Food Franchises Worth Gobbling Up
A Look at The Top Brands and What it Takes to Be Successful
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The most competitive and trend driven sector in franchising is arguably food. Franchisees contend with a variety of fluctuating factors including diet fads, food costs, and minimum wage requirements. However, when the right person meets the right franchise brand, a rewarding, exciting, and profitable relationship can result as illustrated by the fact that 87% of the franchisees we surveyed replied “Agree” or “Strongly Agree” in response to: “I enjoy operating this business.”
This report provides you with a detailed look at the food franchise sector. It delves into the different available concepts, what it’s like to be a food franchisee, and the top food franchises based on rankings from those who know best—the franchisees who own them.
A FEAST OF FOOD FRANCHISE OPTIONS
Just like types of food, there are a wide variety of food franchise concepts including quick service restaurants (QSR), fast casual, and full-service restaurants, as well as dessert or beverage focused retail stores, vending machines, kiosks, mobile trucks, and delivery-only options. Franchise companies may offer several models at different investment levels and many combine food types, such as a smoothie shop that also serves wraps, while other concepts morph over time to offer a variety of products. These factors make classifying certain concepts challenging, as the lines between competing brands are getting less defined.
“Five years ago we made a major change to our business model by deciding to focus on food quality and service in order to deliver a $15 experience for $7. We started using real forks and china in our locations, providing drink refills, and delivering food to the table. As a result of these changes, Fazoli’s, which was once considered a quick service franchise, is now a fast-casual franchise and our franchisees’ same store sales have been enjoying positive growth,” says Carl Howard, CEO of Fazoli’s. Average unit volume (AUV) at Fazoli’s has increased 25% as a result, growing from $800,000 to $1 million since implementing the new changes. The investment range of food franchises varies even more widely than the different types of concepts. For example, Culvers’ startup investment ranges from $1,354,801 to $3,680,500, while a Happy and Healthy Products franchise can be purchased for $45,000 to $90,000. The median investment range for the franchises we researched is approximately $215,000 to $460,000.
THE MOST PROFITABLE SECTORS
When it comes to which food franchises by sector and geographic region had the highest and lowest income, we found that the average annual income of full service restaurants was highest at $153,363 and that Yogurt/Ice Cream franchises had the lowest average annual income at $62,426. Food franchisees in the Western region of the United States have the highest average income of $98,867 while those in the Northeast region have the lowest average income of $80,932. The elevated annual incomes reported by Western Region franchisees appears to be tied to the number of units/ locations owned by each operator. Franchisees in the Western region own on average 24% more locations than franchisees from other regions. The breakout of the average number of units/locations owned by region is as follows: Northeast 2.5, Midwest 2.8, Southern 2.8, and Western 3.1.
How profitable you will be, according to Denny’s franchisee, Erick Martinez, who owns 25 Denny’s restaurants in Ohio, Pennsylvania, New Jersey and Delaware, depends on four key elements: (1) the support your franchisor provides, (2) choosing the right location, (3) building a good team that wants to grow with you, and (4) having the necessary energy, discipline and inspiration. Martinez unexpectedly became a Denny’s franchisee in December of 2007. “I worked for Denny’s corporate from 1993 to 2007 and was a Divisional Vice President when the company decided to restructure. I had a unique opportunity to become a Denny’s franchisee, so I decided to take a leap of faith and purchased four units.” When asked what he thinks all franchisees should know Martinez said, “You should strive to remove all barriers to profitability without sacrificing quality and not spend unnecessarily just because money is coming in. You need to save for future growth and for surprises.”
“Owning Marco’s Pizza franchises has enabled me to grow both assets and income,” says franchisee Glenn Ajmo, who was a day trader when he invested in a 50 unit Marco’s Pizza deal in Orlando and Tampa in 2007. “Some of my locations were profitable right away, while others took a while to grow.”
