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Thursday, Aug 18, 2022

Corporate Strength Can Help Operators in Crisis

Franchised restaurants, often with strong brand recognition and support from well-capitalized corporate owners, may seem better equipped than independent restaurants to survive a crisis such as the coronavirus pandemic, but that assumption isn’t always true.According to Evan Goldman, a lawyer who chairs the franchise and hospitality practice group at A.Y. Strauss in New Jersey, “it depends on your franchiser.”“Many franchisers have, for better or worse, taken a, ‘one of us is going to lose money and it’s not going to be us,’ look at the pandemic, and done things to their franchisees that are horrible,” he said.It’s not unusual to see franchisers use resources as leverage to manipulate the legal terms of their agreements, even convincing franchisees to release them from liability down the line, he added, calling the practice a form of “legal extortion.” Other umbrella companies see the franchise agreement as a financial and legal partnership where both parties are invested in success.Goldman said many such franchisers offered relief to their operators by choosing to “remove or reduce minimum royalty obligations and remove ancillary charges that come every year.” He added that the most involved franchisers have helped individual franchisees adjust their operating models to account for government-mandated restrictions, including partnering with delivery companies and installing outdoor dining zones.But even restaurant franchises that fall into the latter category aren’t immune to the pandemic economy – far from it.

Restaurant crunchPizzaRev, a formerly fast-growing build-your-own pizza chain founded in Northridge and headquartered in Westlake Village, permanently closed more than half of its units this year, including most of its presence in the Valley region. The closures included locations in Camarillo, Thousand Oaks, Burbank, Glendale, Studio City, Northridge, Woodland Hills, Van Nuys and Valencia, several of which were corporate-owned. Only two PizzaRev restaurants remain in Los Angeles County, one in Palmdale and another in Rowland Heights.Last year, the company had 27 restaurants in the U.S. and Mexico. As of press time, its website shows just 11 locations.PizzaRev is No. 12 on the Journal’s list of largest franchisers.By far the Valley’s largest franchisor is Glendale-based Dine Brands Global Inc., which owns the Applebee’s and IHOP banners. It has more than 3,500 restaurants, around 65 of which are company-owned.

Dine Brands announced in November it expected to close “up to 100” IHOP restaurants that weren’t operating sustainably, adding to the 35 already shuttered this year. It said it would also close 15 Applebee’s in the fourth quarter.

Goldman said Dine Brands did well for its franchisees by helping them install large, well-built outdoor dining rooms with tents and tables in parking lots and pairing them with meal delivery apps.Other restaurants are going to extreme lengths to win over customers and keep sales flowing.

Canoga Park-based CaliBurger, No. 8 on the list with 36 locations worldwide, has installed a $100,000 burger-flipping robot called “Flippy” at four of its restaurants, including in Pasadena, to give patrons more confidence their food is being prepared in a sterile environment. It also introduced a second robot that can operate a deep fry machine.

Goldman said food businesses’ marketing efforts post-pandemic will increasingly focus on making customers feel safe.

Expansion wave comingGoldman said 2021 will bring a boom in new franchise development as owners look to replace closures.

“The economy is terrible right now, but it’s going to open up in the next six to 12 months,” he explained. “The average lag time between signing your franchise agreement and actually opening for business is probably six months. Why not use that time to build while I can get good rental rates?”He added that mass layoffs, especially in the corporate sector, always contribute to a spike in new franchisee applications.“We saw this a lot in the 2009 recession,” he said. “People who work in corporate America … those are the people who become franchisees. They don’t want to get fired because shareholders need an extra penny.”To build an independent business from the ground up is an expensive, time-consuming and logistically challenging endeavor, especially during a health crisis and recession. Alternatively, by eliminating in-person discovery days and cross-country flights to sign documents, the pandemic has made it easier than ever to open a franchise – if you have the capital.“The way it used to work is … very wasteful. Now, everything is done virtually. Every closing I’ve done this year has been by DocuSign,” Goldman said.


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