Pizzerias caught in the credit crunch

Oct. 20, 2008
As the credit crisis reverberates through the economy, dough is getting tight for pizza companies.
The tightening credit markets have forced several pizzeria operators to put expansion plans on hold as sources of financing dry up. Companies that had planned to sell company-owned restaurants to franchisees are also seeing their plans put on the back burner.
Yum Brands Inc., parent company of Pizza Hut, Taco Bell and KFC brands, had planned to sell 500 of its company-owned restaurants to franchisees this year. Although the company has nearly reached that goal, tight credit markets are making it more difficult for potential franchisees to obtain financing and lengthened the amount of time it takes to close deals.
Selling those restaurants would free up operating capital for Yum and help boost the company's bottom line. While the company has seen tremendous growth overseas, its U.S. business has remained sluggish.
Yum currently owns about 20 percent of the 18,000 restaurants it operates.
And No. 2 Domino's is finding itself in similar straits as it tries to sell struggling stores to stronger operators. Domino's officials said recently the company will consider making loans to franchisees to help them deal with the lack of credit.
Domino's CEO David Brandon doesn't find the thought of loaning money to franchisees particularly appealing.
"It will never be my preference to provide financing to our franchisees," he said. "We would rather keep our relationship with them focused on being the franchisor rather than their bank. However, we are wading through uncharted waters and we are not going to let our (strongest) franchisees fail if there are ways we can be helpful with some short-term financial support and solutions."
Throughout the industry
Papa John's CEO Nigel Travis also raised the spectre of a credit crunch during an August earnings call.
"While we haven't seen any slowing of development yet attributable to franchisee financing problems, we believe the possibility exists for that to occur," he said. "We have seen financing issues impact restaurant consolidation within our system, including creating additional hurdles for some of our refranchising initiatives."
Operators from all segments agree that the current credit crunch has battered the industry.
At the end of September, an official from Oklahoma City-based drive-in restaurant operator Sonic was quoted by Dow Jones Newswires as saying that GE Capital's franchise lending unit was calling a temporary halt to loans to new franchisees.
The report came just days after Sonic announced a four-year plan to refranchise some of its underperforming company-owned units, or partner drive-ins, and expand into new markets by franchising.
Industry analysts warned that limits on financing could hurt restaurant operators such as Sonic and Panera Bread, who rely on franchising to fuel expansion.
Sonic officials were quick to downplay the significance of GE's move.
"GE is just one of many lenders who finance Sonic franchisees and, in fact, many franchisees maintain access to other diversified sources of financing," the company said in a news release. "Furthermore, Sonic has not received any notification from GE Capital, either directly or indirectly, that it will stop financing new loans to Sonic franchisees."
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Yum officials also assert that tight credit markets won't hurt the company. During a third-quarter conference call with analysts and investors, Novak was quick to point out that Yum's future doesn't hinge on the refranchising effort.
"We've always said that this is a long-term opportunity for us, not a problem," he said.
Established relationships
While financing for major deals may be hard to come by, some operators say that the ability of smaller restaurant players to obtain financing for day-to-day operations hasn't changed all that much.
"It has always been difficult for a restaurant operator to get a bank loan," said Jeff Rosati, chief financial officer for Chicago-based Rosati's Pizza. "It isn't any different than it ever was."
Rosati's company borrows on a fairly consistent basis and so far his bank hasn't indicated there will be any problems. He agrees, though, that he would have a more difficult time borrowing if he were just starting in the industry.
"I think it depends more on your banking relationship," he said. "If we were to go to a new bank today, even with our financials and track record and history, it would be hard to get financing."

Topics: Financing and capital improvements , Operations Management

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