Chipotle could be facing new pressure to franchise its restaurants now that billionaire activist Bill Ackman is its second biggest investor.
Ackman’s hedge fund, Pershing Square Holdings, revealed Tuesday that it took a 9.9% stake in Chipotle. Pershing said it planned to take aim at the company’s governance, operations, cost structure, and strategy.
Ackman may start pressuring Chipotle to sell its restaurants to franchisees as a method of unlocking value in the company, Stephen Anderson, an analyst at Maxim Group, told Bloomberg.
Franchising has facilitated rapid growth for nearly every major restaurant chain in the world, including McDonald’s, Subway, KFC, Pizza Hut and Starbucks.
But Chipotle co-CEO and founder Steve Ells has deliberately abstained from franchising his restaurants in more than 20 years in business. When asked why, the company has said it doesn’t want to relinquish any control over its operations.
“When you franchise, you give up control over how restaurants are run and that can compromise the experience,” Chipotle spokesman Chris Arnold told Business Insider in 2014. “What’s more, our business model is so strong, we would rather not sell off our revenues to franchisees in exchange for only a small percentage of that.”
Arnold also said that Chipotle should franchise if it doesn’t have to.
“The reason we don’t franchise is because we don’t need to,” he said “Companies tend to franchise because they need money to grow and/or operators to run their business. We have plenty of money for growth… and don’t have trouble attracting great people to run our restaurants.”
But that was before an E. coli outbreak that sickened Chipotle customers in 14 states, and sent sales plunging for the last three straight quarters. Sales fell more than 23% in the most recent quarter.
While franchising is a common tool to unlock value in companies, Morgan Stanley analysts are advising Pershing against that route.
“Chipotle has no existing franchisee base to use to kindle this, and there are significant risks to culture and execution,” analysts wrote in a recent note. “From a practical matter, the value in refranchising will likely come from extracting good value for the stores sold, and those are impacted now significantly by the diminished sales.”