Fast food operator closes locations after Chapter 11 bankruptcy
The overall chain has been struggling, and the franchisee's operating agreement has already been terminated.
When a company operates on a franchise model, it takes on a level of risk.
Yes, it's a positive that the business can expand without the company spending capital. But, the risk is that your franchise operators can damage your name.
Related: Distressed iconic food brand files for Chapter 11 bankruptcy
Every franchise operator has some level of vetting operation when it comes to picking who it will license their brand to. Generally, a potential operator must meet certain net worth and operating capital requirements.
That does not protect the parent company fully. A franchise operator can make poor financial choices, or simply come up against unexpected economic situations.
When that happens, the core brand might be damaged because consumers don't really understand the franchise model. If you visit a pizza chain and have a lousy pie because they cut back on the cost of the ingredients (which would violate most franchise agreements), most people blame the brand, not the local operator.
A struggling franchisee can reflect badly on the brand and lead to problems that the parent company can''t control. Even revoking a franchise license can lead to an ugly court fight.
That's part of the story as a franchisor of Jack in the Box's (JACK) Del Taco brand has filed Chapter 11 bankruptcy which has now led to the closing of 18 restaurants. Image source: Del Taco
18 Del Taco locations closed
Newport Ventures, a Del Taco franchise operator in Colorado, filed for Chapter 11 bankruptcy protection last October.
The bankruptcy petition for the company showed assets in the range of $10MM - $50MM with liabilities in the range of $10 million to $50 million. Newport Ventures reported that the number of creditors is in the range of 100-199.
Newport Ventures also shared that it does not expect there will be sufficient assets in the estate to make a payment to the unsecured creditors.
The franchise operator filed for Chapter 11 bankruptcy protection after Jack in the Box terminated its license to operate its Del Taco locations.
Newport Ventures bought 18 Del Taco locations for $14.1 million in 2023 and borrowed $11.8 million to fund the purchase and remodel some locations. The franchisee also agreed to add 10 more locations, according to court documents.
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That did not happen as Newport Ventures ran into financial problems, some of which it blamed on Jack in the Box, and fell behind on its payments to the franchisor. The parent company terminated its license to operate its 18 Del Taco location roughly a year after the original purchase and they have remained open under a provision of Newport Ventures Chapter 11 bankruptcy filings.
Those 18 locations have closed leaving Del Taco with a single location in Colorado.
Del Taco calls closures "temporary"
Jack in the Box has called the closures "temporary" and said it expects the 18 closed Del Taco locations to reopen "as soon as possible."
“At this time, our Denver and Colorado Springs franchise locations are temporarily closed. We will re-open these locations as soon as possible and will share updates as they become available,” the company shared in a statement to Restaurant Business Online.
The Del Taco brand has been struggling in general, with sales dropping by 4.5% in the quarter.
"For Del Taco, it was another challenging quarter with pressured same-store sales results, and Del is also expected to post negative same-store sales in the second quarter. With that said, we have seen an encouraging start to the menu optimization initiative, which rolled out system wide in the middle of the first quarter and has driven higher attach rates and better average check," Jack in the Box CFO Jack Tucker said during the company's first-quarter earnings call.
Related: Popular burger chain closing dozens of restaurants
Still, the chain has a strong footprint and expects to add new locations in 2025.
"Del Taco restaurant count at quarter end was 589 with one opening and six closures during the quarter. Del Taco expects to be within our original guidance of opening 15 to 20 restaurants this fiscal year. We refranchised 13 restaurants in the first quarter, bringing Del Taco to approximately 80% franchise owned," the CFO added.
