Riding the Wave

October 23, 2014

Rubios_Exterior_NEW_2014-08-06_08.50.55_web_r100x80Lou Hirsh
© 2014 San Diego Business Journal. Provided by ProQuest Information and Learning. All Rights Reserved.

Leaders of Rubio’s Restaurants Inc. are taking steps to ensure that the look and feel of its eateries carry elements of the Carlsbad-based company’s DNA.

That includes its 31-year history as a California coastal company that became best known for the Mexican-style fish tacos served at its first restaurant in Pacific Beach back in 1983.

The company recently announced plans for a redesign of 60 of its California restaurants – about a third of the nearly 200 it now operates in five states – with a rebranding of the remodeled locations under the name Rubio’s Coastal Grill.

The first wave of remodelings is underway and set for completion by the end of 2015, with more updates planned for 2016. The first remodel was recently completed at the Rubio’s in Carmel Mountain Ranch, with ocean-themed artwork on the walls and seating areas decorated in beach-oriented colors like cobalt, green and brown, designed to evoke the ocean, sand and coral.

Officials said the first redesign has boosted customer traffic, and those results will inform the upcoming remodelings. In a recent interview, CEO Marc Simon said Rubio’s will likely invest more than $20 million in the first 60 renovations, and depending on the feedback in California, the “Coastal Grill” label may also be applied to the company’s restaurants outside of Calfornia – in places like Nevada, Colorado and Arizona.

The remodelings align with Rubio’s recent ocean-themed marketing campaigns, as the company looks to set itself apart from numerous fresh-Mexican competitors that have arisen in recent years, including local, regional and national chains.

Simon said the company is looking to capitalize on the “health halo” of the seafood, salads and other lighter items that it has been adding to its menu over the past few years. For instance, it will be adding more selections with salmon to its existing offerings like the original fish taco, developed by company founder and Chairman Ralph Rubio.

The CEO said the company is also conscious of serving the large number of consumers who are still budget-conscious and strapped for time, seeking something better than fast food but priced lower than the offerings of fine-dining establishments.

“People don’t want to deal with making reservations, then standing in a line and then paying a 20 percent tip on top of all that,” said Simon, who joined Rubio’s in 2008 and became CEO in 2011.

Rubio’s also plans to open seven new locations by the end of 2015, which will push its total from its current 197 to 204 restaurants, employing more than 4,000. Simon said the growth strategy for the foreseeable future will remain slow and steady.

Right now, 99 percent of Rubio’s locations are company-owned, and while it is exploring future partnerships with already-successful franchisees in places like the Las Vegas market, Simon said the company is in no rush to turn itself into a national player.

“I don’t feel at this point that we need to become a national company in order to be successful,” said Simon, a restaurant industry veteran whose earlier work included executive stints at McDonald’s Corp. and Chipotle Mexican Grill Inc.

The privately held Rubio’s, owned since 2010 by Connecticut-based Mill Road Capital LP, does not disclose revenue or other financial performance figures.

Rubio’s ranked at No. 32, with an estimated $200.9 million in 2013 sales – up 4.1 percent from 2012 – on a recent list of the nation’s top 150 fast-casual chains, published by restaurant industry consulting firm Technomic Inc.

Technomic Executive Vice President Darren Tristano said Rubio’s has generally been careful and prudent about the pace of its location growth, adjusting when necessary to shifts in the economy. By keeping the majority of its restaurants company-owned rather than franchised, it has also been able to focus more attention on improving product and service quality at individual locations.

“They’ve done a pretty good job of differentiating themselves from some of the other fresh-Mexican restaurant chains,” Tristano said.

Technomic’s list shows that 22 of the largest fast-casual chains are in the Mexican-style category. Most are smaller than Rubio’s, though its competitors include several larger chains, including No. 2 Chipotle Mexican Grill, No. 8 Qdoba Mexican Grill, owned by San Diego-based Jack in the Box Inc., No. 9 El Polio Loco and No. 12 Moe’s Southwest Grill.

Fast-casual chains generally do not have drive-through or full table service, with meal tabs averaging around $10 per person. The nation’s top fast-casual chain in 2013 was St. Louis-based Panera Bread, with more than $4.1 billion in sales at 1,700 locations.

