Is Fast-Food Franchising Broken?

As dining habits change and the cost of adapting soars, more franchisees are declaring bankruptcy.

Good Morning!

Here are today’s highlights:            

• Yes, office-to-residence conversions can be challenging, but New York’s financial district shows it can work.

• Ami Kassar says the SBA has created a double-standard in lending policies that is likely to cause confusion.

• On the latest Dashboard, Gene Marks advocates for capturing data, understanding how to manage an accountant, and trying a little “shrinkflation.”

• How much profit is it appropriate for a business to make?

OPPORTUNITIES

In Manhattan’s financial district, families are filling empty offices and business owners are finding opportunity: “In the past few years, luxury apartments have been carved out of a 1907 office tower at 84 William Street and an Art Deco skyscraper at 1 Wall Street that was once the Bank of New York’s headquarters. Five other office buildings are being gutted and turned into residences, including a project that is the largest such conversion in the United States. But the high-rise conversions are just part of a wave of modifications in the area that started decades ago with the transformation of low-rise buildings and continues today with enormous glass and steel towers. The financial district name has become something of a misnomer as the neighborhood, once derided as a desert after the bankers commute home, becomes a vibrant residential enclave at Manhattan’s southernmost tip.”

• “One of the neighborhood’s newest shops is Best Sicily Bottega, an Italian cafe and grocery store on Beaver Street. The store’s founders, Silvia Lombardo and Nicolas Calia, met via Instagram during the pandemic and discovered that they both lived in the financial district and had grown up 10 minutes from each other in Sicily.”

• “When they met, Ms. Lombardo owned an online store that sold Italian goods but she wanted to showcase them in a brick-and-mortar shop along with food like olive oil cakes and meatballs that were made from her family’s recipes. With their shared love for Sicily and food, they opened the shop in May across the street from Ms. Lombardo’s apartment.”

• “They said they had not considered opening anywhere else and had decided to stay open after work hours to serve local residents takeout dinners, like pasta on Fridays. ‘We really believe that something is changing here,’ Ms. Lombardo said.” READ MORE

BUSINESS MODELS

Is the franchising model broken? “In the past year, and more frequently in recent months, franchisees that were once big money makers for such brands as Burger King, McDonald’s, Popeyes, and Hardee’s have started to file for bankruptcy. On Tuesday, a major Wendy’s franchisee—Florida-based Starboard Group—sought debt protection for 73 restaurants. In its Chapter 11 filing, Starboard wrote that both its estimated assets and liabilities were in the $1 billion-to-$10 billion range. Starboard’s CEO, Andrew Levy, faulted his Wendy’s corporate overlords for mandating that they undertake extensive remodels requiring ‘substantial capital expenditures’ with ‘modest or no equivalent returns.’ But he also noted what seemed to be a string of bad luck for fast-food operators collectively: a ‘combination of post-Covid consumer habits, ever-increasing costs to do business, and significantly higher interest rates’ that have ‘placed many QSR [quick service restaurant] franchisees in similar situations nationwide.’”

• “The pandemic left many hobbled. Inflation followed, as did the labor force’s demands for better pay; rising interest rates; and the need to update, or at minimum, digitize the customer experience. Many restaurateurs were squeezed by heavy debt levels already, and now they’re reaching the point where even the industry Goliaths with economies of scale are seeking federal aid to reorganize debts.”

• “McDonald’s just announced that starting next year, it will hike the fees that U.S. franchisees pay by 25 percent—from 4 percent of their annual revenue to 5 percent. Wendy’s similarly increased its take, leading it to report in November’s earnings statement that operating profits had climbed 3.6 percent the previous quarter ‘primarily from higher franchise royalty revenue,’ coupled with crafty declines in other corporate-level expenses.”

