| Domino’s move to thaw credit freeze via loans to franchisees portends trend
By SARAH
E.
LOCKYER
Burger King spokeswoman Deborah Martin said the company has not yet needed “to commit [its] balance sheet to help franchisees fund new restaurants or remodel existing ones.” She added that Burger King had not experienced “any broad-based lending pull-back in [its] system.” Tim Hortons officials could not be reached for comment at press time. At Ann Arbor-based Domino’s, its successful franchisees—what the parent company labels “A” and “B” operators—could get transactional help when looking to purchase underperforming stores, or those units run by the “F” operators the company is trying to force out of the system. This shuffling of operators is part of Domino’s strategy to turn around domestic results, which have battled stalled sales. That plan is now at risk. “There just doesn’t seem to be any capital availability to finance those transactions,” Brandon said. “The bank credit market has been very tough, and it’s gotten exceedingly worse.… I think their credit committees have gotten very conservative as the overall banking industry has gone through its own form of hell.” Domino’s has 8,726 locations worldwide, including 5,086 U.S. units. In the U.S. market, franchisees operate 4,574 locations, or nearly 90 percent of the total market. Many of those franchisees are small businesses that own and operate a handful of locations. Any franchisor-led lending case will be approached on an individual basis, the company said. Options for financing would include small amounts of bridge financing or deferrals of royalties or other costs, and any lending would include relatively small increments. “I don’t want to be a bank,” Brandon said. “It’s never been our plan or our interest. So whatever we do…will be done at a very low level and will not be material to our financials.” For the third quarter ended Sept. 7, Domino’s reported an 8-percent drop in profit, to $10.1 million. Its revenues fell 4 percent to $323.6 million. While agreeing to support certain franchisees, Domino’s also said it would need to explore additional sources of corporate liquidity, as the now-bankrupt Lehman Brothers was a primary lender. The failed investment bank was responsible for commitments of up to $90 million under Domino’s $150 million variable funding notes. Domino’s said it held sufficient operating funds “for the foreseeable future” and that other lenders may be able to fill any gaps. At Sonic Corp., the franchisor or operator of 3,400 restaurants, an aggressive growth plan coupled with a refranchising program could be difficult to execute with the current credit freeze, analysts said. In a conference call, however, the company said most of the franchisees looking to purchase corporate units and most of the operators that have agreed to expand are either self-financed through operating cash or already well-financed. No development projects have been lost, the company said, but operators are reporting that deals require more equity and take longer to close. Sonic officials said required equity now averages between 20 percent and 30 percent, compared with 10 percent to 15 percent last year. One analyst asked if Sonic would consider backing loans to franchisees. The company said it did not have to yet. “Our focus is to consummate [financed] transactions as quickly as possible,” said Clifford Hudson, Sonic’s chairman and chief executive. “We will deal with the eventualities of the tightened credit markets as those situations arise.” | 
