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Food Franchise Industry Report 2014: Industry Segment Overviews

In this section of the report, we take a look at seven industry segments, including growth prospects.


Bakery Franchise Industry Overview

With well over 6,000 retail locations, the bakery café segment of the food industry isn’t just up-and-coming. It’s arrived as one of the major players in the food industry.

Even as health-conscious purchases rise, people acknowledge the need, and benefits, of indulging every now and then. According IBISWorld, the general bakery café industry has outperformed the overall food service sector since the recession. The industry has enjoyed an annual growth rate of 6.5% over the past five years and reached annual revenue of $7 billion. Top franchises include Corner Bakery Café, Panera Bread, Cinnabon, and Auntie Anne’s.

These franchises offer a range of specialties to customers. Some feature a full menu with sandwiches, soups, and additional items. Others focus on certain areas e.g., bread, muffins, bagels, croissants, pastries, donuts, other sweet goods, etc.

Health concerns are a reason for the rise in popularity of some bakery franchises. Nutrition and obesity policies are being adopted across the country. Many bakery café food items are often considered healthier than those offered at quick service counterparts like fast food franchises. To capitalize on these concerns, franchises addressing diet restrictions, such as sugar-free for diabetics or gluten-free for those with celiac disease, show themselves responsive to public needs. Convenience and freshness are other big trends supporting the success of the industry.

Food Franchise Industry Report 2014On the flip side, franchises catering to indulgence desires are also flourishing. Take Cinnabon for example. Company president Kat Cole admits, the company’s signature 880-calorie Classic Roll is “just so over-the-top, it’s a sensory experience” and there are no immediate plans to change the recipe. Although she has considered using less-fattening ingredients, market research showed customers were strongly opposed. They love the Classic Roll just as it is. “It became obvious that it was not the route we should go,” Cole said.


Coffee Franchise Industry Overview

Coffee is second only to water in beverage popularity across the U.S., and consumption continues to increase. According to the National Coffee Association’s National Coffee Drinking Trends 2013 study, 83% of Americans drink coffee with 63% respondents saying they drink coffee at least once daily.

The coffee shop industry as a whole, including franchised and non-franchised outlets, has combined annual revenue of around $12 billion. Leading coffee franchises include Coffee Beanery, Tim Hortons, Dunkin’ Donuts, Coffee Bean & Tea Leaf, and Seattle’s Best Coffee. Coffee franchisees also face competition from independent coffeehouses, bakeries, gas stations, fast food restaurants, convenience stores, and other outlets.

Elevated competition leads many coffee franchises to incorporate several sources of revenue beyond coffee. These items include drinks such as tea, smoothies, bottled drinks and soft drinks. Baked goods and sandwiches are often also offered alongside ready-access wireless technology in a pleasing atmosphere for customers to enjoy.


Fast Food Franchise Industry Overview

Fast food franchises, also referred to as quick service restaurants, are the most recognizable brands in franchising—and for good reason. Quick service restaurants represent approximately 20% of all franchise establishments and 38% of all franchise employment, two stats that top all other sectors. Fast food franchising is the workhorse of the industry—reliable and consistent—yet it currently faces one of the most challenging times in history.

Food Franchise Industry Report 2014One of these challenges is market saturation. Numerous fast food franchises compete with one another for consumer attention and also with full service restaurants and franchises from other segments, like bakery, that have expanded their menu offerings. This competition on a daily basis can be fierce and acquiring consistent consumer loyalty is certainly a costly and energy-intensive pursuit.

Another challenge is an increased emphasis on food quality. Many fast food franchises are perceived as unhealthy which has prompted efforts to allay the concerns of customers by introducing new menu items. These items include wraps, salads, as well as substituting fruit in for dessert items in kid’s meals.

Despite these challenges, fast food restaurants are still expected to grow at a rate of 2% annually. As the only daily meal offering expected to see a sales increase in the near future, breakfast options are a primary factor for increased industry profits. Breakfast daypart growth is expected to hit approximately 9% over the next few years, according to a column in Franchise Times.


Full Service Franchise Industry Overview

Food Franchise Industry Report 2014Full service restaurants are defined as “establishments primarily engaged in providing food services to patrons who order and are served while seated and pay after eating.” Full service franchises can take many forms ranging from buffet to sports bars to more formal dining. Well known full service food franchises include Denny’s, IHOP, The Melting Pot, and Golden Corral.

Full service restaurants only account for about 5% of franchised establishments and 13% of franchise sector employees, mainly because of intimidating start-up costs. Despite this, growing a profitable network is absolutely an accessible goal for those with available resources. “It’s a highly scalable model,” says Rick Bisio, franchise consultant and author of The Educated Franchisee. “With money and management capability, you can build an empire.”

The economic output for full service franchise restaurants is expected to remain steady for 2014, increasing by 1% to approximately $62 billion. Ingredient costs will have an impact on menu items, revenue, and end costs to consumers. Prices for commodities like potatoes, eggs and beef are expected to see inflation rates of 40% over last year’s prices, according to Forbes. Chicken, chicken wings, bread, and pasta will also see increases, but not as sharp.


