"It's a competitive field that rewards passion and hard work." - Guy Guthrie, Hwy 55 Burgers Shakes & Fries Vice President of Franchise Sales
Competitive is only one way to describe the biggest franchise industry segment in the world. Yet, despite its vastness, it still has room to grow – and shows little sign of slowing down.
Case in point. Of the top 8 fastest growing franchise industry segments (by percentage of new brands added since 2013), two are food-related. Keep in mind, the United States franchise industry gains around 300 franchise concepts per year, and has well over 200 different lines of business in operation. Approximately 25% of the fastest growing industry segments are still in food.
For those with the passion and work ethic, the food franchise industry can indeed be a rewarding area.
The Major Segments of Food Franchises
One reason so many food-related concepts open yearly is there are so many options for what people can eat – not to mention all the different ways that food can be prepared. Below is an overview of the major food franchise segments. Something to note is franchises can crossover between the given segments.
These franchises focus on certain product areas for their business e.g. bread, muffins, bagels, croissants, pastries, donuts and other sweet goods. A number of franchises in this area have menus that feature other items like sandwiches, soups, etc. to stabilize income.
The coffee franchise industry is well-developed and competitive. And there’s no wonder why. Coffee is second only to water in beverage popularity in the U.S., and consumption continues to increase. Many coffee franchises have other sources of revenue – including baked goods or sandwiches.
Fast Food Franchises
With an estimated 20% of all total U.S. franchise establishments, fast food is the most common franchising segment. Food production in fast food restaurants, also known as quick service restaurants (QSR), is focused on immediate consumption. Fast food meals are commonly taken out or delivered. However, some fast food franchises offer limited on-site seating.
Full Service Franchises
Full service franchise restaurants encompass a range from casual family-style eateries to upscale restaurants. Meals from full service food franchises are typically eaten on-site, although takeout or delivery service may be provided.
Ice Cream & Frozen Yogurt Franchises
The demand for frozen desserts is more evenly distributed throughout the year than it was a few decades ago. Customization has become a feature of many ice cream franchises as those franchises are taking lessons from the surging frozen yogurt franchise segment.
Juice and Smoothie Franchises
Franchises in this segment have seen a boost from the general public’s turn towards healthier food options. Furthermore, regulations banning soda machines from school have led to franchises, like Jamba Juice, creating vending machines for its wares.
The four main types of pizza franchises are full-service, limited-service, non-traditional, and take-and-bake. It’s also the segment in which a major trend has developed over recent years. More on that trend below in this report.
Retail Food Franchises
Yes, even convenience stores should be mentioned in a food franchise report. Over the past several years, the C-store industry has challenged the other food franchise industry segments by increasing its food offerings, particularly the segments that offer quick, on-the-go items. Additional retail food franchises include liquor stores and caterers.
Vending Machine Franchises
While it’s true many vending machine companies are business opportunities, there are some franchise options. The vending machine food franchise segment is a bit of a catch-all grouping with machine-featured offerings going well beyond the traditional snacks and sodas to anything from cupcakes to smoothies.
Snapshot of the Food Franchise Industry
For data collection purposes, the franchises within the food industry are divided into three areas: full service restaurants, quick service restaurants, and retail food. These three segments account for approximately 33% of the total franchise establishments in the United States, according to IHS Economics.
The number of full service franchises is expected to grow to 38,244 in 2016. It’s the smallest of the three areas by number of locations, bringing in about approximately $70 billion dollars annually. The full service franchise industry is expected to experience a 6.3% growth in sales this year.
The middle area, in terms of size, is retail food. By the end of 2016, IHS Economics expects a 4.7% increase in retail food franchise sales to just under $45 billion, along with an increase in establishments to 63,840 – a 1.5% growth over the number establishments open at the end of 2015.
The most common food franchises, QSRs, are also expected to enjoy a 6.3% sales growth like their full service counterparts. A sales increase of that number would lead to sales of $248 billion for the year. The 2016 estimated increase for establishments mirrors that of retail food franchises at 1.5%, which would lead to a total of 159,839 fast food restaurants.