• “Restaurant Brands International’s [chairman Patrick] Doyle laid out in his speech at the Restaurant Finance and Development Conference earlier this week: ‘It’s always a little dangerous to say this, but at the end of the day, our product is not Tim Hortons coffee, and great subs at Firehouse, and burgers and chicken. Our product is an economic model. As the franchisor, what we provide is a great economic opportunity for franchisees.” READ MORE

FINANCE

Ami Kassar says the SBA has created a dangerous double-standard: “The scene at the American Banker Small Biz Banking conference last week in Nashville almost felt like an old-fashioned Western. U.K.-based Funding Circle, a newly approved fintech lender for the Small Business Administration, rode into town and announced to the bankers in the audience that they planned to be the biggest lender of SBA loans under $500,000 within a year. What is Funding Circle’s plan? My sources tell me that Funding Circle representatives announced that because they won’t have to follow the traditional rules and regulations other SBA lenders still have to follow, they will execute loans in as little as two days. For banks that must continue to play by the rules of their organizations, loans will be more cumbersome and take longer to close.”

• “In traditional SBA lending, banks work carefully with borrowers to understand their historical financials and their plans for using the money. There are many checks and balances that protect everyone’s interests.”

• “When an algorithm spits out a decision and tries to get the money out the door in two days, it’s a different story.”

• “Think of this as a grand experiment. It may work fine. But bear in mind that we have run a test, which did not go well.” READ MORE

THE 21 HATS PODCAST: DASHBOARD

It’s the Data, Stupid: This week, Black Friday and Small Business Saturday will represent hugely important shopping days for many retailers. But Gene Marks says the sales those days generate aren’t necessarily as important as the data they generate -- so long as the retailers are smart enough to capture it. Gene also talks about why business owners need to understand that when they sign their tax returns, they—and not their accountants—are responsible for what the returns show. Plus: why Gene loves shrinkflation as a pricing strategy and why he says it’s not just for those who sell food or products. It can even work for consultants like Gene.

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

MANAGEMENT

How much profit should a business make? That’s an issue for assisted-living homes: “These highly profitable facilities often charge $5,000 a month or more and then layer on extra fees at every step. Residents’ bills and price lists from a dozen facilities offer a glimpse of the charges: $12 for a blood pressure check; $50 per injection (more for insulin); $93 a month to order medications from a pharmacy not used by the facility; $315 a month for daily help with an inhaler. The facilities charge extra to help residents get to the shower, bathroom or dining room; to deliver meals to their rooms; to have staff check-ins for daily ‘reassurance’ or simply to remind residents when it’s time to eat or take their medication. Some even charge for routine billing to a resident’s insurance for care.”

• “About 850,000 older Americans reside in assisted-living facilities, which have become one of the most lucrative branches of the long-term care industry catering to people 65 and older.”

• “Investors, regional companies, and international real estate trusts have jumped in: Half of operators in the business of assisted living earn returns of 20 percent or more than it costs to run the sites, an industry survey shows. That is far higher than the money made in most other health sectors.”

• What do you think? Is 20 percent too much? What would the right percentage be? READ MORE

HUMAN RESOURCES

If you ask your employees for their opinion, you should probably acknowledge hearing what they have to say: “Over the past three years, employers have encountered a host of new problems. How to get employees back to the office. How to approach the Covid-19 vaccine. How to handle unprecedented levels of turnover. While there's a host of best practices for each of those challenges, there's been a common thread in the advice from experts: get feedback from employees — and act on it. As it turns out, many companies are nailing the first part of the equation by performing surveys of workers, but missing the mark on the second.”

• “Shane McFeely, Quantum Workplace’s lead researcher, said simply doing the employee survey alone doesn’t fix the employee experience. ‘Employees want to see that their voice and opinions matter,’ McFeely said. ‘Organizations show that by converting actionable insights from employees to meaningful changes that improve the employee experience.’” READ MORE

SUCCESSION

The owners of a well known family jewelry business in Philadelphia are giving the business to a team of employees: “‘We didn’t want the business to go away if something happened to us, so we needed to find succession,’ said Harvey Rovinsky, who owns Bernie Robbins Jewelers with his wife, Maddy. ‘Who could better succeed us than the people that are running the company with us?’ The business, which Maddy’s parents opened in 1962 as an appliance store, was first at 12 S. Mole St. in Philadelphia. Over the years, the company transitioned away from selling Maytag and GE appliances to selling high-end jewelry from brands including Cartier, David Yurman, and Roberto Coin. The company employs 40 people across its three locations in Somers Point, Villanova, and Newtown.”

