Getting a business partnership right

20. April 2012 08:59

The partnership between a brand or property owner and a dynamic, motivated site operator can be a powerful thing. Look at Domino's Pizza in the UK where motivated franchisees earn more than £100,000 per site and the company is set to reduce its capital expenditure from just £5.8m this year to an even more negligible £3m by 2015.

Franchisees keen to expand in the UK (and also in Germany where Domino's UK holds the master franchise rights) are taking up the capital expenditure slack and very happy to do so. Meanwhile, analysts are forecasting Domino's will have around £250m of free cash flow over the next five years, with circa £82m returned to shareholders via dividends or share buybacks.

This happiest of marriages rides on the back of the relative lack of pizza delivery competition in the UK market. Chief executive Lance Batchelor reports that the company's most popular pizza, the Pepperoni Passion, has an average sale price of £10.50 after discounts.

Over in the US, Papa John's is regarded as having a slightly risky strategy in holding an equivalent product at around £8, a fair bit higher than competitors. But for now, Domino's Pizza UK seems to have forged a pretty much perfect union between brand owner and dynamic, devolved site management.

Over in the US, the dial is being re-set. There's been a strong current towards devolvement as a way of creating more profit. One of the key strategies at Burger King is to follow in the footsteps of McDonald's and Subway and unload as many directly managed units as possible to franchisees.

Burger King sold 278 company-owned sites to franchisee Carrols Restaurant Group at the end of last month. The deal saw sites sold for around £40,000 on the basis that Carrols pledged to upgrade 450 sites to the next generation Burger King fit-out. In other words, the capex requirement passes to Carrols. The deal showed the varied and imaginative way in which these sorts of deals can be sliced and diced because Burger King also took a 28.9 per cent equity stake in Carrols to enjoy some of the upside.

Back in the UK, the direction of travel for swathes of the tenanted sector is about re-balancing control and dynamism from a different status quo. None of the brand owners mentioned above could be accused of lacking operational control (operating manuals are thick as the Yellow Pages) or retail input. For tenanted operators, the challenge is been about exerting far more retail influence and imposing operational disciplines.

This week, Spirit became just the latest company to indicate that it wants to leverage its managed skills to create a better-performing leased division. It makes no sense to own vast amounts of freehold property – and not be doing your utmost to ensure the best returns. Even, a traditionally non-interventionist company like Enterprise Inns has decided the time has come to enter the trenches to create a different future at struggling pubs.

These things can be cyclical of course. It wasn't so many years ago that Charles Wells and Batemans were getting rid of their managed operations. Now the former is trialling franchised while the latter has re-embarked on a small-scale managed operation.

This is a journey that's really only just begun in the tenanted sector - and has a heck of long way to travel this time around, producing much more and varied iteration.

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About the author

Phil Mellows

Former Group Editor of the Publican’s Morning Advertiser, Paul has a wealth of experience in the licensed retail and drinks industry. During his career Paul has helped to establish licensed retail trade publications.

His commercial awareness and communication skills have led Paul to develop his own PR agency, Propel, and he is now the CPL Group’s Public Relations Advisor. Paul is responsible for producing high quality news stories and external newsletters as well as building media relations and helping to develop business strategies by launching the CPL Group in the casual dining arena.

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