The stats above give a macro level overview of what’s going on with food franchise industry growth. What about on the micro level? Below is a more tangible look at how the last few years have gone for individual franchises by looking at the end of year U.S. unit counts for 10 various food franchises.
End of Year Unit Counts from 2013-2015 for 10 Sample Franchises
The consumption of breakfast and morning snacks is expected to grow by 5% through 2019, and food franchises want to be on your mind from the minute you wake up.
The most known example of this is McDonald’s. Of course, McDonald’s has been offering breakfast for decades, but it wasn’t until last October that the fast food chain rolled out its all day breakfast plan. The move has McDonald’s back on a positive track – and surpassing Wall Street expectations. In the first quarter of 2016, the fast food franchise recorded a 35% increase in profits for the quarter. This marked the third consecutive quarter of positive results for the company, following a two-year dip in sales.
Other franchises turning to the traditional first meal of the day to boost sales include Subway, which recently launched a multi-platform campaign called “Déjà Vu” to raise awareness of its morning meal options.
With the increased morning competition, traditional breakfast providers like Dunkin’ Donuts have had to step up their game. Following a year of slower sales, the quick serve coffee and doughnut franchise is exploring new menu options, including a chicken & waffle sandwich, and a Belgian waffle breakfast sandwich. All of the new menu items are currently being tested in select areas across the country to see how the public reacts before a potential full-system rollout.
However, adding breakfast to the menu isn’t a cure-all. As Jonathan Maze, Senior Financial Editor at Nation’s Restaurant News, says, “Breakfast isn't an easy or automatic sales lever. Just ask Taco Bell. Breakfast is also very habitual. Tough to get people to break out of their habits.”
Also Trending: Meal Deals
Several fast food franchises have developed, or re-introduced, value meals to their menus in order to court wallet-conscious consumers. Here’s a sampling of the offers made since late 2015:
- Burger King (early-year 2016): 5 item $4 meal – a bacon cheeseburger, small French fries, small drink, 4 piece chicken nuggets and a warm chocolate chip cookie
- Burger King (mid-year 2016): 2 for $10 – 2 Whoppers, 2 small fries and 2 small drinks for $10
- Carl’s Jr./Hardee’s: $4 value meal – a double cheeseburger and a spicy chicken sandwich, served with fries and a drink
- McDonald’s: McPick 2 – choose two of the following items for $2: McChicken, McDouble, mozzarella sticks, and small French fries
- Pizza Hut: a seven-item value menu where each item is $5 if the customer purchases 2 or more
- Sonic: $5 “Boom Box” – a premium hot dog, a Junior Deluxe Cheeseburger, medium Tots or fries, and a drink
- Wendy’s: 4 for $4 – a junior bacon cheeseburger, 4 chicken nuggets, small fries and a drink
According to Brad Haley, chief marketing officer for Carl’s Jr. and Hardee’s, “The fast food industry hasn’t seen this kind of a price war since the ’90s.”
The deals are largely believed to be an evolution from “Dollar Menus,” which were very popular with consumers but had fast food chains concerned about their margins and incoming revenue in the face of rising ingredient and labor costs.
Growing Food Franchise Segment: Custom Pizza
The food franchise industry hasn’t been immune to the trend of customer-driven product customization. Fast casual, made-to-order brands account for over 10% in annual growth – more than 3x the annual growth rate for restaurants overall.
But within this segment, there is a group that is growing even faster: create your own pizza. While it isn’t brand-new – a number of pizza franchises have been operating in this area since at least the 1990s – custom pizza has never seen a growth spurt like it’s experiencing now. This particular segment is growing at a rate of 22% annually, including franchises such as MidiCi Neapolitan Pizza, 1000 Degrees Neapolitan Pizzeria, Russo's New York Pizzeria, Toppers Pizza, Uncle Maddio’s, Persona Wood Fired Pizza, Pieology, and Top That! Pizza.
According to an editorial in the March edition of Franchising World, the average create-your-own pizzeria serves the following:
- Personal pizza with an average size of 10 inches and an average price point of $7.95
- Pre-packaged salads
- Pre-packaged cookies or brownies for dessert option
- Soft drinks, including bottled water
- Beer and wine
Outside of the typical fast casual restaurant concerns of serving a quality product in an acceptable time to customers, the growing pains that come with rapid growth appear to be the biggest obstacle these pizzerias face in the foreseeable future. “Since the majority of these [newer] concepts have been created by non-pizza professionals, the rush to market might very well be their downfall in the long term,” says Glenn Cybulski, CEO and co-founder of Persona Wood Fired Pizza.