The U.S. restaurant industry registered $448.8 billion in sales during 2013, up 3.2 percent from the prior year, with the fast-casual segment accounting for $34.5 billion – an increase of 11.3 percent, Technomic reported.

Researchers at consulting firm NPD Group noted that sales at fast-food restaurants, with an average check size of $5, were flat for the year ending in June 2014, while visits to fine-dining establishments, with an average check size of $40, were up 3 percent from the prior year. Total industry traffic was generally flat over the past year.

Experts said the midpriced fast-casual restaurants may hold appeal to diners looking to trade up from fast food, but still unable to eat at the upscale fine-dining restaurants on a regular basis.

“Consumer attitudes and behaviors have changed since the Great Recession began and may well have changed for the good,” said Bonnie Riggs, NPD Group’s restaurant industry analyst, in a recent report. “However, offering a good product at a fair price is no longer good enough. To attract them will take a deeper understanding of what they want when dining out.”

RUBIO’S RESTAURANTS INC.

CEO: Marc Simon

Sales: $200.9 million in 2013, according to Technomic Inc.

No. of local employees: Approximately 1,300

Investor: Mill Road Capital LP

Headquarters: Carlsbad

Year Founded: 1983

Company description: Operates 197 Mexican-style restaurants in five states, with seven openings planned for 2015


After missteps, Dunkin’ Donuts Set for California Expansion

September 4, 2014

pictureChastened by early mistakes, company takes a 2d shot in the state Starbucks rules

By Taryn Luna

Globe Correspondent

Al Golub/AP for the Globe

Dunkin’ Donuts launches its campaign in Modesto, Calif.

Dunkin’ Donuts, the coffee chain so familiar in the Northeast, is nearing the end of an expansion march across the country to become a true national brand.

The retailer kicked off its California expansion on Tuesday, the first step in a strategy to challenge Starbucks’ stronghold on the West Coast.

The company once operated more than a dozen restaurants in the state but shuttered them by the early 2000s, citing logistical problems and poor relationships with franchisee partners.

Dunkin’ temporarily abandoned its California dreams as the international business grew to more than 3,000 restaurants. Today the chain serves its signature Munchkins and Coolattas at nearly 900 stores in South Korea, but has only three nontraditional stores in obscure California locations: on a Marine base, inside a hotel, and at a highway rest stop.

Now the coffee chain is preparing to take another shot in a market where its toughest competitor, Starbucks Corp., dominates with more than 2,500 stores.

Dunkin’ plans to open its first traditional restaurant in Modesto, Calif., on Tuesday and a second store in Santa Monica in the following weeks.

Three additional restaurants in Long Beach, Downey, and Whittier are expected before the end of the year. Franchisees have signed agreements to open nearly 200 stores by 2020 and the company intends to eventually grow to 1,000 stores in the state.

“We’ve learned a lot about operating out West,” said Nigel Travis, chief executive of Dunkin’ Brands. “We’ve been incredibly impressed with the quality of the franchisees.”

But Dunkin’ had to learn the hard way.

The chain was so eager to enter California in the 1990s that it “hopscotched a lot of the country,” said Grant Benson, vice president of global franchising and business development at Dunkin’ Brands.

The nearest distribution center was in Chicago, and truck drivers hauled products thousands of miles to the California stores. “It left a lot of gaps where we didn’t have a supply chain and any development,” Benson said.

Travis has also said that Dunkin’ was less selective with its franchisee partners and did not properly train them.

Dunkin’ vs. Starbucks in California

Locations of the first new traditional restaurants in California, compared to the current locations of Starbucks restaurants in the Golden State.

The company renewed its plans to move into California a few years ago and began building up its network of stores in the West, entering Denver and Salt Lake City in the past year.

The California stores will be supplied from a Phoenix distribution center, and the company intends to open a new warehouse in California as more restaurants get off the ground.

Benson said the chain has also upgraded its training program. It is working with a mix of existing franchisees that operate Dunkin’ restaurants in other states and new partners with experience in California.

Software programs that aggregate data on demographics, competition, and traffic will help the company select the best locations for restaurants, he said.

Darren Tristano, an executive vice president at the food industry research firm Technomic, said that California is a major growth opportunity for the Canton company.

