Dive Brief:
- Jack in the Box has engaged The Cypress Group, a restaurant and franchising investment banking firm, to manage the sale of select company-owned Del Taco restaurants to new and existing franchisees, the company announced Wednesday.
- The sale of these units, which make up about half of Del Taco’s roughly 600-unit system, will begin immediately and represents a shift towards a more asset-light portfolio for the brand.
- Jack in the Box is planning to make significant progress on its refranchising of Del Taco units in 2023 by partnering with franchisees who are interested in developing additional restaurants.
Dive Insight:
Jack in the Box has been leaning into franchising to drive growth after it restarted its franchising program in 2021. It’s also offering multi-unit franchisees discounted royalty rates during the first five years if they commit to opening at least three stores.
The company has been refranchising units across several markets, signing a letter of intent to refranchise seven stores in Oregon. As of August, franchisees represented 84% of the company’s system compared to 93% before it closed its Del Taco acquisition. The company is aiming to bring that number to 93% within the next few years, according to The Wall Street Journal.
“Identifying appropriate partners as part of this effort is critical, both in terms of strengthening our franchisee base across both brands so that we can deliver attractive annualized net unit growth by 2025, as well as maximize proceeds,” CFO Tim Mullany said during the company’s August earnings call.
Jack in the Box’s partnership with The Cypress Group could help it reach this goal, as Cypress has over three decades of experience with multi-unit mergers and acquisitions and corporate refranchising in the restaurant industry, according to the press release.
Del Taco is already on a growth trajectory. As of the end of fiscal Q3 2022, Del Taco had signed agreements with franchisees to open 79 new Del Taco units across 11 states, Jack in the Box CEO Darin Harris said during the August earnings call.
Franchised stores also tended to perform better financially than company-operated units in recent quarters. Franchised same-store sales increased 4.8% while company-owned units increased same-store sales by 2.3% during the third quarter, Mullany said. Compared to 2019, franchise sales were up by double digits while sales at company-owned units were up by mid-single digits.
An asset-light model comes with significant financial benefits. By having fewer assets on its balance sheet, Jack in the Box can continue accessing securitized debt. This form of debt is a less expensive option than conventional term loans, since it offers low interest rates in exchange for debt that is backed by recurring royalties provided by franchisees, according to The Wall Street Journal. Jack in the Box would reduce its exposure to inflation risks and establish a simplified business model with this strategy.