“As market players increase, one thing is for sure: some of them will close their doors as fast as they opened them,” he says. “To be truly relevant in the next five to 10 years, you will have to evolve within the concept you have created. Did you leave yourself enough room to do that? Maybe so, but many did not. What happens in the fast casual and the custom pizza space in the coming years will be interesting to watch.”
Snacking: It’s A New Daypart
For years, food franchises have used the commonly known dayparts of breakfast, lunch, and dinner. However, the eating habits of adults in the United States are causing new segments to be defined.
In 2015, American adults snacked on ready-to-eat foods more than 200 billion times, according to consumer research firm the NPD Group. This shift towards small meals has spurred the addition of three snacking dayparts in restaurants— mid-morning, late afternoon and late night.
The NPD study also revealed that snacking makes up 18% of all restaurant dining. Restaurants are adapting by offering new, lighter menu options – typically at reduced prices from their full-size counterparts. Sliders, mini bowls and bar-inspired fare are helping transform traditional meals into snacks consumers will enjoy.
As expected, kids lead the way when it comes snacking. Children aged 2-17 consume an average of 1,500 snack foods per year, an above average amount compared to other age groups. However, maybe surprisingly to some, Baby Boomers (those born between 1946 and 1964) are another strong snacking cohort.
According the NPD research, the annual eatings of ready-to-eat snacks per Boomer are about 1,200, or a total of 90.4 billion snack eatings. Millennials (those born between roughly 1980 and 2000) made up about 1,000 snack eatings for each individual, or a total of 83.1 billion snack eatings.
The kinds of snacks, in terms of savory or sweet, consumers are eating depends on two main factors: time of day and place. The NPD study found healthier snacking is done early in the day, savory snacking picks up around lunchtime, and there’s a strong desire for sweet snacks at night.
“Our snacking research shows us that all snackers are not alike. Motivations, snack food choice, and when and where to snack differs among age groups,” says Darren Seifer, NPD food and beverage industry analyst and author of the Snacking in America study.
New Look, More Customers?
Taco Bell is one of a number of food franchises rolling out new restaurant designs – and with good reason. As long as the updates don’t alienate current customers, brand refreshes can broaden a company’s audience and position it to take advantage of changing market conditions.
But why now for Taco Bell specifically? The fast food franchise wants to reach 2,000 restaurants by 2022. Add in the fact consumers are becoming partial to restaurants that reflect their surrounding community, and you get the roll out of four new Taco Bell designs, all of which incorporate more environmentally-friendly elements such as LED lighting, energy-efficient heating and cooling, solar panels, and reclaimed water irrigation:
- California Sol: a laid-back, “beachy” design that incorporates indoors and outdoors in the same unit
- Modern Explorer: a rustic motif that can fit both suburban and rural locales
- The Heritage: a modern interpretation of the fast food franchise’s original style
- Urban Edge: a mashup of international and street styles
And Taco Bell is alone in remodel phase. Another big name franchise working on a brand refresh is Cinnabon. The bakery franchise is taking its corporate inspiration combining it with its reputation with customers and creating a new store model.
“In research we did around brand architecture, clearly [Cinnabon] represents indulgence, but we found that people also associated it with belonging — with going to the mall with friends, and baking at home with mom,” Brand President Joe Guith said in an interview with National Restaurant News. “We love the baking credentials of a French patisserie, but we also want approachability, because Cinnabon is for everyone. So we have French patisserie meets home kitchen as inspiration.”
According to Guith, the new stores with have a lighter color palette in general, including lighter-tone woods. They will also still Cinnabon’s signature teal color. Technology upgrades are another part of the revamp to help not only customers, but in back-of-the-house functions as well.
Both Taco Bell and Cinnabon are hoping the years ahead mirror one franchise currently experiencing success with a new look: Captain D’s.