Dunkin’ was the second-largest coffee chain in the United States last year, with $6.7 billion in annual sales and a 30.9 percent market share, according to Technomic. Starbucks posted $11.7 billion in sales and a 53.8 percent share last year. Technomic does not track sales by state.

And although Dunkin’ is entering a region dominated by Starbucks, it will appeal to a different customer, Tristano said.

Starbucks typically opens in middle- to upper-income neighborhoods and generally draws more affluent consumers, Tristano said. Dunkin’ prices are slightly lower, and the chain primarily draws middle- to lower-income consumers who represent a larger percentage of the workforce.

The stores tend to be smaller than at Starbucks, which means Dunkin’ pays less for real estate. They also can open more stores in nontraditional spaces, such as gas stations and convenience stores, he said.

Dunkin’ will serve its hot brews in paper cups in California — a move Tristano lauded and said environmentally conscious consumers will expect in the Golden State. The company will use the same polypropylene recyclable cup that was introduced in Somerville in May to comply with a citywide ban on disposable polystyrene, often referred to as styrofoam.

“When you look at how the brand has evolved over time, they should have a pretty good opportunity to grow there,” he said. “Today I think the California market is ready for Dunkin’.”


It’s Good to be King

September 3, 2014

burgerking-304xx3148-2112-482-0Emon Reiser

© 2014 American City Business Journals, Inc. All rights reserved.

Burger King responded to the public outrage it inspired this week by saying its deal to merge with Tim Hortons was about global growth, not tax evasion.

“We don’t expect there to be meaningful tax savings,” Daniel Schwartz, the 34-year-old CEO of Miami-based Burger King Worldwide, said during a conference call with media on Aug. 26.

The deal is more complicated than that. And the public isn’t buying Burger King’s characterizations. Sen. Sherrod Brown, D-Ohio, called for a Burger King boycott after the company announced the $11.4 billion deal to merge with the Canadian coffee and doughnut chain. So did MSNBC TV host Joe Scarborough.

Sen. Dick Durbin, D-Ill., emailed supporters, asking them to sign a petition to tell Burger King to stay put: “Burger King told us they were proud to be in America, but now we know that was a whopper.”

The deal will create a new holding company for Burger King and Tim Hortons that will be based in Oakville, Ontario. The move was immediately characterized as a tax-inversion acquisition that would allow Burger King to skirt millions of dollars in corporate income tax payments to the U.S. government.

Petitions cropped up on the Internet. Social media commenters flame-broiled Burger King on Twitter and the company’s own Facebook page.

Some of the less vulgar comments:

 

  • “Liars. Tax dodgers.”
  • “Kiss my business goodbye forever.”
  • “I’m not boycotting your product, I’m merely relocating my loyalties.”

 

 

 

Burger King issued a response on Facebook hours after the deal was confirmed, assuring angry customers that it will continue to pay its “federal, state and local U.S. taxes.” The deal, however, will most assuredly lower its tax burden, particularly on dollars it earns offshore.

“Our headquarters will remain in Miami, where we were founded more than 60 years ago, and business will continue as usual at our restaurants around the world,” the fast-food chain wrote. “It’s about global growth for both brands.”

Burger King and Tim Hortons executives reiterated that stance on their conference call. But Schwartz, Burger King Chairman Alex Behring and Tim Hortons CEO Mark Caira never denied that the deal was a tax inversion.

The company paid a 27.5 percent rate in the U.S. last year – about the same rate it will pay in Canada.

The real tax savings potential lies in the income Burger King has earned offshore. The company gets nearly half of its revenue from other countries, and currently has nearly $905 million in cash and cash equivalents on its balance sheet.

“Our consolidated cash and cash equivalents include balances held in foreign tax jurisdictions,” Burger King has disclosed in a regulatory filing.

Were the company to bring this cash to its headquarters to pay shareholder dividends or reinvest, it would have to pay perhaps one-third of it to the U.S. government in taxes.

In Canada, it would keep far more of this money – which could amount to hundreds of millions of dollars to help fund its “global growth.”

In addition to any tax savings, the merger of these two fast-food giants will lower the costs of goods for both companies, said Alex Macedo, Burger King’s president for North America.

“These two brands will have more purchasing power, which will reduce the costs for our franchisees,” he said. “The overall support has been very good.”

