizza chain’s U.S. outposts reported a decline in comparable-store sales in the second quarter, ending July 1, when consumers protested the brand after racist remarks made by former CEO John Schnatter in May. Papa John’s store sales fell 6.1 percent in the first half of 2018.

Things only got worse in the third quarter. For the period ending Sept. 30, Papa John’s reported a 9.8 percent decline in U.S. sales and a 15.7 percent drop in revenue. The company spent north of $10 million in “special charges” alone to remove Schnatter from its marketing materials and provide financial assistance to domestic franchisees to mitigate store closings. The aid, in the form of royalty reductions, was not enough to keep the restaurant’s owners’ association from lawyering up, however. Papa John’s franchisees hired industry attorney Robert Zarco to represent them in talks with the company and Schnatter two days after the company last reported earnings.

To fix its growingly fragile relationship with franchisees and customers, Papa John’s needs to look no further than its main competitor, Domino’s, as an example. Though highly regarded for its tech innovation, longstanding sales success on the part of the chain has led to operators opening even more locations, and being more receptive to store makeovers and new technology initiatives.

Dominos also appears to be immune from the many issues plaguing a majority of restaurant chain stores in the market — labor, customer traffic, and innovation to name a few. In fact, CEO Richard Allison pointed out on the company’s third quarter earnings call that Stan Gage, a former member of the Domino’s leadership team, left the company to become a 12-store franchisee in the Carolinas. Life is that good as a Domino’s franchise operator.

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