Food Franchise Industry Reports:
Fast food restaurants, also known as quick service restaurants (QSR) or limited service restaurants are also commonly described as limited menu establishments. Food production is focused for immediate consumption, packaging or both. After purchase, meals may be consumed on-site, taken out or delivered.
The U.S. fast food industry began in the early 1920s in Wichita, Kansas where J. Walter Anderson opened the first White Castle. Hamburgers, fries and sodas were sold for 5 cents each at the time and –since then – the industry has exploded in popularity with annual earnings over $170 billion.
Fast food franchises operate in well over 100 countries around the world. The U.S. has the largest number of fast food restaurant locations in operation and although McDonald’s may be the most recognized, Subway actually more locations in operation around the globe. Other popular franchise brands include Chick-fil-A, KFC and Taco Bell.
According to a Franchise Business Review report in 2012, over 4,000 franchisees from 84 industry brands surveyed are experiencing an increase in profitability and satisfaction. The survey also revealed an increase in the number of sandwich franchise concepts and continued growth in the burger segment; 15% of surveyed franchisees were pizza concepts compared to 25% in 2011.1
Continued Health Push
The fast pace of modern life increases the demand for quick-service restaurants. Nevertheless, people are growing more aware of what they consume and the effect it may potentially have on their health. This awareness creates a greater demand for alternative quick-service foods.
The push for healthier fast food options isn’t new and continues to impact the industry. Fast food franchises have responded to this movement, whether on their own or through legislation, by expanding their menus to include even more nutritious offerings while removing some with less nutritional value.
The health push isn’t limited to simply changing menus. Disclosure of nutritional details also gives consumers the opportunity to make even more informed decisions about how they eat. In 2010, a healthcare reform law was passed with a calorie menu-labeling provision. Although some cities and states already require menu labeling, nationwide enforcement of the law has been gradual. It is expected that adoption of calorie menu-labeling legislation will become more prevalent by early 2013.2
Catering to patrons in an increasingly health conscious society can undoubtedly pay dividends to fast food franchisors. Subway overtook fast food giant McDonald’s in the number of worldwide operating units in 2010 by advertising as an even healthier fast food choice. To appeal to such consumers, some franchises may subsequently take measures to alter their concept and menu, although other franchises may have built such concepts into their system. There are numerous franchises – such as Saladworks and The Pita Pit – which were founded as alternative health conscious quick service restaurants.
Further Development of Mobile Relationships
Mobile phones currently go far beyond their original purpose of making a simple telephone call.
Mobile technology has been a part of the fast food marketing toolbox for years by way of mobile coupons. Technology continues to advance with even more sophisticated methods of reaching active consumers.
Newer versions of fast food mobile applications, such as the one used by Subway, even allow users to watch while their sandwiches are made in “real-time” as they select their favorite ingredients. The application also accommodates health-conscious Subway customers by giving them the ability to count the calories of each meal as they select ingredients.3
Another fast food franchise that has embraced mobile technology is Burger King. Burger King is exploring the next step in the franchise-customer mobile relationship by introducing a mobile payment program. Customers could then pay with their Android or iOS-based device (iPhone) by scanning a QR code located on register counters or drive-thru windows at participating locations. To use this payment option, customers must download Burger King’s “BK Mobile Crown Card” application. McDonald’s and other franchises are also testing mobile payment options.
Mobile payment and other mobile efforts make the transaction process easier and the new technology that accompanies mobile payment may also lead to enhanced interaction and relationship building between franchises and their customers through preference tracking.
The ability to personalize consumer experiences is important to franchisors maintaining success over future generations. “Flexibility and customization is very important to Millennials (those born between the early 1980s and late 1990s),” says restaurant analyst Darren Tristano, executive vice president at the Chicago-based consulting firm Technomic. Mobile phones are personal and they allow consumers to tap into a network that caters to their interests.4
Important Note: The provisions and fees illustrated in this report are only the most common and not a complete listing. Please review the Franchise Disclosure Document (FDD) for all of the provisions and fees related to investing in a specific franchise.
When many prospective franchisees first consider opening a franchise, their main concern is the financial aspect. There are several factors however that must be considered thoroughly before beginning the franchise opening process. One of those many factors is discussed here followed by a brief look at a couple of main financial considerations.
Traditional vs. Non-Traditional Locations
A main characteristic of fast food franchises is customer convenience. As a result, fast food franchises can set up shop in a multitude of places. A traditional location is commonly associated with a freestanding building where only one brand is sold. Non-traditional locations take on a variety of sites including:
• Shopping Malls
• Convenience Stores
• Travel Plazas
• College Campuses
• Military Bases
All franchisors will approve the franchisee’s site ahead of proceeding with the franchise location opening process. Many franchisors will help in the selection of a site by designating parameters from within which a location must be selected or by other means of assistance. In choosing a location, prospective franchisees should be aware of items like traffic patterns (vehicle and foot) as well as ease of access with the goal of finding a site that would maximize exposure of their fast food outlet to potential customers.
The range of investment between franchises can be large due to variations in business systems and execution requirements. The following charts demonstrate this by comparing initial costs associated with opening one of the 10 sample franchises presented.
Initial costs associated with opening a franchise include the franchise fee, training expenses (such as travel and living expenses, not the actual training courses), grand opening marketing costs, and more. One major variable in the initial investment into a franchise is the cost of real estate. Some franchisors may not include land or real estate costs in estimates because of the price variation between locations and whether their franchise system requires a new rather than leased building.
Estimated Initial Investment Ranges for Sample Fast Food Franchises
A significant item within the initial investment is the franchise fee. This part of the overall initial investment grants the franchisee the right to use the franchisor’s trademarks, service marks and other branding. It also gives the franchisee access to the franchisor’s business systems, including training opportunities. Fast food franchise fees can vary depending on the type of location a franchisee chooses to open.
The length of the initial franchise agreement term for the 10 franchises samples range up to 20 years. Franchise term length is dependent upon not only the franchise system, but whether a franchisee is seeking a traditional or non-traditional location. Some franchise term lengths also are dependent on the franchisee’s lease terms.
Throughout the length of the agreement there will be costs for being a part of the franchisor’s business system. These costs include items such as royalty fees, charges for technical support and marketing costs. The most common is the royalty fee and below is a look at the royalty for each of the sample franchises.
Royalties for Sample Fast Food Franchises
In addition to the regularly assessed fees, other fees are charged on an “as needed” basis such as audit fees or costs for additional training. All prospective franchisees should do their research and carefully review a franchisor’s FDD for more detailed information on all systems, procedures and costs involved before investing.