It also helps to have Warren Buffett on your team. America’s most popular billionaire is financing 25 percent of the deal. Buffett has crusaded for higher taxes on corporations and the wealthy, and has championed some of President Barack Obama’s ideas about tax policy. His involvement in this deal could be read as hypocritical, or as a sign that he doesn’t see it as driven by tax savings, either.

Local business leaders are pleased Burger King’s Miami headquarters would remain intact, along with its staff.

If anyone will feel the pain of this deal, it’s Burger King’s independent franchisees. Only 52 of its 13,667 restaurants are corporate-owned. In 2013, franchise restaurant revenues were four times that of company restaurant revenues, at $923.6 million and $222.7 million, respectively. So if customers stop eating Whoppers because they’re not American, it will hit the store sales of franchisees first. So far, they don’t seem concerned.

Guillermo Perales, who owns 191 Burger Kings in Florida and Texas, said that, if anything, sales are rising because of the backlash: “Besides the comeback of chicken fries, this is one of the best promotions we’ve had this year.”

Financiers, not franchisees, call the shots at Burger King. A global investment fund, 3G Capital, owns 70 percent of Burger King. It’s a Brazilian firm that has offices in New York and is used to crossing borders with its investments.

It’s betting Burger King customers will have short memories, or that the gains it achieves with its controversial move will overcome any losses in sales.

Some observers say it’s a safe bet.

“I don’t think Americans are concerned with where a brand is based,” said Darren Tristano, executive VP of Chicago-based food industry research firm Technomic.

Being labeled a corporate turncoat on social media hasn’t stopped companies from inversions. And ultimately, it’s problems with U.S. tax codes that are forcing some of America’s household names to leave, many tax experts have said.

Armando Hernandez, head of Hernandez and Co. CPAs in Coral Gables, said the advantages of tax inversion transactions can’t be ignored. After all, a company that doesn’t do an inversion faces steep taxes in the U.S. on earnings achieved abroad.

“If the tax adviser would recommend that their headquarters stay in the U.S., they would be committing malpractice,” he said.

Senior reporter Brian Bandell contributed to this report.

THE EVER-INCREASING MOVE TO TAX INVERSIONS

What is a tax inversion? A tax inversion describes when a U.S. company buys a foreign business and then shifts its headquarters outside the country – as Miami-based Burger King Worldwide (NYSE: BKW) plans to do with Canada’s Tim Hortons. Such a move carries many tax benefits for the companies, even though it largely stiffs U.S. tax collectors.

Why are tax inversions becoming more common? Companies are facing increasing costs, including modest ticks in inflation, higher health care tabs and even the potential for a higher minimum wage. At the same time, Canada and many European countries have cut their corporate tax rates.

What is the U.S. government doing about it? Almost nothing. While President Barack Obama has spoken out against the practice, tax reform is stalled in Congress.

What does the American public think? A wide swath of business-minded people believe anything a company can legally do to reduce its tax bill is a wise course. Others believe corporations should pay their share of income taxes. It’s an easily politicized issue. Walgreen Co. backed away from an inversion after too much of a backlash from its customers. Other companies have accomplished inversions without any backlash at all.

What are the benefits for a corporation? While they must still pay some taxes on their U.S. operations, companies achieve lower corporate income tax bills. Additionally, they can bring the cash they’ve earned overseas into their headquarters without paying taxes. This allows them to pay more dividends or invest in their operations. U.S. companies have accumulated about $2 trillion in cash overseas.

Does a company actually have to move its operational headquarters? No. Under current tax laws, companies don’t have to shift offices or executives overseas to be considered foreign. In the case of Burger King, the company will actually remain in Miami, but it’s corporate parent will be located in Canada.


5 Reasons Burger King Wins with Tim Hortons Beyond the Tax Inversion

August 25, 2014

Print

Yesterday Burger King announced plans to acquire Canadian coffee-café chain Tim Hortons, which would enable the burger chain to relocate its headquarters to Canada. The move would lower its tax obligations, a fact the media has latched onto. But even without the so-called tax inversion, Burger King could win with the deal. Here’s how.

