Dive Brief:

• Jack in the Box franchisees have filed another complaint against corporate, this time due to lease restructuring, according to a release from the National Jack in the Box Franchisee Assocation. The new strategy, first announced in an Oct. 8 letter to landlords of 1,800 properties — 900 of which are in California — moves leases to a newly formed subsidiary, Jack in the Box Properties LLC.
• In the complaint filed with California’s business oversight department, franchisees allege the company wants to build credit worthiness and obtain additional financing, but they worry landlords could refuse to work with the new LLC, jeopardizing their business. The current leasing system, pioneered by McDonald’s and Subway, already keeps agreements under corporate control, according to Restaurant Business. Rent, taxes and insurance go to Jack in the Box, which remits payments to each landlord, leaving franchisees out of those direct relationships.
• The association represents almost all of the company’s 2,000 or so franchised stores, owned by 95 franchisees. Because the Oct. 8 letter warned landlords of lost assets or revenues to cover rent, the group’s attorney Dan Watkins said the filing intends to “insure the franchisees are protected from losing their livelihood as well as their employees.”

Dive Insight:

This tension escalates an arduous year for Jack in the Box and its franchisees, who have recently called for the CEO’s ouster as well as a seat on the board. If landlords refuse to follow suit with the restructuring plan, according to the letter obtained by the association, Jack in the Box might cut the restaurant off. Owners, meanwhile, already have little to no recourse because they don’t pay the landlords directly in the first place, a common reality in franchised restaurants.

McDonald’s, for instance, typically owns properties outright. Jack in the Box functions like Subway, acting as the primary lessee for all of its operators, per Blue Maumau, a franchise owner-focused news site. In some cases, companies require franchisees who own their own properties to lease them to corporate, which in turn subleases the space back to the operator. It’s a convoluted system, but one that lets the company maintain strict control — and higher profits — over its franchised business. When owners don’t see their lease agreements, they don’t know how the company and the landlord split rent payments. It’s also not terribly uncommon.

Currently 94% franchised, Jack in the Box could be setting up for 100% with the new property company, or it could be angling to inflate credit value during these months of slow growth. Since selling off Qdoba in March, revenues have dropped significantly to $177.5 million from $232 million at this time last year, while profit fell to $16.3 million, or 68 cents per share compared to last year’s $1.05. As of its fourth-quarter earnings report on Monday, Jack’s stock has dropped nearly 18% in the past year.

Watkins told Blue Maumau that landlords might presume assets remain with the core company and decide the new company lacks preferred protections. Owners would have no recourse should their landlords “balk at leasing to the new Jack in the Box property entity,” he said.

Given the ominous “no revenue” warning in the letter to landlords, Jack in the Box might hold another kind of leverage over the franchise agreements unbeknownst to operators. They face a grim outlook in the coming months, too, as the fiscal year 2019 projects only flat to 2% growth.