Revive a Flagging Franchise

How three franchises came back from bankruptcy.


Revive a Flagging Franchise

Franchise brands go belly up for many reasons: bad food or service, a bad concept, a stale look or an ageing menu. Financial mismanagement, neglect or an ineffective growth strategy that brings on too much debt can also sink a franchise system.

But not all bankrupt franchises deserve such a fate. In fact, some brands have enough mojo to revive themselves. Here, three US-based restaurant franchises talk about how they came back from a pretty bad day.

The Call They Hoped to Never Get

In February 2004, Ground Round casual dining franchisee Jack Crawford got a call from his franchisor, American Hospitality. He knew the company had undergone financial difficulties, but wasn’t expecting what he heard: American Hospitality was closing its 59 company-owned stores that day.

Shortly thereafter, the company filed for bankruptcy. It was shocking. We didn’t know it was going to be that drastic,î Crawford recalls. The company’s franchisees, who owned 72 units in 19 states, were left swinging in the breeze.

In many cases, their life’s work was tied in with a franchise that no longer had an organisation behind it. Shocking though it was, there was a ray of light. If it wasn’t such an abrupt closing, the company might have been saved by a buyer.

But it opened a window for the franchisees to do it themselves,î explains Crawford, who was voted president and CEO of the new Ground Round Independent Owners Cooperative. We paid $2 million from our own pockets and financed another $3 million. In April 2011, we made the last debt payment and now own the company outright with no risk of bankruptcy.

Ron Paul, president of Chicago-based Technomic, a food industry consulting and research firm says, ìIf a restaurant had a terrible reputation, franchisees may want to start over. But if there’s still equity in the brand, they might be better off sticking with it. If the brand is still strong, there’s consumer acceptance, unit economics are good, and it has a point of differentiation, it can still work.

Taking Back What’s Theirs

That’s what Sizzler CEO Kerry Kramp did. The US steakhouse chain filed for Chapter 11 bankruptcy protection in 1996 after folding to competition from buffet concepts. Sizzler tried several comebacks, but by 2008 the 54-year-old company had dropped from a peak of 650 units to fewer than 200, and its parent company put it on the auction block.

That’s when Kramp got his hands on the brand. When I came on board, we were down 8% in sales, trailing our industry peers, and had no strategic plan,î he says. His choices were to go to a full-service model, or embrace the brand’s history.

Opting for the latter, Kramp brought in Dennis Scott, one of the founders of HomeTown Buffet, to play with the menu. ìI consider him a food genius, Kramp says. ìHe went through our menu archives and found our original steak seasoning, our cheese toasts and other classics. He really embraced Sizzler’s history.

Scott also trimmed the menu by 25% and returned Sizzler to its roots, bringing fresh-cut meat into the kitchen and dumping the steam tables used for reheating. He embraced real food made by hand. Kramp says the new menu has both Sizzler classics and modern updates like hot wings, Asian slaw and Greek salads.

The next problem was that the new Sizzler still looked old: dark, unpadded booths, low light and cramped layouts. So Kramp embarked on a store redesign, introducing cushions, illuminated ceilings and bright fabrics to the dÈcor.

His efforts seem to be working. In the made-over units, same-store sales are up, and after suspending franchise operations in 2008, Kramp is again seeking franchisees. It depends on how things go, but I could see us with 300 or 400 stores in the next five to seven years, Kramp says.

Getting Back to Good

Technomic’s Paul is more conservative in his recovery predictions though. ìI haven’t seen any franchise get back to where they were before bankruptcy. It’s a long shot. More often, franchises tend to follow the model of Ground Round, Paul says.

Typically, they form a co-op, which helps franchisees with purchasing, and they work out an agreement on advertising dollars,î he says. They have to work on keeping the brand alive. And they have to be realistic about what they are now.

In the case of Ground Round, the company shrank to 25 stores. But CEO Crawford isn’t worried. People see us as small, but put us up next to the big guys in casual dining and we beat them in sales, Crawford says. Our system average is $1,7 million. Last year 75% of our stores had comparable-store sales increases. In this economy, it speaks to the power of the brand.

Building on Name

Name recognition and brand loyalty are what Bennigan’s is banking on. In 2008, the pub-theme casual dining franchise found itself in a similar spot to Ground Round and Sizzler. Its franchisor, Metromedia Restaurant Group, was overleveraged and declared Chapter 7 bankruptcy, closing all company stores overnight.

But when Paul Mangiamele took over as Bennigan’s president and CEO in 2011, he wanted to give Bennigan’s new life in the 21st century. We’re giving the brand a new look, a new feel, refreshing the menu, pricing and presentation. And for franchisees, there’s a new fee and royalty structure.

To Mangiamele, consumers never abandoned Bennigan’s; rather, the brand was brought down by poor financial management. There’s still a pent-up demand and when consumers see a new Bennigan’s going up, they ask when they can get a Monte Cristo sandwich. We have an exciting brand. Our testimony is we still have 80 restaurants and we’d like to double the system within five years.

Even if they never reach the numbers they had in the ‘80s or ‘90s many legacy brands have found that there’s a customer base for their product. The real net is that we’re a brand people know all around the country, Ground Round’s Crawford says. For us, our franchisee owners put their necks on the line to save this brand. Now it’s nice to see that we’ve made it to the other side – we’re growing debt-free and loyal people are coming back.

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