  1. Burger King continues to compete in the breakfast daypart, and coffee is essential to attracting patrons. Although Burger King has integrated Seattle’s Best coffee into its breakfast offering, replacing it with Tim Hortons’ premium-blend 100% Arabica bean could be a more financially advantageous opportunity on coffee purchasing.
  1. With increased emphasis on global brand growth, a combined Burger King/Tim Hortons provides strong growth opportunity through co-branding. Giving potential licensees the opportunity to offer a strong breakfast/lunch offering from Tim’s and lunch/dinner offering from Burger King maximizes rents and revenues.
  1. Competing with McDonald’s has become a challenge for larger brands. Since both Tim’s and Burger King compete with the global burger giant, Burger King should get a leg up in the competition. With greater opportunities to fine tune their Canadian operations, Tim’s knowledge of the market should support BK’s strategy and planning in Canada and create stronger competition with McDonald’s stores overall.
  1. Consumer loyalty and sentiment toward Burger King would likely improve with the Tim Hortons marriage. As the majority of Tim Hortons’ customers are brand fans, the strong emotional connection could carry over to Burger King with the new relationship. Emotional connections are important to younger Millennial consumer, and the connection could help strengthen brand perceptions.
  1. Out-of-the-bun thinking is becoming increasingly important to consumers. Menu innovation, limited-time offerings and the need to build what’s new and what’s next on the menu is important for consumers to maintain relevance to restaurant operators. The crossover of Tim Hortons’ and Burger King’s insight and development teams can provide some new perspective and ideally leverage staff experience and skills to support ongoing development programs.

Final Thoughts: Although this investment makes strong financial sense, the post-investment reality will be on leveraging synergies that exist and maximizing the relationship with new emphasis on overall brand growth objectives. How quickly each brand accepts the new realities and bands together culturally will determine the expected success.


Arahova Lands National Deal

June 23, 2014

9951741MONTREAL — Arahova Souvlaki, the Greek restaurant chain that opened in 1971 with a three-item menu, two tables and nine chairs on St. Viateur St., is now expanding nationally.

But unlike other Quebec restaurant chains that have grown by opening a slew of franchised restaurants in other provinces, Arahova’s tzatziki, spinach dip and gyros will first hit Canadian grocery shelves this summer.

Arahova Production, the chain’s retailing arm, reached an agreement on June 11 with Loblaw Cos. Ltd. to launch six of its product lines at 140 Loblaw stores across the country, said division vice-president George Kalogrias, 38.

Kalogrias expects the agreement will boost the company’s retail sales by a third and lead to the opening of an Arahova franchise in Calgary and two more in Vancouver in 2015. He declined to disclose Arahova’s total revenues.

“It’s going to help us grow our brand,” he said. “Then we can start our restaurant expansion. It’s hard otherwise to negotiate a new lease. You have no clout.”

Arahova’s strategy reflects a broader industry trend as chains turn to retail licensing to build their brands in new markets and diversify their revenue streams in the competitive restaurant sector. On the flip side, supermarkets have also opened in-store eateries dubbed “grocerants.”

In 2013, fast-growing MTY Food Group Inc. reached a deal with 295 Quebec-based grocers to carry its Thai Express meals in frozen food aisles. And Imvestcor Restaurant Group Inc., which operates Pizza Delight, Mikes, Scores and Bâton Rouge, grew revenues 13 per cent year-to-date, on an annual basis, due mostly to higher manufacturing sales and retail royalties from its ribs and sauces, the company said this month.

“These brands provide credibility in terms of quality, and consumers are willing to pay more for brands they trust,” explained Darren Tristano, executive vice-president of Technomic Inc., a Chicago-based research and consulting firm servicing the food and food service industry.

“Customers who enjoy the products will look to dine out at the restaurants if they are located near them.”

Arahova Production already sells its dips and Greek yogurt cheesecake at most Quebec supermarkets and at Costco Wholesale Corp. stores in four U.S. states. Retail sales now generate more than half of the family-owned chain’s total revenues.

But in the restaurant industry, the strategy of growing sales through retail licensing also carries risks, notes Tristano.

Retail purchases, especially of frozen, prepared meals could cannibalize occasions for customers to eat out at restaurants. And there’s the chance that the taste of a product doesn’t translate well from the restaurant table to the grocery shelf, he said.

“Products that aren’t considered as good from retail may give customers a negative reaction … and thus avoid dining at the restaurant,” he said.