One of the clearest trends we noted in our conversations with franchisees and franchisors is the growing number of “fresh casual” dining experiences within the fast casual sector. This newer, elevated fast casual category, which is also referred to as “fast casual plus”, “premium fast casual”, or “fast fine”, entails counter rdering with added service including delivering food to customers’ tables, refilling drinks, and bussing tables. Fresh casual restaurants tend to have interiors that feature higher quality furniture and fixtures than fast casual establishments, which traditionally have minimalist and sleek interiors. The prep and cooking of food, which may be preheated or have been previously frozen, at fast casual establishments tends to be as simplified as possible whereas the food at fresh casual restaurants is often locally sourced, rarely frozen, and requires more involved preparation and cooking. An entertainment factor, even if it’s simply the customer being able to personalize their meal and watch their food being prepared, is often involved in fast and fresh casual concepts.
The overall growth of the fast casual sector is primarily due to the fact there is demand for affordable fine dining inspired food that is healthier than fast food, customizable and quickly made. Getting your order at a fast casual restaurant often just takes a few minutes longer than it would take at a fast food establishment.
“Fresh” is certainly a word we heard over and over again during our interviews for this report. Church’s Chicken cooks fresh, hand battered chicken and biscuits all day. Hwy 55 Burgers Shakes & Fries serves fresh, never frozen hand-pattied burgers. Marco’s Pizza dough and sauces are made in store and only fresh, not pre-cut vegetables are used.
No ice cream and frozen yogurt concepts, much to our surprise, made our list within the Ice Cream/Frozen Treats category. Our theory as to why Kona Ice and Happy & Healthy Products took this year’s top spots is that their start up costs are the lowest on our Top Food Franchises list, which may mean their franchisees are profitable faster.
“Our success is due to a variety of reasons,” says Tony Lamb, CEO of Kona Ice. “Perhaps two of the biggest factors are our investment in innovation and the multiple revenue streams we offer our franchisees. Our franchisees have the ability to customize flavors based on what is popular in their marketplace and we regularly roll out new products. Our latest Vita-Blend product is Smart Snack Compliant, which means it can be sold on school property during school hours. We have also created a kiosk and smaller version of our trucks, the Mini, that can be brought into buildings for special events. In 2016, we’re excited to be introducing crushed fruit toppings that will count as a serving of fruit.”
Each year we have franchises that fall off of our Top Food Franchises list and new ones whose high franchisee satisfaction land them a spot on it. New to our list this year are Denny’s, Church’s Chicken, PJ’s Coffee, Jason’s Deli and D.P. Dough.
FOOD FRANCHISE HEALTH INSPECTION
Just as you do when deciding what to order from an extensive menu, take your time thinking about which franchise option will make you happiest by meeting both your business and personal goals. In order to do so, you’ll need to find out the following for each franchise concept you are considering: sector growth projections; unit growth data; how much training and marketing support you will receive from the franchise company; how strong and experienced the franchise’s management team is; how satisfied current franchisees are; and how much income you might earn. Unit-level economics and potential profitability are two of the most important areas to look at before investing in a franchise, or any business for that matter. You must ensure that once your overhead is paid, you will still make the profit you need to survive. Typical expenses will include: food costs; rent; salaries; health, workman’s comp and building insurance; utilities; royalties; and maintenance costs. It’s crucial you have enough capital to meet overhead and other financial obligations (e.g. loan payments and personal living expenses) while you get your franchise off the ground.
Once you’ve settled on a franchise option and the franchisor decides you are a great fit for their brand, you will be provided with a Franchise Disclosure Document (FDD). The FDD features contact information for current and past franchisees; audited financial statements of the franchise company; executive bios; typical start-up and maintenance costs and fees; an overview of what your responsibilities as a franchisee will be and those of the franchisor; as well as a copy of the actual franchise agreement you will be required to sign if you choose to become a franchisee. Be sure to carefully read it and to reach out to as many franchisee contacts as you can.
Speaking with franchisees is truly the best way to get a realistic understanding of the business. It’s important to ask about their experiences and compare their responses to the information provided in the FDD and franchise agreement (e.g. training, support, potential earnings, etc.). If the franchise participates in Franchise Business Review’s franchisee satisfaction survey, you can find out what its franchisees think about it by looking at its survey results at www.FranchiseBusiness Review.com. If the franchise you are interested in does not share its franchisee satisfaction data publicly, ask if it has similar data. Of the franchisees surveyed for this report, 76% replied “Good” “Very Good”, or “Excellent” in response to: “Overall, how would you rate your satisfaction with this franchise?”
