I think it has the potential to be.

I’m no financial analyst, and this is in no way financial advice. 

I am concerned about the potential reputational collateral damage to the franchising model brand of doing business if or when the market falls out of love, given the sheer level of 'hype of love' experienced for GYG.

It is clear that a lot of analysts were also calling this out as incredibly over hyped and over valued on the financials alone.

And an initial 36% surge on launch day was wow, but not unexpected for me given the hype and spin in the lead up.

What big, high profile franchisors do matters, a lot

What big, high profile franchisors do, really matters for the rest, the 1,200+ other franchised brands.

It significantly impacts every other franchisor in the market. 

Only last week I sat with a mid-sized cleaning franchisor lamenting the long-lasting historical damage that the RFG scandals of several years ago did to his ability to sell a franchise for a number of years due to a fear of people 'being ripped off by franchising' as he basically put it.

First thing’s first - we acknowledge the achievement

Don’t get me wrong, I love what GYG are doing broadly. 

But team, you have a serious responsibility as you’ve made some big claims for the future.

I do think we must also acknowledge the amazing achievement by Steven Marks and his entire team and strategy. This truly is the ultimate dream of just about every other entrepreneurial franchisor with an idea and a dream - and they’ve done it. 

And it is actually a fantastic tick for franchising as a business model, a great story of success.

I think they have raised the bar and showed food brands a new level of marketing skill, brand promotion and hype in particular. 

Ironically, I actually still don’t think they are the best Mexican food franchise offering in the Australian market!

That goes to Mad Mex for my personal taste buds :-), but they are certainly by far the fastest growing and most dynamic.

Source: Guzman y Gomez Facebook

GYG hype has taken care of business

In fact, the hype and combined great marketing is what has been crucial in leaving their would-be competitors in the dust. 

In a glaringly obvious opening fast-food niche for the last decade+, Mad Mex has arguably been too conservative, Zambrero has held its own and gone mostly international it seems. And Salsa’s Fresh Mex, who knows what happened there, but Janine Allis’ Retail Zoo had Mexican on a platter years ago, and really dropped the ball it seems. 

I’d love to know what happened to the Salsa’s plan as I remember them as being pretty sharp back in the day and I thought they were absolutely primed.

I flagged way back in early 2020 what I thought was a whole bunch of spin that was being generated to hype the GYG business with no doubt in mind at all that this was where we were headed - IPO.

How many Mexican Restaurants can Australia handle?

One analyst backs up that GYG could have 800 locations in the Australian market alone - what numbers back that up?

Another I read recently referred to 1,000 locations in the Australian market as achievable, backing and giving credibility to what CEO Brett Hilton and the company says to support their IPO hype - which is astounding to hear.

Over $100million in shares we're sold on day 1 according to The Motely Fool. With CEO Brett Hilton selling 47,000 shares, Guy Russo, Chairman $10million worth, and another Director, Bruce Buchanan, offloaded 125,000 shares amongst others.

Clearly, international growth is on their radar and all the best to them, but to suggest that the Australian market could have 500 (quite the stretch to start) let alone 800 or 1,000 GYG Mexican locations is quite a remarkable position to take.

When I talk these numbers, I'm talking and assuming 'profitable' locations. Now that's important in any business, but even more so in a franchise dominant network.

And that is alongside all the other Mexican food brands currently in the market such as Zambrero 237+, Mad Mex 70+, Salsa’s 43, Taco Bell 39, likely continuing to move forward you’d expect. 

Or perhaps acquiring some of them out?

It does sort of feel like quite a lot already, huh?

Does it already just feel like to you that there seems to be quite a lot of GYG locations around you? They have 185 in Australia currently, and around two thirds are franchisee owned.

Are you seeing them often in your daily travels?

Even now, I live within around 10 minutes of 7 locations, and they only have 185 locations in Australia. Imagine 500 or 800, let alone 1,000!

I think these location number suggested targets are highly unrealistic and have concern it will cause reputational damage at some point to franchising as a whole.

Source: Guzman y Gomez Facebook

Tweaking what we know as a ‘store location’

Now, the potential is there to ‘tweak’ the GYG model for sure, so what we see and perceive as a ‘store location’ now, may not be the same in the future.

Perhaps limited stores, express stores in airports, train stations and the like see micro-level brand locations. That is all likely as they tweak the model and milk the market for all they can.

However, that is not what they have claimed when referring to growth locations in Australia. As that would imply reduced range, and thus, sales and transaction values, which would prompt many other questions on the future financial modelling based on the current model.

Imagine that, just another franchise brand with trust issues after the scandals of recent years. But this one, even higher profile again…

Take care GYG, as what you do going forward will impact every single franchise brand in some way at some point.

What do they say in Spiderman? “With great power, comes great responsibility.”

Even reachable on a company-owned strategy?

Now for a predominantly company-owned restaurant model - currently around one third, where the company foots the bill and risk, and employs managers and staff to run the locations, having too many in your market, well, that’s their problem. 

By all measures in my view (and others), it would still be an economically unfeasible stretch in Australia at those numbers.

The impact on franchise owners

Too many locations, and I mean, way too many locations, in a franchised model, becomes the individual mum and dad franchisees problem with them cannibalising each other's sales just a few mins down the road. 

