Fast Food Franchise Industry Study

 

US Fast Food Franchise Industry Report

 

FF signThis study outlines a brief review of the U.S. fast food restaurant franchise industry based on data collected from Franchise Disclosure Documents (FDDs) and from published industry sources. The FDDs covered 22 fast food franchises in the U.S.

When J. Walter Anderson opened the first White Castle in Wichita, Kansas in 1921, it marked the beginning of the fast food industry in the US. They sold fries, sodas and burgers at 5c each. The modern day market leader, McDonalds, didn’t open their doors for business until 1940 and with the help of Ray Kroc, McDonalds’ first franchisee, they have since become the world’s largest food service retail chain. The fast food industry has over 300,000 units in the US alone and US fast food franchises are present in over 100 countries around the world. The global fast food industry generated total revenues of $154.7 billion in 2008.¹

¹Datamonitor, Global – Fast Food (Published august 2009)

Market Definition
 

A fast food restaurant, also known as a quick service restaurant (QSR), is described as a limited menu establishment which lends itself to production line techniques of producing food that is served packaged for immediate consumption, on or off the restaurant premises. Fast food customers normally order at a counter and pay before eating.

Industry
 

Market value


fast foodThe fast food industry in the US consists of nearly 300,000 restaurants and franchised units and is projected to post sales of $163.8 billion for 2009, a gain of 4.2% over 2008 which generated total sales of $157.2 billion.²  A typical fast food restaurant or franchise generates sales of $670,000 annually according to the National Restaurant Association. The fast food industry has exhibited a continuous growth rate over the previous 3 years and the value of the fast food industry is forecast to continue to grow by approximately 4% each year.³
 

²National Restaurant Association, 2009 Restaurant Industry Forecast: http://www.restaurant.org/research/forecast.cfm
³Datamonitor, United States - Fast Food (Published August 2009)

 

Market Volume


The US leads the global fast food market, accounting for 52.4% of the market's overall value. According to a report released by Datamonitor the fast food market reached a volume of 36.6 billion sales transactions in 2008. The number of sales transactions has grown at a stable rate of 1.6% for 2007 and 2008 but is however predicted to slow marginally in the coming year due to a lack of consumer spending. 

Segmentation


McDonalds is the clear market leader in the fast food industry. For 2009 McDonalds recorded $30,025 million in sales, the highest in the industry. Burger King has the second highest sales in the industry with generated sales of $9,600 million. The fast food industry is highly fragmented with the top 50 companies holding about 25% of the industry sales.

The following break down of projected increases in sales by state was released by the National Restaurant Association.  Sales growth favored the West of the US in 2009. The states predicted to see the greatest sales increases are:


•    Texas (up 4% to $35 billion)
•    Nevada (up 3.5% to $5.2 billion)
•    Colorado (up 3.4% to $8.4 billion)
•    New Mexico (up 3.3% to $2.7 billion)
•    Arizona (up 3.2% to $8.7 billion).


By overall sales volume, the top states will be:


•    California
•    Texas
•    New York
•    Florida
•    Illinois


Franchise Direct’s Top 100 Global Franchises is dominated by fast food franchises, with McDonalds and Subway coming first and second respectively. Of the top 10 Global Franchises, 6 of those are fast food franchises. Pizza Hut, KFC, Burger King and A & W all feature.


º2009 Restaurant Industry Forecast: http://www.restaurant.org/research/state/index.cfm
 

Demographic


The customer base for fast food franchises and restaurants includes the entire population; however the population aged between 12 and 30 years of age averages the greatest frequency of patronage in fast food establishments as they are the category with the greatest disposable income. 

Trends affecting the fast food market

Value for money

Fast food franchises continue to offer the customer the value-for- money that is desired. 36% of franchisors, owners and operators have reported that there is an increase in the demand for value. The good news is that operational improvements have resulted in considerable savings, which can then be passed onto the customer while maintaining the same standard in food and service. The price of fast food is low but the portions are big which leads customers to feel satisfied both gastronomically and financially.

Health and Nutrition

Healthy SaladIn recent times, the fast food industry has had to contend with claims that its food is, as standard, unhealthy, full of empty calories and lacking in the essential vitamins and minerals required for day to day life. Fast food franchises have responded to this by expanding their menus and adding new, healthier offerings and removing or changing some of the unhealthy ingredients found in their products. This move is reflected in the recent evolution of the McDonalds Happy Meal. They can be ordered with a side of apple dippers (with low-fat caramel) instead of fries and low-fat milk or fruit juice instead of soda. McDonald’s fries are now also made in a healthy canola-blend.

Many franchises and restaurants have incorporated a much larger health food section to cater for the health conscious customers and a larger non-meat section to cater for vegans, vegetarians and other dietary requirement choices. Yum! Brands owned KFC has recognized this consumer trend towards healthier eating and in response they have moved away from their staple fried chicken and are now offering Kentucky grilled chicken. 