Kalogrias said Arahova has kept the same family recipe used over the last 43 years for the 10 tonnes of tzatziki a week sold to customers in restaurants and in retail stores.

The Arahova Souvlaki brand is owned by two related families of Greek heritage, which each operate separate companies. Together, they run two corporate and eight franchised Arahova restaurants in the Greater Montreal Area. Kalogrias’s family started Arahova Production and it is the only one to sell retail products.

The first Arahova restaurant, a 400-square-foot eatery in Mile End, was owned by George Kalogrias’s father, Christos, and his uncle Nick Koutroumanis. It was named after Arahova, a village in Greece.

Kalogrias first experimented with retail in 1995, when local grocers approached the family with requests to stock Arahova’s tzatziki on their store shelves. One of those customers was the St. Viateur bagel factory, Kalogrias said.

“At 4 a.m., all those people were coming in for tzatziki and bagels,” he recalled.

The family started small, with Kalogrias driving orders to clients in his car.

“I started delivering it myself in those green picnic coolers,” he said. “Then one cooler became two coolers.”

Arahova Production now manufacturers and distributes most of its retail items from two separate centres in Laval. The division’s Greek yogurt cheesecakes are made at a separate facility in Toronto. With the agreement with Loblaw’s and the new franchises, Arahova may soon outgrow those locations.

“This is going to mean a lot for our name,” Kalogrias said. “We want to become a household brand across Canada.”


Franchise Chatter Names Emerging New Food Segment The Hottest Franchise Concept of 2014

May 22, 2014

By Brian Bixler
Franchise Chatter

During the last few years, a band of start-ups has been racing to become what some have called “the Chipotle of pizza,” seizing upon the fast-casual custom concept and mimicking the company’s model in hopes that they can do for pizza what Chipotle did for the burrito. With major names in franchising recognizing the potential in the fast-casual custom pizza segment and backing some of the brands financially, potential franchisees are seeing dollar signs in what has evolved into the hottest franchise concept of 2014—one that looks to have staying power, rather than being a passing fad.

That’s the conclusion drawn in a report from Franchise Chatter, an online information resource for franchisees. Published on franchisechatter.com, the new report looks at the latest developments and growth within the fast-casual custom pizza segment, which has been drawing increasing interest among investors as new brands look toward explosive expansion, spreading the concept across the country.

“There are now dozens of brands in this segment, which could become as popular as frozen yogurt franchises were a few years ago,” said Ambrosio Cantada, founder of Franchise Chatter. “As these companies gain market share, we know potential franchisees will want to read about the future of this segment of the pizza category, and which brands may end up on top. “

Since 2008, a growing number of companies has moved into the custom pizza segment by establishing fast-casual restaurants in which customers choose their ingredients—including the dough, sauce and toppings—along a service line. With pizzas being cooked in high-temperature ovens, the concept combines speed and customization that customers are looking for today, with a variety of healthy ingredients.

So many new brands are entering the market with none of them dominating yet that potential franchisees face the dilemma of striking while the iron’s hot (or, in this case, the oven) or sitting on the sidelines to see which brand will best capture market share.

Some brands are posting impressive annual sales volumes as high as $1.8 million at individual units, according to Technomic Executive Vice President Darren Tristano, who recently completed the Fast-Casual Pizza Cluster Report for the market research firm.

Even though Technomic’s year-end 2013 figures show Pie Five Pizza Co., Uncle Maddio’s and Your Pie leading some competitors in the number of units, each with 18, the landscape is about to change.

“I think right now the two brands that are at the forefront would be PizzaRev because of the investment of Buffalo Wild Wings and Blaze Pizza, which is expanding rapidly,” Tristano says. “They both have strong management and overall knowledge of the consumer market.”

The speed with which the dueling companies bring their concepts to additional markets will be key to determining their success, he added. Tristano expects the custom pizza segment to be especially popular with the noon crowd.

“Fast-casual pizza has emerged out of a white space that’s typically lunch time,” he said, adding that brands that offer comfortable environments and alcoholic beverages will also be able to pick up dinner and nighttime customers as well.

“We expect to see a lot of opportunity for growth in the next five to eight years,” Tristano said. “It will likely attract more franchisees and other investors to come into the market as it’s still in the very early stage.”