We recommend that you hire an attorney who specializes in franchise law to help you evaluate the franchise package, as well as an accountant to review your financial projections and tax considerations. They will be able to help you understand a variety of things including what can happen if the franchise fails, if you’ll be locked into paying the franchise company a set amount of money each month regardless of your success, and much more. An accountant can also help you determine the opportunity costs and whether or not the investment is feasible for you.
The Franchise Buyer’s Toolkit, which was created by Franchise Business Review’s leadership team, is a wonderful resource for detailed information regarding how best to analyze a franchise opportunity. It will help you estimate long-term franchise profitability, the potential return on your investment, do a deep-dive into the FDD and more.
INVESTING IN A FOOD FRANCHISE VS. STARTING FROM SCRATCH
If you are trying to decide whether to invest in a food franchise concept or to launch your own brand, you’re not alone.
“We went back and forth for a while trying to decide if we wanted to open our own concept or bring one that was already successful to Des Moines,” say sisters and Planet Sub franchisees, Barb Brodie and Robin Myers. “We are very glad we opted to invest in a Planet Sub franchise instead. We do not have to come up with action plans, suppliers, or menus, which is fantastic.” Their advice to anyone considering investing in a food franchise is to invest as much cash as you can because the less you need to borrow, the more profitable you will be. They also suggest keeping a sharp eye on the daily operations of your locations in order to control waste and avoid pilfering.
Brodie and Myers clearly appreciate the many benefits a food franchise offers including:
Clear Concept & Brand Recognition
The absence of a clearly defined concept leads to many new-to-market restaurants failing. When you invest in a franchise, you are buying a well-defined, branded and proven concept. If you choose an established brand, you also benefit from customers’ recognition of it.
Established franchises have already worked out their issues. Everything from location selection, menu items, food preparation, employee hiring and training, and customer service is based on successful models. It is for this reason that franchisees who adhere to their franchisor’s guidelines are far more successful than those who do not. If you don’t think you would be able to avoid playing around with the menu offerings and other things the franchisor will require of you, then investing in a franchise is probably not a good idea for you.
Although food franchises have their standard menu items, most invest in product development in order to keep customers engaged and coming back. Franchise companies often involve their franchisees in product development for two reasons: 1) Franchisees can help test the products and provide feedback and 2) if the product does well, obtaining buy in from other franchisees is easier since solid data from testing and sales is available. ￼￼￼
“Denny’s never rolls out new products without testing them extensively in both its corporate locations and franchisee locations and obtaining buy in from franchisees,” says Denny’s franchisee Martinez.
Support From a Team Who Knows More Than You Do
Training, strategic marketing campaigns and material, sales support, software that helps you run your business, expert guidance, and more are what most franchisors offer to franchisees. You will also be part of a network of franchisees whom you can turn to for advice and share best practices with.
“We send our franchisees weekly communications that provide them with marketing and operations information and host quarterly webcasts that give them a three-month picture of where we are today and where we expect to be,” says Jim Hyatt, CEO of Church’s Chicken. “In addition, we have implemented a visitation protocol that requires coaches to visit our franchisees’ restaurants multiple times per year to evaluate opportunities and help train them on what improvements are necessary to take advantage of these opportunities.” Church’s Chicken also has a dedicated franchisee organization, Church’s Independent Franchisee Association (CIFA), which connects franchisees with each other and works closely with Church’s Chicken’s corporate office.
Group Purchasing Power
Franchisors are able to buy in bulk and pass the savings on to their franchisees. Independent restaurant owners are unable to obtain the same volume discounts.
“Our Vice President of Purchasing reports every week to our franchisees the savings that Marco’s was able to negotiate on both food and equipment and how it effects each store,” says Bryon Stephens, President and COO of Marco’s Pizza.
“Our supply team works very hard to keep back-of-the-house costs as low as possible by working with suppliers, which enables us to keep prices in our restaurants at a level that our guests have grown to expect, while continuing to give them a great product,” says Hyatt of Church’s Chicken.
