E Why Is Restaurant CapEx Spending Assistance To Franchisees On The Upswing?

Some interesting developments in restaurant franchising are becoming a reality even in the “asset light" restaurant space. It turns out that it does take money to make money in the future.

The requirement for franchisee capital spending (CAPEX)—the big-ticket construction, equipment and information technology outlays—is often underestimated and almost always under reported. These outlays traditionally have been the franchisee’s responsibility. A few chains, like McDonald’s (MCD) and Tim Horton’s (THI) Canada, kept real estate and construction in house and initially corporately funded it, with franchisor cost recovery occurring over time by the franchisee paying at or above market rents. Later, the McDonald's franchisee must pay for remodels, as well as the more costly total rebuilds or relocated units. Typically the franchisee remains responsible to pay for all future remodel and maintenance CAPEX outlays. But this is relatively rare, mostly the franchisee funded the capital spending via friends and family, bank debt, partners and injected cash. That was doable by some, especially after the Great Recession as interest rates remained very low.

This “franchisee sole responsibility to fund” reality has begun to change in some brands over the last few years out of necessity.

First, as the utility and success of technology backed loyalty, delivery and digital interfaces have been pioneered by Panera (PNRA) , Starbucks (SBUX) and Dominos (DPZ), the digital level of complexity has been raised. Restaurant franchisors have come to understand that an IT backbone would have to be built and maintained centrally by brand headquarters.[1] It would have been unworkable for there to be thousands of servers among a brand’s franchisee units all maintained separately—the cost to implement would have been impossibly expensive and many of the systems would be built differently and likely couldn’t talk to one another.   

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Disclosure: The author has no positions in any stocks mentioned.

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