The Fast Food Franchise Industry
Fast food restaurants concentrate on producing food for immediate consumption. Food is often consumed away from the restaurant—by either take out, drive thru or delivery—and can also be eaten on-site in certain locations. Fast food restaurants are also referred to as quick service restaurants (QSR) or limited service restaurants.
Since the early 1920s, fast food restaurants have established themselves as a cornerstone of the U.S. food industry. In fact, restaurants of this type make up over 53 percent of the over 617,500 restaurants in the U.S. The Centers for Disease Control and Prevention also established that fast food accounts for over 15 percent of daily calories for consumers in their twenties and thirties. Annual earnings for the industry are consistently in the hundreds of billions of dollars.
Fast food franchises have achieved popularity outside the U.S. operating in well over 100 countries around the world, though the U.S. still has the largest number of fast food restaurant locations in operation. Popular franchise brands include McDonald’s, Subway, Chick-fil-A, KFC and Taco Bell.
The Push for Healthier Options
The push for healthier fast food options isn’t new, yet it continues to have a major impact on the industry. Fast food franchises have responded to this movement by expanding their menus to include even more nutritious offerings while removing some with less nutritional value.
Children are a major focus of the push for healthier meals. In 2012 it was discovered that 31.8 percent of children and adolescents are considered at least overweight (16.9 percent are considered obese).
To encourage healthy eating options when families dine out, several groups and organizations have initiated changes, such as the widespread Kids LiveWell program. Launched by the National Restaurant Association, the voluntary program is open to restaurants that meet certain criteria. The criteria includes offering and promoting “a selection of items that meet qualifying nutrition criteria based on leading health organizations' scientific recommendations, including the 2010 USDA Dietary Guidelines.” Over 40,000 restaurants participate in the program including fast food franchises Arby’s, Burger King, Chick-fil-A, and Wendy’s.
Even government officials are attempting action to encourage healthier consumption habits. 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 in the near future.
Additionally, in September 2012 New York City Mayor Michael Bloomberg took steps to ban super-sized, sugary drinks at restaurants, cafeterias, and concession stands, though a March 2013 NY state Supreme Court ruling established that Bloomberg did not have the authority to issue such a ban. In July 2013, the New York appeals court upheld the March ruling.
Standing Out from the Crowd
As mentioned earlier, fast food franchises account for over half of the restaurants in the United States. So how does a franchise position itself to attract consumer attention?
One way franchise brands differentiate themselves from competition is by employing technology to engage customers even when they aren’t eating.
For example, Arby’s recently used online games to promote a limited-time offer. During key moments in the games (e.g. winning a level, getting a high score, needing a “rescue”), players were presented with congratulatory messages and chances to interact with the brand. For instance, if players needed help reaching the next level of their game, Arby’s offered help in exchange for watching a branded video message.
The digital efforts played a significant role in the success of the overall campaign. The limited-time offer, for Arby's/King's Hawaiian sandwiches, was one of the franchise’s most recently successful according to Mary Ellen Barto, VP of media impact for Arby’s Restaurant Group Inc.
Another way franchises are courting consumers with technology is by tailoring their offerings to individual customers, particularly via mobile devices.
One such mobile application is used by Subway, which allows 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 each meal’s calories as they select ingredients.
Another franchise embracing mobile technology is Burger King. Burger King is exploring the next step in the franchise-customer mobile relationship by introducing a mobile payment program to make fast food even more convenient.
The main purpose of using technology is customer convenience, though franchisors also benefit because strategic use of digital media creates opportunities for even greater interaction and relationship building with customers—a key aspect of future profitability.
“Flexibility and customization is very important to Millennials,” says restaurant analyst Darren Tristano, executive vice president at the Chicago-based consulting firm Technomic. The ability to personalize consumer experiences through technology will stay important to franchisors to maintain success over future generations.
Choosing the Right Fast Food Franchise for You
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.
There are several factors to thoroughly consider before opening a franchise. One of those many factors—choice of location—is discussed here, followed by a brief look at financial considerations.
Importance of Location
The success of franchises with a physical presence is greatly impacted by location. Poorly situated franchises in a demographic area that cannot sustain business may suffer even if the service and food offered are superb. Additionally, a great location can act as an excellent marketing initiative for potential customers. During site selection, an experienced franchisor is an invaluable resource with dependable knowledge of the kind of market and demographics that will keep the concept thriving.
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 and 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. Some franchisors help in the selection of a site by designating parameters from within which a location must be selected or by assigning professional real estate support. In choosing a location, prospective franchisees should be aware of vehicle and foot traffic patterns 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.
How much will it cost to open a fast food franchise?
When many prospective franchisees first consider opening a franchise, their main concerns are finances. The investment can be separated into two parts: initial investment and ongoing fees.
Investment costs vary for different franchises depending on the particular business system and execution requirements. The following charts demonstrate, by comparison, 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
Throughout the length of the franchise agreement there are 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, with examples below for a list of sample franchises.
In addition to regularly assessed fees, other fees are charged on an “as needed” basis such as audit fees or costs for additional training. Prior to investing, prospective franchisees should do their research and carefully review a franchisor’s FDD for more detailed information on all systems, procedures and costs.