Ice Cream and Frozen Yogurt Franchise Industry Overview

A sweet way for investors to chase their professional goals, ice cream and frozen yogurt franchises satisfy the commercial market for sweets and have been doing so for decades. Ice cream and frozen yogurt aren’t the only two products in the industry. Related offerings within the industry include gelato, an Italian frozen yogurt similar to ice cream, and shaved ice (snow cone) franchises.

Food Franchise Industry Report 2014The ice cream franchise industry is the more established of the two. The first ice cream franchise reportedly began in 1947. Traditionally a seasonal product, ice cream consumption is more evenly distributed throughout the year than in the past. One step many franchises have taken to increase the appeal of their shops and maintain steady sales year-round is experiment with menu additions such as coffee and baked goods. Another way some franchise companies augment their sales is by offering their products in additional channels like grocery stores.

Frozen yogurt franchises by comparison are younger, making their way on the scene in the 1980s. After a slight dip in the 1990s, the industry came back strong in the mid-2000s and has found its niche in the marketplace. The perception of frozen yogurt as a healthier option for a sweet treat by consumers and the enhanced ability to customize orders are two main factors behind market stability.

Of the entire frozen novelty market, ice cream leads the way with 54% of sales and this figure is expected to remain unchanged in terms of growth for the immediate future. Frozen yogurt franchises are the largest competitor to ice cream franchises. The industry publication Yogurt Nation reveals an expected growth of frozen yogurts sales at $9 billion across all distribution channels by 2016. Commodity prices, particularly the cost of dairy products, will impact the profitability of both industries going forward.


Pizza Franchise Industry Overview

It’s widely believed pizza was brought to the United States by Italian immigrants in the late 1800s and early 1900s, along with other dishes.The popularity of pizza boomed in the U.S. when American troops returned after being stationed in Italy during World War II. The boom in demand led to pizzerias opening all over the country between the mid-1940s and early-1960s. Market leaders include Papa John’s, Pizza Hut, Cici’s Pizza, Papa Murphy’s, and Domino's.

There are four main types of pizza franchises:

  • Food Franchise Industry Report 2014Full service: A sit-down restaurant where the food is served at the table or buffet-style. Many full service pizzerias also offer take-out services.
  • Limited service: Usually customers order, pay and collect their food at the counter. Many of these franchises offer delivery services.
  • Non-traditional location: Customers are served at non-traditional locations including office buildings, shopping malls, stadiums, airports, zoos, rest stops, and similar retail facilities. There may be limited seating depending on the location.
  • Take-and-bake: The newest concept. Customers are able to watch as their pizza is made in the store, and usually it is taken home to heat and eat. Some restaurants of this type are set up for immediate cooking and for customers to eat on-site.

Pizza franchises are another segment that has expanded its menu items to compete with other lower-cost food chains in a bid to retain or gain customers. In recent years, many pizza franchises have launched new product lines such as salads, pastas and chicken dishes.

Pizza consumption is expected to remain high for the foreseeable future. Technomic’s 2014 Pizza Consumer Trend Report finds that 75%of consumers eat pizza at least twice a month.


Other Types of Food Franchises

As mentioned in previous food franchise industry segment overviews, the desire to live a healthier life is having a dramatic impact. One of the big winners from this shift in consumer behavior is the juice and smoothie franchise industry. The highest concentrations of smoothie businesses are located in the Southeast and Western regions of the nation. To continue growing, franchises must reach out to new markets by creating unique flavor options and innovative ways to distribute products. For example, Jamba Juice introduced self-service venues called “JambaGo” in grocery stores, convenience stores, and schools in 2013.

Food Franchise Industry Report 2014Healthy living has also helped the rise of food gifting franchises. Consumers tiring of the traditional candy gifts have begun to turn to franchises like Edible Arrangements and Vom Fass to express appreciation to loved ones. Annual sales for the industry are estimated at around $11 billion, and the potential marketplace for service is huge with target markets being individuals, families, and corporate gift givers. Potential occasions for food gifting are endless, including sympathy situations, graduations, anniversaries, promotions, weddings, housewarmings, holidays, and more.

An often-overlooked segment of the food industry is vending machines. Here is a sampling of additional food items that are currently sold via vending machines:

  • Cold Drinks
  • Coffee & Hot Beverages
  • Sandwiches
  • Pastries & Desserts
  • Salads
  • Fresh Fruit & Vegetables
  • Smoothies
  • Soups
  • Dietary Supplements

Franchises that lead the way in the industry are Fresh Healthy Vending and U-Turn. Note that many vending machine opportunities are business opportunities and not franchises. Each mode of business involves different guidelines and contract terms that each potential investor must consider.

Convenience stores as another part of the industry are actually becoming large players—and not just by hosting fast food, pizza, or other franchise concepts within their spaces. According to the National Association of Convenience Stores (NACS), “while convenience stores have offered fresh, prepared foods for years, it is only over the last decade that the trend has accelerated. The result is that convenience stores have continued to evolve from gas stations that happen to sell food to restaurants that happen to sell gas.”

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