Green Initiatives

Three in ten fast food operators say that they will dedicate more of their budgets to green initiatives in the year ahead according to the National Restaurant Association.
Introducing green techniques and policies now means that a business can run more efficiently and effectively making it a very strong trend for 2010. More restaurants will be seeking to gain “Certified Green” status to attract eco-conscious customers. Fair trade certified will continue to factor into food choices.

Opportunities and Variety


Location

ff restaurantThe location of a fast food franchise is crucial to the success of the franchise. Customer convenience is critical and so a fast food franchise needs to be in a place with high traffic, whether that be foot traffic or car traffic, and easily accessible. A premium site will need to be carefully selected before opening a franchise. Many franchisors will help with this process either by helping with the actual selection or approving it afterwards. A new franchisee should be aware of such factors as the population of the area, traffic flow and the walking patterns to maximise the exposure of the restaurant to potential customers.

For example, Church’s Chicken offers a potential franchisee the opportunity to operate a franchise in a variety of locations. Church’s Chicken’ franchises are located in


•    Freestanding buildings
•    Storefronts
•    Mall Locations
•    Convenience Stores
•    Airports
•    Travel Plazas


A Church’s Chicken franchise may feature walk-in, drive-in, or sit-down formats.

Church’s Chicken  utilize their judgement and experience in aiding a franchisee in  selecting a location based upon population density, traffic patterns, market statistics, and proximity of shopping centers and schools, competition, accessibility to public services and assessment of future demographic developments.
 
Support and Brand Recognition


A fast food franchisee will benefit not only from the continuous support, knowledge and experience of a franchisor but will also be able to take advantage of the brand recognition developed by the franchisors. A well-known fast food franchise can instantly establish brand recognition. For instance, the golden arches are instantly recognizable as McDonalds, as too is Colonel Sanders recognized as KFC. 
 

Fast Food Franchise Companies


The table below provides an overview of the estimated initial investment required to open one of 22 fast food franchises as well as the initial franchise fee payable on signing the franchise agreement and the ongoing sales royalties payable to each franchisor. It also contains a detailed profile of each franchise which presents these costs in more detail.  The profiles are extracted from Franchise Disclosure Documents (FDD) of the 22 franchisors.
 

Name of franchise Initial franchise fee Royalty Total Initial Investment – Low-    Total initial investment
-High-
A&W $20,000 5% $611,400 $1,130,000
Alohana $25,000 3% $218,200 $456,000
Arbys and Wendys $37,500 4% $180,700 $504,400
Burger Hut $35,000 5% $424,084 $474,458
Burger King $50,000 4.5% $1,408,000 $2,486,000
Charleys $19,500 5% $126,500 $408,500
Cheese Steak $15,000 5% $199,500 $299,500
Chick-fil-A $5,000   $267,890 $884,950
Church’s Chicken $15,000 5% $609,800 $1,113,600
ElPolloLoco $40,000 4% $416,850 $789,850
Hardee’s $35,000 4% $1,095,800 $1,497,500
KFC $25,000 4% $1,142,300 $1,732,300
McDonalds $45,000 4% $182,375 $1,842,700
Papa Romanos $25,000 4% $179,500 $348,300
Pipes Café Licensing $20,000 4% $191,000 $274,000
Pollo Campero $20,000    5.5% $1,234,400 $1,726,000
Popeyes $7,500 5% $292,300 $400,100
Qdoba $30,000    5% $439,000 $727,000
Sonic $30,000    5% $1,194,300 $3,398,800
Taco Bell $45,000 5.5% $242,800 $536,000
Wing Stop $16,500 5% $255,440 $408,070
Woodys Hot Dog $75,000 6% $61,000 $447,000

 

Permits and Licenses

man drinkingA franchisee or owner of a fast food establishment will need to comply with local, state and federal laws that apply to the operation of the franchise, including health and safety, sanitation and employment laws. Advertising may be affected by federal, state and local regulations and it may even require point of sale disclosure of certain information on nutrition and the dietary characteristics of the food served at the franchise. It is recommended that a perspective franchisee should consult with an attorney concerning these and other laws that may affect the operation of the franchise.

Conclusion

The fast food franchise industry has experienced continuous growth over the previous 3 years and is forecast to continue to grow by approximately 4% each year. This is good news for any perspective franchisee. A franchised fast food establishment provides a franchisee with not only full training programs and continued support but also with strong brand recognition.


The trends that will affect consumer spending in the fast food industry in 2010 are a continuation of some of the trends that we saw in 2009. Consumers still want value for their money, healthier options and to know that the company they are buying from are environmentally responsible and are taking actions to decrease their negative impact on the environment. 
 

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