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C+CT

Franchising: A big brand name doesn’t mean a big business on the lease

May 13, 2020

Just because a shopping center has a big name like McDonald’s, Great Clips, Planet Fitness or Pearle Vision on its tenant roster doesn’t mean it has a big business among its leaseholders. The franchisees operating those locations often are mom-and-pops, which are now struggling, and both landlords and franchisors worry about franchisee businesses closing permanently. “Franchisors are only successful to the extent that their franchisees are successful, so when individual franchisees feel distress, they feel distress all the way through the system,” said Jay Duke, lead of the franchise industry practice and national managing partner of advisory services at BDO. “Franchisees will bounce back when we get back to whatever the new normal is, but there will be casualties along the way,” he said.

Most franchise systems were quick to shift into survival mode. They are finding creative ways to deliver products and services and connect with customers, all while continuing to focus on cutting costs and maintaining supply chains. The first step for many was to establish internal task forces to assist franchisees and to form communication plans to make sure their franchisees, vendors and consumers are all getting consistent information, says Dave Hood, president of consulting firm iFranchise Group. Those task forces can comprise senior leadership, board members, external advisors and key suppliers. “They want to make sure they have input on how to address the crisis from a legal, franchise relations, finance, marketing, supply-chain and even medical perspective,” he said.

Survival mode

The good franchisors are focusing first on making sure their franchisees are aware of and complying with state requirements for employee and customer safety. Brands also are getting creative to reduce overhead, generate revenue or engage with customers during the shutdown, from fitness clubs hosting virtual workouts to curbside pickup on items from cheeseburgers to prescription eyewear.

Franchisors are considering ways to provide relief or to reposition their concepts, notes Hood. For example, iFranchise client Woofie’s dog-walking and -grooming service added Fetch Concierge Service to deliver to people those sheltering in place. The pivot in business model created a new revenue stream for franchisees and generated income for team members, adds Hood.

Franchisors also are providing guidance and information on how franchisees can access assistance, such as how to apply for the federal government’s Paycheck Protection Program loans.

Franchisors also are encouraging franchisees to seek rent relief from landlords and deferrals from lenders. For example, Hand & Stone Massage and Facial Spa drafted a template for a letter to landlords to help franchisees request rent relief. About 35 percent of its 456 locations have obtained rent abatement or deferred rent, according to Bob McQuillan, vice president of franchise development. Though all its spas closed during the shutdown, franchisees have continued to generate some revenue through monthly membership fees. “The longer this goes, that might deteriorate, but so far the membership program is helping sustain our franchisees,” he said. As of May 15, roughly 75 locations had reopened.

Checkers & Rally’s, Church’s Chicken and Qdoba have gone even farther, offering short-term reductions or deferrals of monthly royalty payments. “This is something that a franchisor, historically, would almost never do,” said Hood. Other franchisors, including McDonald’s and Yum Brands, have said they will waive obligations for franchisees to remodel this year, he adds.

Ready for a recovery

As business restrictions ease in many states, franchisors are focusing on how to adapt business models to accommodate social distancing, how to create a safe environment for employees and customers and how to recapture business.

Hand & Stone plans to roll out an HVAC system that continuously “cleans” the air and to require its team to wear masks and gloves when providing massages and facials. “We understand that the industry is going to change, and we are planning to be on the forefront of that with these new challenges ahead of us,” said McQuillan.

The extent of the negative impact will depend on the timing of each region’s economic recovery, the franchise system’s previous strength and the effectiveness of the brands’ reactions to the disruption, says Hood. For example, restaurants that did no takeout or delivery before COVID have had to develop new processes on the fly. On the other end of the spectrum, those that already had delivery models in place have found themselves in better positions. Domino’s, Pizza Hut and Papa John’s, for example, announced in March that they’d hire thousands of additional workers to accommodate increased demand for delivery. Domino’s alone planned to hire an estimated 10,000 pizza workers, delivery drivers and customer service reps.

“I think franchising is going to come back very strong, but different parts of the franchising industry are going to come back faster than others,” said Hood.

The good news is that before COVID-19, the franchise industry was doing very well. Coming out of the 2008 financial crisis, the franchise industry suffered as banks tightened lending policies so much that it was hard for operators to get capital. “I don’t think that is going to be the case at all here,” Hood said. “There is going to be a lot of money out there from private equity and other sources.”

By Beth Mattson-Teig

Contributor, Commerce + Communities Today

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