Executive Summary with Brad Hayes, Business Banking Franchise Manager at Regions Bank

How Quick-serve Restaurant Brands are Retooling for Growth

As the credit markets show signs of easing, quick-serve restaurant brands are focusing on comprehensive re-branding campaigns to re-establish themselves and regain market share.

“It’s a critical time for many brands,” says Brad Hayes, Business and Community Banking franchise lending manager at Regions Financial Corp. “There is a conscious movement toward remodeling and reimaging of existing facilities in order to convey a fresh look. This type of growth typically requires significant capital requirements, which is something that we at Regions are excited to assist in financing.”

The International Franchise Association predicts a gradual positive trend for franchising in 2013, increasing about 1.4 percent, he says.

“Banks are ready to lend to proven brands with staying power,” says Hayes. “But those less proven may encounter significantly more challenges.”

Hayes talked about the industry’s re-branding initiatives and the focus of financial institutions on growth in the quick-serve restaurant (QSR) category.

What are the challenges in the QSR industry?

Brands are recognizing the need to improve service and cleanliness which many times is being facilitated through the re-branding and remodeling of stores. Brands which succeed in these areas are more likely to experience favorable results than those that do not.

Continuously rising food costs are also an ongoing concern. Some concepts have been able to accommodate this better than others through hedging strategies while other brands may not have the capacity to do so.

Another challenge is increased labor costs.  A potential sizeable hike in minimum wage, would affect brands across the board. In addition, pending health care mandates will likely also impact the industry. Any combination of these challenges could impact the consumer through gradual upward adjustments in the menu prices.

How will these challenges affect brands?

Brands which may have struggled over the last few years with decreased sales volumes are beginning to regain market share and are now seeing positive sales trends as a result of their re-branding efforts. Some stronger brands are “co-investing” with their franchisees in a cooperative attempt to increase sales and promote the brand.  Brands unable or unwilling to invest may be more challenged than others that can, which can lead to continued erosion in both sales and profitability.

How does this impact the lending environment?

Lenders generally have become interested in providing financing to larger and more successful franchisees, who now as a result, are enjoying sources of capital which may not have been so accessible only a few years ago.  Much of this is also being fueled by a highly favorable interest rate environment. Attractive market conditions are also highly accommodating for expansion for operators with readily available access to capital.

Franchisees with limited experience that are interested in expanding their organizations, may however find it more challenging to obtain financing, as credit markets remain tight for loans  to less experienced borrowers.  While loan volume may be trending upward within the QSR industry as a whole, it’s not necessarily in the same proportion for those just starting out and those with limited histories of success.

What resources are available to help franchisees seeking capital?

Regions offers a full array of banking products and services to assist the growth and expansion needs of this market segment.

For operators who are unable to obtain conventional bank financing, we may be able to assist through the enhancement of an SBA guaranty. SBA loans may be used for inventory and equipment purchases, as well as working capital, but the SBA also offers other programs, including some designed specifically for real estate purchases, which can be accompanied by attractive interest rates, as well as specific and accelerated programs for smaller loan requests of up to $50,000.

Our Regions bankers many times work in conjunction with other resources – including CPAs and attorneys who specialize within the industry or even with a particular brand -- in an attempt to arrive at the most suitable financing arrangements for the operator. Brands also may provide assistance through networks of operators who are elected or volunteer to serve on either local or national committees and  share a common interest in assisting in the success of the brand and their fellow operators. In addition to these operator networks, brands may offer other assistance directly to operators. Many of the more successful brands, which have resources in both of these areas, can attribute much of their success to this collaborative effort.

How are financial institutions driving growth in the QSR industry?

The experience attained over the years by banks such as Regions, which has a dedicated Franchise Program in place, has developed an industry of experts within this niche industry.  As a result, we are highly skilled in our ability to provide a full range of banking services to these clients and become viewed as a strategic partner. This skill set has afforded Regions with a better understanding of the various concepts and their unique banking and financial needs.