• “There have been offers to buy the business, but it was more important to have the right people own it than to sell it, said Harvey. ‘We have run this company exactly the way that Bernie did it when he started it, and that’s why we were not going to just sell it to anybody who would take it over and change it,’ he said.”

• “Although Harvey couldn’t disclose how many employees will get ownership and who they will be, the handoff of the business is expected to occur in the first quarter of 2024. The Philadelphia Business Journal reported that the new ownership group will likely consist of about six longtime employees.”

• “After the ownership is transferred, the couple will stay involved in the jewelry stores’ operations for some time. Harvey has been asked to fill the position of CEO going forward, he said.”

• “To defray the company’s existing debt before the ownership change, beginning Thursday, $25 million worth of inventory at the Somers Point and Villanova stores will be marked down as much as 60 percent.” READ MORE

VENTURE CAPITAL

Two years after being terminated, Kara Goldin and her husband Theo are suing Hint, the flavored-water company she founded: “The circumstances behind the Goldins' termination have remained murky. At the time the company said the moves ‘reflect(ed) our strategic approach to long-term growth and succession planning’ and would position Hint better to ‘achieve its full potential’ and ‘seize the significant growth opportunities ahead.’ Kara Goldin's successor, Blair Owens, still holds the CEO role. Several former employees previously told the Business Times that what they perceived as Kara Goldin's dedication to building her online and media brand as a business influencer would sometimes lead to friction in the office, as well as occasional personal disagreements between Kara and Theo Goldin.” 

• “At the time of the Goldins' termination, Hint employed roughly 200 people and boasted an email newsletter — a key sales generator for the company, grown since 2012 — more than a million members strong. Hint had at that point raised $51.5 million in outside funding, but has since boosted its total support to $85.3 million, according to PitchBook.”

• “Hint, also known as Hint Water, became one of the country's best-selling water brands as a popular choice for stocking expanding tech campuses in the 2010s. As recently as 2021, the company claimed to be one of the largest nonalcoholic beverage companies independent of giants Coke, Pepsi, Dr Pepper, and Snapple (and their many affiliates).” READ MORE

FEATURE

And now, remote-work weddings are a thing: “Some couples choose to make a weekend destination out of their ceremony. Such weddings have long been a boon to hotels and resorts, many of which also added work spaces and upgraded their Wi-Fi to cater to remote workers during the pandemic. Now the two trends are converging. At Camptown, a 50-room hotel that opened this year in Leeds, N.Y., at the foot of the Catskill Mountains, wedding-related stays have been getting longer, said Stephen Wendell, chief executive of Mountain Shore Properties, which owns the hotel. When guests realize they can work from the lodge, which offers high-speed internet, work spaces and a pantry of snacks available to buy on the honor system, he said, ‘They start thinking about relaxing and getting into wedding mode and extending their bookings.’”

• “Currently, about 20 percent of wedding guests arrive at Camptown from Tuesday to Thursday for a weekend ceremony, with Wednesdays experiencing the largest growth, Mr. Wendell said: ‘You see people at the pool with laptops, taking calls on the nature paths.’”

• “The growth of extended-stay wedding guests happened naturally, said Mr. Wendell, of Camptown, but looking toward the 2024 wedding season, he said, ‘We are marketing to that group.’ When wedding inquiries come in now, planners highlight the appeal of the property’s remote-work capabilities and longer stays. ‘The area is very much a weekend destination,’ he said, so filling midweek rooms really helps the business.” READ MORE

THE 21 HATS PODCAST 

Paralee Boyd is not working: This week, Dana White drops a few surprises. When we began this podcast in 2020, Dana had two promising hair salons in Detroit that she’d named after her grandmother, Paralee Boyd. She had an innovative business model designed specifically for women with thick and curly hair. And she was on her way to winning a prestigious business plan competition. All of which presented her with a wide array of opportunities to consider. Would she continue to bootstrap? Would she franchise? Would she take on an investor? Would she open salons on military bases? But the pandemic hit her hard.

• “Struggling to find both employees and customers, Dana eventually decided to close her Detroit locations and open a new one in Dallas, Texas, where she hoped the greater population density would help her make a fresh start. But in this episode, she tells Jay Goltz and Laura Zander that she’s come to a painful realization: “Paralee Boyd is not working.”

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

Thanks for reading, everyone. — Loren