Reporter's Notebook
Want to generate higher sales? Don't franchise

Want to generate higher sales? Don't franchise

This post is part of the Reporter’s Notebook blog.

Company-owned brands generated higher sales growth last year than franchisee-owned concepts, at least according to figures from Technomic, and it wasn’t particularly close. 

The Chicago-based consulting firm analyzed data from its Top 500 Chain Restaurant Report and noted that the 275 brands that own and operate more than half of their locations averaged a 5.6 percent increase in sales last year.

By comparison, chains that operate fewer than half of their own units averaged a 3.2-percent sales increase.

But the gap widens into a gulf if you compare all company-owned brands with all-franchisee brands.

The 183 chains on Technomic’s ranking with no franchisees averaged a 6.2-percent increase in sales. By comparison, the 44 brands that are entirely franchisee-owned on average reported a decrease in sales of 1.6 percent. That’s a big gap of 780 basis points.

So much for the idea that heavily-franchised companies only focus on top-line sales.

These numbers should come with a caveat: It’s just one year. And one year is just that — a single year. That’s a small sample size from which to draw too many conclusions.

But they also demonstrate how franchising seems to have evolved from a growth model and into a long-term investment strategy.

The Technomic data uses systemwide sales, and growth in total sales comes from new unit development as well as same-store sales growth.

In theory, franchisees should grow faster than company-operated chains. Companies typically franchise because they can add new units more quickly by spreading the financing burden across many different franchisees, rather than a single company. And franchisors are focused heavily on generating top-line growth.

In recent years, however, that seems to have turned on its head. Large, no-growth concepts are more likely to turn to franchising, while high-growth chains are less likely to franchise than they were just a few years ago.

Indeed, at least part of the explanation for the lack of sales growth on the part of franchisee-heavy concepts is because more of them are large legacy brands that aren’t adding new units. Chains like Burger King, McDonald’s, Wendy’s, KFC and other big concepts have either halted new unit development or are closing locations. It’s hard to generate total sales growth when you have fewer units.

Only six of the 30 largest restaurant chains in the U.S. are company-operated brands.

Brands are refranchising more often because investors love franchising and its low capital costs and higher profit margins. But as I’ve noted before, it tends to be a strategy for companies that generate thinner margins. Those with higher profits keep operating more units.

Meanwhile, fewer emerging chains are taking up the franchising mantle as they seek to expand.

The Great Recession hammered franchise credit, especially for emerging concepts, forcing many of these chains to look at other strategies to grow.

In addition, more emerging brands are attracting private equity dollars at earlier stages of their development. And so they don’t need to franchise to expand like they might have a few years ago. If a brand doesn’t need to franchise, it probably won’t. 

These are just generalities, of course. Plenty of small chains are using franchising to grow, and as chains such as Chili’s and Buffalo Wild Wings have demonstrated, not all big brands are refranchising.

Still, it seems, franchising is less of a new chain’s game, and more of a big chain’s evolution.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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