TGI Friday’s said it intends to honor its gift card obligations following the chain’s recent bankruptcy filing, but franchisees say they’re worried they’ll be stuck with the nearly $50 million liability.
The chain filed for Chapter 11 bankruptcy on November 2, citing $37 million in debt and just $5.9 million in cash on hand, and though it plans to sell its assets, the company is described as “asset light.”
In the U.S., the 59-year-old casual-dining chain owns 39 restaurants and has 122 franchised sites. There are also 316 franchised eateries outside the U.S.
“When a company like TGI Friday’s goes into Chapter 11 bankruptcy, it’s reorganizing its finances to try to stay afloat,” Oppizi general manager Nicolas de Resbecq told The Food Institute.
“Those gift cards – normally a simple promise for future meals – become a financial liability,” he added. “Gift card holders might think they’re guaranteed to redeem their cards, but in bankruptcy, companies often have to prioritize paying off their biggest debts first.”
Reuters reported that, after a hearing in U.S. bankruptcy court in Dallas on November 4, franchisees expressed concern they would have to bear the burden of honoring gift cards with no hope of reimbursement from the corporation.
David Chen, director of finance at Srlon, said whether the franchisees are responsible for the gift cards “largely depends on the franchise agreement. Some agreements might require franchisees to honor the parent company’s gift cards while others may not.
“In this case, there’s no one-size-fits-all answer as it’s a part of a larger business negotiation, embedded in particular legal and contractual frameworks.”
U.S. Bankruptcy Judge Stacey Jernigan gave TGI Friday’s approval to continue the gift card program on an interim basis but there were no guarantees it would continue through the duration of the bankruptcy proceeding.
Gift card holders are unsecured creditors and do not generally get priority consideration from the courts. The other pitfall is that with the bankruptcy filing public, gift card holders will rush to redeem them.
“This could lead to a sudden flood of redemptions, putting even more strain on franchisees who already operate on slim margins,” Resbecq said.
“It’s a tough spot to be in, as both customers and franchisees may end up caught in the middle, dealing with the fallout of TGI Friday’s restructuring.”
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