Comeback-Driven Red Robin Kicks Up Refranchising Efforts
Among the many tenets in Red Robin’s vast comeback plan, refranchising is one initiative expected to ramp up shortly. The burger brand is currently corporate heavy, with only 89 of its 573 units franchised, although this has been a push two years in the making. CEO Denny Marie Post said in Red Robin’s fourth-quarter review that the company would continue “to seek buyers for the regions that we had identified previously as refranchising priorities.” She added Red Robin engaged an outside firm to dial up the pace on certain markets and to support the sale of any future regions it might choose to franchise.
What this amounts to is roughly 100 existing Red Robin locations, as well as future development opportunities for partners to take the franchise mix up to 30 percent.
CFO Guy Constant said Red Robin would allow franchisees to pick up territories that have some development upside. Meanwhile, the company can grow in “one part of the country when we're ready to do so that we could allow our franchisees to develop along with us in those areas of the country where we would feel like wouldn't be as high a priority for us to develop in the future.”
In regards to expansion, Red Robin is looking at this through a long-term lens. Current refranchising efforts are more in tune with changing the current mix than tacking on locations. The company previously said it would halt growth in 2019 as it looks to shore up operations. Five company-run stores are expected to close this coming year. None are planned to open.
On March 21, Red Robin announced it retained The Cypress Group to manage its refranchising initiative. “Strategically refining our real estate portfolio and pursuing development opportunities with high-quality franchisees is a key component of future growth for Red Robin. We are excited to partner with The Cypress Group to facilitate our franchising efforts and leverage the Cypress team’s extensive deal experience and vast network of potential franchise partners,” Post said in a statement.
She added Red Robin would work with The Cypress Group to determine which markets “may make sense for strategic franchising in addition to the approximately 100 existing Red Robin locations we have previously identified.”
“We look forward to our collaboration with The Cypress Group to help us grow the community of franchise partners who share our passion for the Red Robin brand and are equally excited about our vision to serve generations of families to come with our craveable Gourmet Burgers,” she said.
The Cypress Group is a restaurant staple in the refranchising conversation. The company has more than 35 years of multi-unit M&A and corporate refranchising. Two notable examples are Wendy’s and TGI Fridays. Buffalo Wild Wings also hired the investment banking firm in March 2017 as it was being pushed to refranchise heavy from activist investor Marcato Capital Management. Buffalo Wild Wings said at the time Cypress would help it market roughly 10 percent of company-owned units in the first phase of an ongoing optimization process. When the announcement was made, Buffalo Wild Wings 1,220-unit footprint had more than 600 corporate stores. Of course, things have changed since Arby’s bought the company for $2.9 billion and created Inspire Brands.
The move could help Red Robin reassess its real-estate portfolio, something Post called an urgent task. The chain saw the gap widen between enclosed mall units and freestanding restaurants in 2018. This as dine-in traffic declined a total of 4.2 percent for the year.
She said Red Robin was addressing high-occupancy rates in an effort to improve store-level economics, and the chain secured more than $2.5 million in cumulative rent savings in 2018. “We are targeting additional negotiated savings in 2019 and may take more aggressive actions on our portfolio,” she said.
The likely result? As enclosed mall units continue to decline, Red Robin could shutter units, “where they make sense,” Post said.
Red Robin’s mall performance declined 5.5 percent in the fourth quarter—a big difference from about 3.6 percent for non-mall stores.
Post said this has gotten worse for three straight quarters. Earlier in 2018, Red Robin was riding the up-and-down wave most retail brands were. But the arrow doesn’t look like it’s turning at this point, which has Red Robin “looking with greater urgency at that element of our portfolio,” she said.
Declining traffic and weakness at in-line mall locations affected revenues in Q4. They totaled $306.8 million, down 10.8 percent from the prior-year quarter.
For the full year, revenues dipped 3.5 percent to $1.5 billion, leaving the company with a $6.4 million net income loss. Adjusted earnings per share fell 30.5 percent to $1.73 as same-store sales declined 2.6 percent.
In Q4, same-store sales were down 4.5 percent as average guest check declined 0.1 percent and traffic slid 4.4 percent. The average check decline resulted from a 0.2 percent decrease in menu mix offset by a 0.1 percent hike in pricing.
Here’s a look at where the brand has tracked in the past two years in regards to comp sales:
- Q4 2018: –4.5 percent
- Q3 2018: –3.4 percent
- Q2 2018: –2.6 percent
- Q1 2018: –0.9 percent
- Q4 2017: 2.7 percent
- Q3 2017: –0.1 percent
- Q2 2017: 0.5 percent
- Q1 2017: –1.2 percent
- Q4 2016: –4.3 percent
- Q3 2016: –3.6 percent
- Q2 2016: –3.2 percent
- Q1 2016: –2.6 percent