Refranchise-Ready: Arby's Taps Refranchising For Growth Strategy

When I joined Arby's as president in May 2010, I was eager to once again work with the roast-beef sandwich leader and pioneer, where I served as vice president of product marketing and strategic planning in the early 1990s. This time I had a much greater task at hand. Through the collaborative effort of a new leadership team, we succeeded in restoring the confidence of our franchisees and their employees and reinvigorating our menu. With eight consecutive quarters of same-store sales increases, we are laying the foundation to start growing the brand again.

Part 1 of this series (Franchise Update, Q4 2012) explored the strategic steps taken to bounce back from four years of slumping sales and profits. In Part 2, I discuss how Arby's refranchising strategy contributed.

Why refranchising?

Arby's is a 48-year-old quick-service restaurant chain with more than 3,400 restaurants system-wide. For us, and for most established franchisors, growing the brand is not just about adding new locations. For us to bolster our image and sales in both saturated and underserved markets, we needed to adopt a strategy that would put more capital to work in the system. So we developed a refranchising program to attract multi-unit restaurant operators with access to capital to a) acquire and operate a group of corporate Arby's restaurants, b) complete a remodel program of existing locations, and c) open new units to further develop the market.

Finding the right partners

The success of any refranchising deal requires that a franchisee not only has the financial means to purchase existing stores, but also the experience within your industry to run the operations efficiently and profitably.

In July 2012, Arby's announced its first multi-unit franchise transaction since the company was acquired in 2011 by Roark Capital Group, an Atlanta-based private equity firm that specializes in investing in franchised companies and brand-building. Arby's sold 51 company-owned locations and extensive development rights for Dallas/Fort Worth to Guillermo Perales, the nation's largest Latino franchisee and one of the pre-eminent multi-brand franchisees in North America. In addition to remodeling Arby's restaurants purchased in the Dallas/Fort Worth market, Perales committed to building 15 new Arby's over the next 5 years.

In November 2012, we announced our second major deal with another seasoned, multi-brand restaurateur, Tony Lutfi, who purchased 42 Arby's units in the Seattle and Portland markets. He committed to remodeling at least 17 locations and building 5 new Arby's locations in the next several years. Both Perales and Lutfi have extensive backgrounds in restaurant operations and collectively operate more than 500 restaurants in their portfolios.

But beyond industry experience, franchisors need to ensure that franchisees who gain such a large stake in the company are also in sync with their company's core values and philosophies. Perales, for example, shares Arby's mission of community support. As co-founder of the Latin America/DFW Fund that raises money for Latino-based programs and initiatives, president of the International Hispanic Franchisee Association, and a supporter of many programs that encourage Latino students to stay in school, Perales says he felt a synergy with Arby's philanthropic commitment. Last year alone, the Arby's Foundation raised $2.2 million for Share our Strength and the No Kid Hungry Campaign to end childhood hunger in the U.S. And each year, Sun Holdings, Perales's restaurant group, distributes 5 million certificates for free kids' meals and 50,000 free meals on Veteran's Day.

Keeping skin in the game

Arby's refranchising campaign will allow us to expedite brand growth and revitalization in key markets across the country. However, we will always retain a healthy percentage of company-owned Arby's locations and continue investing in our brand. Franchisors are responsible for providing franchisees with proven products and services, marketing campaigns, and operating systems. So before we roll out any significant new initiatives to the system, they are first tested at Arby's corporate stores. Part of the reason we were able to attract high-caliber franchisees like Perales and Lutfi is the significant investments we've made in all facets of the business, from research and development of new products to operations and advertising and marketing.

While refranchising is a strategy that can make sense for many established franchisors looking to accelerate the growth of their brand, timing is indeed everything. Attracting qualified franchisees is possible in any economic climate, but only if the franchisor has a clear vision for the successful future of the entire system. Franchisors considering launching a refranchising program should also be prepared to address questions from franchisees, investors, and the media about the program. It is critical to clearly communicate your intentions, why the strategy will help the brand meet its growth goals, and how the franchisor will continue to invest in the brand.

Hala Moddelmog, president of Arby's Restaurant Group, was hired in May 2010 to lead the transformation of Arby's. She can be reached at hmoddelmog@arbys.com.