I wrote this article late in 2011. Given the recent lawsuit between Wendy's and DavCo, it is worth revisiting. This is a perennial issue, the contractually required upgrade.
"Remodels and upgrades are always a bone of contention between a franchisor and franchisee. Older units in a system rebel against a forced upgrade, sometimes correctly guessing that a fancier unit will not be profitable enough to pay for the upgrade and maintain a healthy return on investment.
So, it very surprising to see the new management of Burger King to encouraging this rebellion amongst its franchisees.
Burger King still owns and operates 1295 units, world-wide, mostly in the US and Canada. Before BKC was acquired by 3G, one of the due diligence concerns known to everyone in the restaurant sector was that Burger King units, both company and franchisee operated stores, were in need of remodel and store physical plant renewal, estimated then at $3B.
If all BKC company stores were remodeled at BKC's just updated cost of $200-300K per store it would require $3.2 billion, the "CAPEX" tab that needs to be funded. (This remodeling deficit itself was a partial legacy of the prior private equity owners, Bain Capital/Texas Pacific Group/GSCG PE group, which took Burger King public in 2006.)
3G has swept out the prior Burger King executive management clique, set up a loan program for franchisees, changed ad agencies and marketing thrust, and rolled out new products. Company EBITDA dollars are improved.
It would be reasonable to think that this improvement would find its way back to the corporate stores.
Especially with the NFA, the Burger King Franchisee Association, watching every move carefully. After all, if BKC doesn't think that all of its units ought to be upgraded, NFA will argue the same point on behalf of some of its members.
And we learned more about 3G's intentions for Burger King. On Thursday, November 10 2011, Burger King held its Q3 2011 earnings call and filed its 10Q with the SEC.
Company and debt tolerance conditions are apparently "favorable" enough for its PE owner that it is now working a $393M dividend payable back to 3G Capital, by December! Despite BKC needing $3 Billion to remodel, 3G wants return of capital first.
The wording from the fall 2011 10Q is below:
On October 19, 2011, the Board of Managers of BKCH approved a distribution to Parent and, subject to such distribution, the Board of Directors of Parent approved a return of capital distribution to the shareholders of Parent, including 3G, in the amount of $393.4 million, representing the net proceeds from the sale of the Discount Notes, payable by December 16, 2011, provided that the Board of Parent does not act to revoke its decision to declare the return of capital distribution prior to the payment date.
3G is taking the cash out, and not putting it towards remodelling or upgrading its corporate stores in North America. Time will tell if this strategy encourages compliance or dissent amongst the North American franchisees who are going to have to remodel."
For the 5 Most Fascinating Stories in Franchising, a weekly report, click here & sign up.
