Column: Asset-Light Works Until a Franchisee Falls

Read this fall's franchisor earnings in one sitting and you get whiplash.

On one side, the sellers. Papa Johns refranchised 28 company restaurants in Orlando in August and told investors on its Nov. 5 call it wants company ownership down to a mid-single-digit share of its North American system. Krispy Kreme's franchisees now generate about 42% of its sales, up from roughly a quarter, with half as the goal, as we reported today. MTY, after closing 50 corporate stores in a single quarter, said in its October results: "The Company will focus on reverting to asset light franchising operations."

On the other side, the buyers. Wendy's signed a letter of intent to take back up to 163 restaurants from its bankrupt franchisee Meritage. Dine Brands grew third-quarter revenue 15% by buying its franchisees' restaurants. Bloomin' Brands lined up as the first bidder when Outback's biggest franchisee went bankrupt.

Same season. Same tired consumer. Opposite moves.

Except I don't think they are opposite. I think they are the same strategy caught at different points in the cycle. Refranchising hands operating risk to franchisees. When the consumer softens, some of that risk comes back to the franchisor as a distressed portfolio. Then the franchisor buys, fixes and sells again.

Wendy's CEO Bob Wright said as much. "Where we acquire restaurants, our objective is to improve performance and, in certain cases, position them for refranchising," he told analysts, Restaurant Dive reported. Buy back, repair, resell. That is not a retreat from asset-light. It is asset-light with a repair shop attached.

Look at the timing on the sell side. Papa Johns is handing stores to operators in a quarter when North American comparable sales fell 8.3% and the system has closed 146 North American restaurants this year on the way to roughly 300 through 2027. To its credit, the company is paying for some of the pain: it plans to cut its supply chain margin to 4% and its technology fee to 1.5% in 2027, Pizza Marketplace reported. But the buyer of a refranchised store is buying at a moment of the franchisor's choosing, and franchisors usually sell when they want cash, not when the store is at its best.

There is a third path, and it deserves credit. Denny's, facing a failed 30-unit operator, said it wants other franchisees, not corporate, to take the restaurants. That is a bet that the bench is deep enough to absorb trouble without the brand's balance sheet. If it works, it is the cleanest version of the model. If it doesn't, the stores close.

What I don't know: the prices. Few of these deals disclose what the franchisor paid or received per unit, so we can't yet say whether the buybacks are rescues at fair value or bargains bought from people out of options. That number would settle a lot of arguments.

What I do know is the question every franchisee buying refranchised stores should ask. Not "how light is your model?" but "what do you do when one of us fails?" A franchisor sitting at 5% company ownership has less cash tied up in real estate and fryers. It also has fewer stores to learn from and less capacity to catch a falling operator before the lights go out.

Asset-light is a fine business model. It is a poor insurance policy, and franchisees are the ones holding it.