How Refranchising Worked For Burger King


Refranchising has been a common strategy among large, legacy restaurant brands for the past several years. But few concepts have sold off company stores as quickly as Burger King. At the end of 2011, the Miami-based QSR had 1,395 company owned locations. Today it has about 50. It sold off 96 percent of its locations to franchisees.

This speed also gives us the opportunity to analyze the impact  refranchising can have on a brand. Based on Burger King's most recent financial report, that impact has been huge.

Franchising strategies among restaurants run the gamut, from all operations to all franchise. Historically, brands have kept a certain percentage of stores as a way to test new products and to demonstrate to franchisees they have skin in the game. In many other cases, the companies like the cash that their restaurants generate.

Operating restaurants generates lots of cash and can yield great returns. But franchising is more profitable to the company. That's pretty clear in the massive profit improvement at Burger King the past two years. 

In 2012, as Burger King was selling off stores, 59.3 percent of its revenue came from store operations. In 2013, that had fallen by about two-thirds, to 19.4 percent. But by the fourth quarter, only 8.3 percent of the company's revenue came from running restaurants. In short, the King went from a company that relied mostly on restaurants for its sales, to one that simply sold the rights to run its brand.

Indeed, revenues fell by 42 percent last year.

One would think that such a revenue decline would yield declining earnings. Instead, the opposite happened. Burger King actually earned more money.

Adjusted EBITDA increased by 2 percent last year, from $652.1 million to $665.6 million. The company's EBITDA margin improved from 33.1 percent to 58.1 percent. By franchising, rather than operating restaurants, Burger King generated substantial profits.

Net income, meanwhile, nearly doubled, increasing by 93 percent. And adjusted net income increased by 23.6 percent.

This strategy doesn't work for everybody. Brands like Chipotle and Panera that operate more profitable restaurant companies have little incentive to do anything but run their restaurants. But, over the years, many legacy brands like Burger King that mostly franchise have seen their profits from restaurant operations diminish. Pressure to sell those stores to franchisees and concentrate on the more profitable franchising business intensifies.

And those franchisees usually do a better job of squeezing out profits from that business model than did the franchisor. The risk, of course, is that the franchisor loses touch with what it means to operate a restaurant and does things without regard to store level margin. But, at least for now, refranchising is working for Burger King.

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