High-tech new kiosks at Burger King? Another Firehouse Subs in your neighborhood? As the tide turns from COVID closures to growth, fast food giants are flipping up incentives to encourage franchisees to expand their businesses amid soaring costs.
With higher food costs and wage inflation — particularly as California’s FAST act is set to kick in on Apr. 1 — franchisees are feeling the pinch. Instead of opening new stores, local owners are more focused on ensuring their current restaurants are up to snuff.
"Coming out of the pandemic in today's environment, the good operators within brands, and even some of the largest, are being very cautious and smart about development," Ab Igram, executive director of Babson College’s Tariq Farid Franchise Institute, told Yahoo Finance over the phone.
But corporate parents are seeing a rosier future. Brands are now trying to get "in front of as many customers as possible," Igram said, adding that their newfound zeal for more units may be overdone.
The latest is Restaurant Brand International's (QSR) Firehouse Subs, which the fast food conglomerate acquired in 2021. The sandwich chain, founded by a pair of firefighter brothers, is offering first responders and veterans $100,000 cash upfront to start their first restaurant, with another $100,000 for second or third locations.
"We've really been trying to ramp up our growth ... basically, since the acquisition," Mike Hancock, Firehouse Subs president, told Yahoo Finance.
The brand aims to up its share of first responder or veteran operators from 5% of franchisees to 15% to 20% in the next three to four years. It's also piloting an “operator to owner” initiative that helps top-performing managers and operators to become franchisees.
Hancock said while the industry "has had some challenges over the past few years," the company has been gaining momentum.
In 2024 Q3, net new restaurants for Firehouse grew at a rate of 2.6%, bringing it to 1,266 locations. That's higher than RBI’s Burger King (2.4%), but less than its other brands Tim Hortons (5.5%) and Popeyes (11.3%).
In some cases, franchisors are opting to do the work themselves. Burger King recently announced an agreement to buy out its biggest franchisee, Carrols Restaurant Group, for a whoppin’ $1 billion.
TD Cowen's analyst Andrew Charles called the acquisition, which includes over 1,000 Burger King locations, "fertile ground” for RBI’s turnaround strategy.
"The plan is to use $500 million funded by Carrol's operating cash flow to remodel 600 acquired Burger King US restaurants that do not reflect the modernized image over the next five years," added Charles.
These locations will then be re-franchised out, saving its new owners the renovation costs.
However, the deal ups the risk for RBI, whose investors fear that it’s trading a capital-light model of collecting franchise fees for a more complex operation that exposes it to increasing labor and other costs.
But Morningstar analyst Sean Dunlop told Yahoo Finance that the deal’s impact on profits will "probably be neutral," given that the future renovations will be classed under capital expenditure. Citi analyst Jon Tower added that the move will "support sales growth and share gains in the years ahead" in a note to clients.
Restaurant Brands isn't alone in its bid to incentivize new and existing franchise operators.
Earlier this month, Papa John's (PZZA) introduced a North America development incentive that includes waiving payments to the national marketing fund for five years for new stores.
In December, McDonald's (MCD) announced record expansion plans, which aim to increase its restaurant count from 38,000 to 50,000 by 2027, the fastest pace of growth in its 68-year history.
And last March, Wendy's (WEN) rolled out a program to waive $50,000 worth of technical assistance fees franchisees typically pay when opening a new location. It’s also discounting royalties and marketing fund contributions for three years.
But the jury is still out on whether these incentives will be worth the cost.
"It's a little too early to tell," Igram said. Investors should be on the lookout for store count increases and same-store sales growth during the rest of the year.
Long-term success will require more than providing financial incentives to franchisees, though. Parent companies will need to continue innovating their menus, learn to attract Gen Z audiences, maintain strong relationships with food suppliers, and execute strong marketing campaigns, says Igram.
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
