Buffalo Wild Wings Is Becoming More Like Chipotle in This Key Area

By Demitrios KalogeropoulosFool.com

Buffalo Wild Wings just passed a big milestone: The company -- not franchisees -- for the first time owns a majority of B-Dubs' store base.

The level of corporate control has been inching higher for years, but this quarter's $160 million franchisee buyout finally tipped the scales and pushed franchisees into the minority.

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Source: BWLD financial filings.

To franchise or not to franchiseThe franchise model is attractive because it supercharges profits while making growth easier to manage. Franchising provides corporate headquarters with steady income while spreading out major costs, including for store base expansion, to a wide pool of owners.

That's why many chains operate under an almost totally franchised structure. Restaurant Brands, which controls the Burger King and Tim Hortons brands, owns far less than 1% of its store base. McDonald's maintains only about 20% of its restaurants.

In its 10-K report, Mickey D's sums up the advantages of the franchising setup like this: "Even in periods of softer performance ... cash from operations benefits from our heavily franchised business model as the rent and royalty income we receive from franchisees provides a stable revenue stream that has relatively low costs."

Source: Buffalo Wild Wings.

But franchising comes with one massive drawback: The company has little control over what its franchisees do with its precious brand. Sure, there are agreements that obligate them to a long list of operational standards, but many of the key aspects of the guest experience are ultimately up to the franchisee.

A Burger King franchise contract, for example, includes mandates on menu items, signage, equipment, and suppliers. But the hiring and ongoing training of management is beyond Restaurant Brands' control. And it can't compel a franchisee to upgrade or remodel its store as part of a companywide redesign.

Compare that to a setup like Chipotle's, which involves 100% corporate ownership of stores. Unlike Burger King and McDonald's, the burrito chain has free rein to ensure that each restaurant in the store base is run according to plan. That structure supports the development of "restauranteurs," Chipotle's home-grown management positions. Here's how a CMG executive recently described the difference to investors:

Why B-Dubs is changingB-Dubs' move in Chipotle's direction should come with many of the same payoffs. The wing-slinger's corporate-owned locations have been booking faster sales growth than franchisees have for seven straight quarters (most recently 4.2% vs. 2.5% comps). Part of that outperformance is because franchisees haven't quickly adopted the company's new "guest experience captain" position.

And company-owned locations are getting an extra boost from B-Dubs' new "stadia" store layout, which has pushed customer traffic and average spending higher. With more restaurants under BWLD's control, CEO Sally Smith and her team can quickly roll out initiatives like the guest experience captains and store redesigns.

BWLD's "stadia" restaurant layout. Source: Buffalo Wild Wings investor presentation.

The level of company-owned B-Dubs locations should keep rising. "We don't have a set target for company owned and franchised location mix," Smith said in last month's quarterly conference call. She explained:

The company is happy to trade higher short-term expenses and more volatile earnings for the prospects of accelerated growth and tighter control over the guest experience.

The article Buffalo Wild Wings Is Becoming More Like Chipotle in This Key Area originally appeared on Fool.com.

Demitrios Kalogeropoulos owns shares of Buffalo Wild Wings and McDonald's. The Motley Fool recommends and owns shares of BWLD and CMG. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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