Franchise-operated restaurants are owned by private entities who use another company’s business model and brand for a certain period of time. These private entities are responsible for day-to-day operations. They bear all the costs involved in operations and keep revenues generated from the restaurant’s operation, but franchise owners have to pay royalties to the main company for using the brand name and business model.
Analyzing revenue from franchises
From 2011 to 2015, Buffalo Wild Wings’ (BWLD) revenue from franchised restaurants increased from $67 million to $98 million—a growth of 45.7%. This revenue growth was mainly due to increases in the unit count of franchised restaurants, which rose from 498 to 573 during the period.
Positive same-store sales growth also contributed to revenue growth because increased franchised restaurant sales boost BWLD’s royalties. In 2015, the unit count of franchised restaurants decreased from 584 to 573. But BWLD still registered a 4.8% revenue growth due to positive same-store sales growth.
Notably, although revenues generated from company-owned restaurants grew three times faster than revenue from franchised restaurants during 2011–2015, revenues from franchised restaurants as a percentage of total restaurants decreased to 5.4% in 2015 from 8.6% in 2011.
By comparison, during the same five-year period, revenues from this segment of peers Texas Roadhouse (TXRH) and Chili’s Grill & Bar of Brinker International (EAT) grew by ~63% and ~23.6%, respectively. BWLD and Jack in the Box (JACK) make up 0.55% of the holdings of the iShares Russell 2000 Growth ETF (IWO).
Now let’s explore why BWLD is focusing on franchise growth going forward.