An extremely popular meal spot in 1970s, especially in the Southeastern U.S., Captain D’s sales started to dip significantly during the past decade leading to an overhaul – and the changes are working. The seafood franchise ended 2015 with an all-time system-wide average unit volume record, largely attributed to its new look and revamped menu.
“Customers are truly blown away by our refreshed look, which reminds them of a coastal vacation getaway,” Chief Development Officer Michael Arrowsmith said in a spring 2016 interview with Franchise Direct. “We have also revamped our dining experience with real silverware and plates, adding to the family-friendly ambience and great value of our menu.”
In addition to the restaurant redesign, Captain D’s also refreshed its brand image with a menu update.
“We have systems in place for listening to our customers and monitoring their requests,” Michael said. A number of the customer requests were for healthier options. In response, Captain D’s brought on Jason Henderson, a graduate of the Culinary Institute of America, to be its trained head chef on staff. The result was the creation of “D-Lite” meals.
All of the D-Lite meals are under 500 calories, and include options such as tilapia, surf and turf, wild Alaskan salmon, and shrimp skewers. “We have been integrating healthier grilled items into our menu, and health-conscious customers love the selection,” Michael said. And don’t worry about beloved staples from the original menu such as batter-dipped fish and chips, shrimp, and sides. Those items still factor highly into Captain D’s sales.
For the full Captain D’s interview, including its immediate growth plans, click here.
Investing in a Food Franchise
Please note: the provisions and fees illustrated below are some of the most common and not a complete listing. All financial figures come from the Franchise Disclosure Document (FDD) of each respective franchise dated 2016. Please review the FDD of a franchise for all of the provisions and fees related to investing in that particular franchise.
One of the first financial questions many prospective franchisees ask themselves is “do I have enough money to start a franchise?” The amount necessary to open a franchise varies depending on the unique business system and execution requirements.
Initial costs associated with opening a franchise include the franchise fee, land and building costs, training expenses (such as travel and living expenses, not the actual training courses), grand opening advertising and marketing costs, and more.
The following chart demonstrates, by comparison, estimated initial investment ranges associated with opening one of the 15 sample franchises presented. As you will see, the initial investment can range widely within a single franchise system. That is because of factors such as whether the franchise is mobile or building-based, real estate cost differences from area to area, whether or not a building is being constructed or retrofit and, as described above, the type of franchise the franchisee decides to open.
Estimated Initial Investment Graph for Selected Food Franchises
Notes for Graph:
*Range doesn’t include real estate costs
**Mobile franchise; uses truck
***Doesn't include exclusive territory fee (between $40,000 and $200,000)
Also note, some of the estimated initial investment ranges given by franchises don’t include real estate estimates because of the variability. In addition, ones that do include a real estate estimate might be for a lease instead of purchase.
When setting your franchise budget, don’t forget about the ongoing fees. In addition to normal business operating costs like payroll and utilities, the most common ongoing fee for franchises is a royalty. Royalty fees are assessed for the continued use of the franchisor’s trademarks and patented processes. Examples of how royalties are collected are provided below for each sample franchise.
5.9% of Gross Sales
Cinnabon - Full Bakery
6% of Net Sales
4% of Gross Sales
Domino's - Traditional Store
5.5% of Weekly Royalty Sales
IHOP - Traditional Restaurant
4.5% of Gross Sales
6% of Weekly Gross Sales
$3,000 annually for the first 5 years, $3,500 for the next 2 years, and $4,000 for the remaining 3 years of franchise agreement
5% of Net Sales
Papa John's - Standard Restaurant
5% of Net Sales
4% of Weekly Gross Sales
Popeyes - Free Standing
5% of Gross Sales
5% of Gross Sales
5% of Net Sales
Tim Hortons - Standard Restaurant
4.5% - 6% of Gross Sales (or more under limited circumstances)
5% of Gross Sales
Royalties for Selected Food Franchises
(For a FDD summary of the selected franchises, you can click the name of each franchise above.)
Other regular ongoing fees include marketing, software and technology costs. In addition to regularly assessed fees, other fees are charged on an “as needed” basis such as audit fees, or costs for additional, non-mandatory, 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.
For more information on numerous food franchises, please see our food franchise profiles.