Easier Access to Financing
Franchisors often work with you to secure financing to start your franchise, purchase additional equipment, or expand your business. Lenders also tend to be more amenable to financing a franchise business because of its proven track record.
“We have a financing program that is available for all of our existing franchisees and enables them to obtain capital with respect to managing their restaurants. Through this program franchisees can borrow up to 100% of financing for their reimaging projects,” says Hyatt.
Potential to Be Profitable Faster
Due to all the benefits franchising offers, it is possible you may be able to ramp up and make a profit faster than if you started a restaurant from scratch. It is wise, however, to set aside enough money to carry your new franchise, as well as you and your family, through the first few years of operation in case profits do not come as quickly as anticipated.
“Our goal is to have our franchisees open within 90 to 120 days of their signing an agreement with us”, says Kenney Moore, CEO and Founder of Hwy 55 Burgers Shakes & Fries. “We do extensive pre-opening marketing for our franchisees with the objective of their having positive cash flow from day one and stay on-site with our franchisees as long as they need us.” Same store sales at Hwy 55 Burgers Shakes & Fries are up six to eight percent year over year.
DO YOU HAVE THE TRAITS IT TAKES?
Food franchisors tend to look for investors who have extensive management experience or are successful entrepreneurs and meet the initial financial requirements. They’ll also review your capital liquidity and net worth in order to ensure you have the funds needed to keep your business going until it is profitable.
Although many brands, particularly those that are well established, also require restaurant experience, not all do. “We look for franchisees of great character and tremendous integrity who fit our love thy neighbor culture and are desirous of controlling their own destiny,” says Moore. “We do not require restaurant experience because sometimes preconceived notions come with it and we’ve only ever had problems with franchisees who have tried to change our business model.” Moore was quick to point out that since Hwy 55 Burgers, Shakes & Fries began franchising in 1992 it has never been sued by a franchisee. It is a good idea to see if the franchise you are considering has been involved in excessive litigation, which is a red flag. You can find this information within the FDD.
“We are not about short term gains for long term disaster, so we carefully vet potential franchisees,” says Stephens of Marco’s Pizza. “We look for outgoing and energetic people who are driven not only to maintain high quality standards, but who are highly motivated to become a strong community partner.”
Whether you choose to start right out of the gate by investing in several units of a major national restaurant franchise or a single truck from a food truck franchise, ultimately the only things that matter are that the concept will meet or exceed your financial expectations and that you will receive the support you need to be successful. One thing you can be certain of is that success will not be instantaneous. Your new franchise business will require tremendous hard work and patience.
“I worked tirelessly during many long days the first two years I owned my franchises,” says Denny’s franchisee Martinez. “I probably could have worked less, but I wanted to make sure business was running smoothly and that my team would be a success. Also, if I did not work so hard then, I probably wouldn’t be able to enjoy the work life balance I currently have while owning 25 Denny’s franchises within just six years.” Martinez said because of the hours most food franchisees must work, at least initially, that it is essential to communicate your vision for the business and your personal life with your family because you will need a lot of support.
“I try to be at one of my restaurants every day and take one day for payroll,” says J.R. Cottle, who owns a total of five Hwy 55 Burgers, Shakes & Fries in South and North Carolina. Cottle began at Hwy 55 Burgers Shakes & Fries earning minimum wage at age 15 to earn money to pay for his car and car insurance and was managing a location when he was 18. When he was only 24 he owned his first Hwy 55 Burgers Shakes & Fries franchise location. Cottle says what he loves most about the brand is how personal and close knit it is. His advice to franchisees is, “Be there. You can’t develop a good team that can eventually help you work less if you are not present in your restaurants.”
“If you think you can buy a franchise, open the door, sit back and get cash you are wrong,” says Marco’s Pizza franchisee Ajmo. “You will have to work hard, but your life will get easier.”
While the food industry may be challenging, its operators are among the most passionate in franchising. The best way to understand whether or not the food franchise concept you are considering investing in will deliver is to spend time comparing brands side-by-side and carefully researching each opportunity. Every food franchise has its own economics and culture, both of which you must be comfortable with. More detailed research on specific food franchises can be found at www.FranchiseBusinessReview.com.