My spider senses might have been tingling if I was a current GYG franchisee on seeing the float. 

“Am I going to have dozens of GYG’s in close proximity within a few years?” 

I wonder if some astute operators within the network have already zeroed in on a shorter term plan of business exit, trying to pick the right moment of potential upside for maximum re-sale price.

This is the problem when such over-inflated location growth numbers become a key factor later down the track in a franchise brand's market-expected growth numbers. 

I fear for ultimate franchisee unit profitability in an environment where the market demands unit growth in alignment with the astounding numbers floated (1,000 units in Australia).

Think F45 recently anyone?

Source: Guzman y Gomez Facebook

Where do other fast food brands sit in numbers in Australia?

It is worthwhile looking at the current numbers for other fast food franchise brands in the Australian market.

Subway - Sandwiches = 1,223

McDonald’s - Burgers, coffee, everything = 1,043

Hungry Jacks - Burgers, coffee, lot’s = 470

KFC - Chicken = 776

Red Rooster - Chicken = 352

The Coffee Club - coffee and wide food range = 234

Guzman y Gomez (GYG) - Mexican food = 185

The question on numbers is one thing, but can the GYG offer be diverse enough to support enough sales to a limited Australian population?

At 1,000 locations for example, they’d have a lot more than The Coffee Club, Nando’s, Gloria Jeans, Muffin Break and Donut King COMBINED!

Does that make sense to you?

What franchise experts privately tell me

I talk to a lot of different people at all levels in franchising as you can imagine, and we talk about a lot of things happening in the sector.

And I can tell you that people in the know, people involved in territory mapping and planning, leasing and brand expansion, have been eye-rolling at the mere suggestion of 1,000 GYG stores in Australia, which could be argued was largely used as bait to hype the IPO valuation.

It’s interesting that the claims from GYG on store growth have now reached out to a 20 year plan. 

A long time-frame stretch goal is a great way to pitch when in a current state of hype, it gives you plenty of runway - for a time anyway.

Australian Population impact

According to the ABS, depending which growth track, slow, medium, or fast will occur, we’re looking at these sorts of numbers;

27 million people now in 2024

35 million people by around 2044

Ok, so an Australian population explosion doesn't seem to be a relevant factor here to lean on.

Source: News .com au - 'Taking on McDonald's'?

It’s a brilliant marketing campaign, perfectly executed over a decade or more

For as long as I can remember, the brand has been talking about itself - that’s right about itself - as on the same level as McDonald’s, or at least aspiring to be. 

I can almost envisage a rule of thumb internally to ‘keep mentioning McDonald’s aspirationally in any media interviews’, type of mantra.

This brilliant macro strategy positioned itself as the underdog, yet at the same time, also the cool on-trend challenger in the markets eyes. Adding ex-McDonald’s senior leadership to the GYG senior leadership was a masterstroke that further cemented this self-placed halo.

And the holy grail of the US market, the ultimate target for so many global franchises, is also another location that GYG pin many of the hype-hopes on. I just can’t see how the brand is going to go over and teach the USA how to do Mexican.

Hey, I might be wrong, and that would be fantastic, an Australian export franchise brand taking large chunks of the US market, that would truly be an incredible Australian franchising success story, and one to be celebrated.

I just don’t see enough differentiation at this point for that to happen. And just can’t see it evolving into such.

Not a GYG hack job

This is not a hack job on GYG. I’m not a GYG hater in any way. 

As I said, I like the business. 

We eat there and love the consistency and high quality experience we enjoy, and like what they have been doing in raising the bar for QSR. They truly are raising the bar.

Much of what they do is outstanding. I enjoy the food, the welcoming atmosphere and environment they create. In fact, for customer experience, they are leaving the likes of McDonald’s as an example, well and truly behind. 

Source: Guzman y Gomez Facebook

My key fears

I just fear that on seeing the incredible early success of this, that a couple of key things happen.

Other brands tempted 'over-sell'

That firstly, other franchise brands may start to stretch the reality of actual achievable growth potential to ‘over-sell’ their concepts. And it’s subtle, but underpins a broader brand-value proposition pitch to a would-be new franchise partner.

Maybe not at a heavily scrutinised IPO level, but perhaps in recruitment promotional language and chats at franchise expos and the like to potential buyers / investors. 

A trickle down effect of the GYG IPO success and emulating the formula at some reduced level.

For the most part, experienced franchise executives and brands are reluctant to be pinned on specific growth numbers, because they know a lot of factors go into making it work over a sustained period. Many don’t want to be quoted on a big number unachieved 2 - 3+ years down the track…

You normally hear big growth and store number claims from naive new franchisors who are always incredibly enamoured with their own brand or concept - until the reality of the competitive market shows them otherwise.

I see and hear this all the time at franchise expos for example when talking to many launching their new concept. Often, they are so excited that they say these lofty targets on camera before they have even sold one franchise.

Franchise business model collateral damage

And secondly, my other fear is that if the market falls out of love, that the GYG lofty proclaimed potential location numbers don’t come back to severely haunt them, and even worse, their franchise owners.

And worse again, tarnish the franchising business model name once again for everyone else.

With great power, comes great responsibility…