Sunday, May 6, 2007

Franchising: Darden Restaurants closing 56 Smokey Bones

I caught the story about this in today's Indianapolis Star. I am assuming some of these restaurants were franchisee owned, even though this is unclear from the news.

Darden Restaurants, operator of Red Lobster, Olive Garden and other restaurants, said Saturday it's closing 56 of its Smokey Bones Barbeque & Grill locations, including the one in Downtown Indianapolis and two others in the metro area.
The Star mentions that Darden Restaurants did this to increase profitiablity. Google News provides links to some other articles. From some of these articles I infer they may be corporate stores and that Darden may be looking to sell itself.

From PR Newswire:
"This was a difficult decision because guests continue to give the Smokey Bones experience solid marks and there is a core of restaurants with good sales and earnings levels," said Clarence Otis, Chairman and Chief Executive Officer of Darden. "However, the Smokey Bones concept and related business model was designed to be a nationally advertised brand. Since it is not on a path to achieving this vision, we have concluded that it is not a meaningful growth vehicle for Darden. As a result, we've decided to exit the Smokey Bones business and offer it and the related assets for sale. Even as we make this difficult decision, we appreciate the passion and commitment of the employees of Smokey Bones and we're working to ensure that employees affected by the closures are given opportunities to transfer to other Darden locations. We are convinced this action is appropriate, timely and beneficial to our shareholders."
Articles on Darden as a possible target for buyouts can be found here and here.

Even if the Darden owns these restaurants, this story serves to make a point about franchising. Every franchisee and franchisor needs to think about the sale of the franchise system. Seldom do franchising systems reach the size of McDonalds and a sale of the franchise system is likely, if the system is successful. Of course, every franchisor wants to be as successful as McDonalds. That sums up what I think is the franchisor's interest in selling the system - having such a successful franchise system that someone will pay a lot of money to take over the running of the system.

The issue differs for the franchisee. When the franchisee first looks at the franchise circular the possibility of a sale of the franchise system must be in the franchisee's mind. The franchise agreement provides that the franchisor does certain things for a franchisee but I say that the franchisor brings one overarching thing to the franchise relationship: a marketable brand which will bring profit to both franchisee and franchisor. Within that adjective of marketable lies certain standards. The franchisor requires the franchisee to maintain certain swystem-wide standards. A McDonalds restaurant in Augusta, Maine differs not one essential bit from an McDonalds restaurant in San Diego, California. Customers going from the restaurant in Augusta to the one San Diego can eat without the anxiety of ordering strange food in a strange place. However, the franchisor must also provide a certain level of quality and oftentimes marketing. When contemplating a franchise agreement, the franchisee must be certain that the franchisor's obligations in maintaining the quality of the franchise system are enforceable against the franchisor and the franchisor's successors.