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Refranchising Gets Hot Again in the Restaurant Industry

Stocks in this article: BKW DIN JACK YUM MCD JMBA

NEW YORK ( TheStreet) -- Once-struggling restaurant chains like Arby's and Sizzler are building a new face for customers and pitching a new opportunity to successful franchisees through a process called refranchising.

As franchisors look to expand while slashing expenses and paying off debt, several brands in the restaurant industry are resorting to selling off corporate-owned stores to franchisees with the capital to give the neglected stores a boost.

"Refranchising is not a trend or fad. It's been happening for a long time," says Steve Caldeira, CEO of the International Franchise Association. "It's an excellent way to free up working capital for franchisors to focus on growth markets or new products and deliver value back to shareholders. Generally these stores perform better because franchisees tend to focus on operations full time as opposed to corporate owned stores."

While the trend may not be new, industry observers say it is picking up as a strategy in the restaurant sector, another byproduct of the recession.

Dine Equity's (DIN) Applebee's Neighborhood Grill & Bar and IHOP Restaurants, Roark Capital's Arby's, Sizzler, Yum! Brands (YUM) -- owner of Taco Bell, KFC and Pizza Hut, Jamba Juice (JMBA) and Burger King (BKW) are just a few of the names that are selling off company-owned stores and becoming primarily franchise models.

"I think a lot of brands are looking to bring capital in because they've been hurt by the recession. It's an asset that they can convert to liquid," says Darren Tristano, executive vice president of Technomic, a food and restaurant research and consulting firm.

Restaurants have struggled for years -- and particularly in recent times -- to build profitability.

"They've taken on debt and increased capital expenditures because of remodeling restaurants, enhancing risk efficiencies, adding equipment," to be able to create new and more appealing items, Tristano says. Refranchising takes the burden of running the restaurant off the company. "They're basically running the brand and not the restaurants," Tristano adds.

When DineEquity announced in July the sale of 65 company-owned Applebee's in Michigan to TSFR Apple Venture LLC, the company noted that its "increasingly franchised business model is less capital intensive and experiences less volatility in cash flow performance compared to the operation of company-operated restaurants."

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