The Franchise Chatter report includes updates on specific brands it has identified for having the greatest growth potential over the next five years.

For more information, click on the Hottest Franchise Concept of 2014 banner at franchisechatter.com.

Brian Bixler is a freelance journalist and blogger who writes for several business-oriented websites, including Franchise Chatter, a membership site devoted to reviewing franchise earnings claims. By talking to executives of leading brands as well as some of the most successful franchisees across the country, Franchise Chatter reports on growing brands as well as those that might be struggling. The website also examines the profit potential of all the major brands with its FDD Talk feature.


Subway Owners Take Stake in BurgerFuel

May 14, 2014

subwaylogopromoThe “better burger” niche is already crowded with domestic startups, but a new player from New Zealand, BurgerFuel, soon might break into the competition and onto the fast track to growth, helped by a partnership with Subway founders Fred DeLuca and Peter Buck.

According the The New York Times, DeLuca and Buck acquired a 10-percent stake in BurgerFuel in January through their investment company, Franchise Brands, which supports small and midsize concepts. BurgerFuel reportedly hopes to leverage this strategic alliance into expansion throughout the United States by selling franchises to operators of Subway, which is 100-percent franchised and has more than 25,500 restaurants in the United States.

Officials from Milford, Conn.-based Subway did not respond to inquiries for comment as of press time.

Darren Tristano, executive vice president of Chicago-based research firm Technomic Inc., noted that Subway’s growth in extremely nontraditional spaces — such as a church, a Goodwill training center and auto showrooms, to name a few recent openings — show franchisees’ willingness and demand to open restaurants.

Fellow industry expert Dennis Lombardi, executive vice president of Columbus, Ohio-based WD Partners, added that those Subway franchisees might be looking to open more units but, depending on where they are located, might not have the chance to grow as fast with more Subway locations as they could with a new concept, like BurgerFuel.

“It may not be about the 25,000-plus Subways [in the United States], but more about a franchisee’s home trade area, where it’s hard to expand your own franchise business and almost have to wait for somebody in the area to sell,” Lombardi said. “This gives the franchisees the opportunity to have a growth vehicle, and typically these kinds of new brands have a higher revenue potential relative to Subway’s.”

With BurgerFuel as a possible growth vehicle, Subway might have a way to enable its franchisees’ growth in more traditional spaces or make inroads with a slightly different customer base, Tristano said. He added that Subway’s tack of looking for a concept outside its segment — similar to Chipotle’s interests in ShopHouse Southeast Asian Kitchen and Pizzeria Locale, or Buffalo Wild Wings’ investment in PizzaRev — is likely the better option than taking its current offering and trying a more upscale take on it, as Taco Bell plans to do with U.S. Taco Co. and Urban Taproom.

“Subway is looking for growth potential, and it probably has more opportunities outside of the sandwich segment than within sandwich,” Tristano said. “They should look at something that could work in a co-branded way, like maybe with desserts. They still have so many franchisees that they could really leverage that base.”

Lombardi added that BurgerFuel’s possible entry to the United States “is not exactly coming in at the early stage of the better-burger trend.” In addition to muscling into a crowded segment, BurgerFuel would present completely new operations models or real estate needs to Subway franchisees, but “that’s not an overwhelming issue” to the better-performing operators in the system, he said.

“Subway is doing something nice for its franchisees by making this concept available to them,” Lombardi said. “But you’re not going to give a marginal operator the ability to expand into a second concept. If they want to grow, they’ll have to show Subway they are good at what they do.”

Both experts agreed that a possible expansion of BurgerFuel in the United States could be an intelligent long-term plan for Subway, and neither saw it as an indication that Subway’s growth could be slowing down in the United States.

“If you think about Subway’s royalty stream coming into its two owners, it’s crazy; you probably wouldn’t need to do anything else,” Tristano said. “But progressive brands always need to think about where the future is. There may be a day when people don’t believe Subway is the healthiest restaurant in the world, so Subway would need some bench strength and a way to hedge a little.”

Lombardi said that day is not really close to arriving.

“There are no real negatives in this, and I’m not surprised it’s happening,” he said. “Subway is still the golden goose for them. I just interpret this as another growth angle, an ‘and,’ not an ‘or.’”

As of May 13, Subway had 41,800 restaurants in 106 countries.


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