500 Big Brands: Top 200 franchisors
Here’s a whopping number: $590 billion in total sales, the tab achieved by the 200 largest franchise systems on our annual ranking. Much of that increase came from abroad, and offset a lackluster domestic scene.
Stop us if you’ve heard this one: The biggest franchisees are adding a lot of units in international markets.
This has been true for years. The percentage of locations outside the United States has increased every year we have published our annual Franchise Times Top 200 (plus 300) ranking of the country’s largest franchise systems.
But that development appears to have accelerated. The number of international locations operated or franchised by companies on the Franchise Times Top 200 grew by 10.3 percent in 2013. By comparison, domestic growth was just 1.3 percent.
Let’s put it another way: The largest franchise systems added four locations in a foreign market for every unit they added stateside in 2013.
The average franchise system now has 36.3 percent of its locations outside of the United States, nearly two full percentage points higher than 2012, when that number was 34.4 percent. When we first published the ranking in 2000, that percentage was 27 percent.
The international growth helped companies on the Top 200 to what we’d call an average year in 2013. The added units outside the U.S. offset a lackluster domestic economy. Many of the companies at the top of the ranking struggled to grow sales stateside, so the international units picked up the slack.
Companies on the ranking reported $590 billion in sales last year, up 4 percent from the year before, when they earned an adjusted $567 billion. That’s about the rate of retail sales growth.
Our rankings measure franchise performance based on total worldwide system sales. That gives systems credit for how much they sell, rather than simply how many units they build. On a unit basis, for example, McDonald’s would only be the third largest franchise after 7-Eleven and Subway. But the chain’s unit volumes, combined with that presence, make it a worldwide behemoth.
International development is simply a sign of the times. The United States is saturated with industries in which many companies franchise, like restaurants and retailers and hotels. And the domestic market is flush with small, aggressive competitors that are quickly grabbing market share. It only makes sense these chains would look to other countries in an effort to grow their business.
Itchy for growth
Perhaps one reason for the increased international development is the growing ownership of franchises by private equity groups. These investment groups are itchy for growth and have to sell within a few years, putting pressure on the companies to add units.
For the first time this year, we asked franchises submitting information whether they were owned by a private equity group. We supplemented these results with our own research.
According to the survey, 71 of the companies on the Franchise Times Top 200 are owned by private equity. That’s a sizable percentage, especially considering most of the rest are publicly traded brands. It means that either an investment group or shareholders own companies on the Top 200.
Interestingly, private equity ownership is more likely among the smaller franchises, the companies that make up the next 300 systems on the ranking. Private equity owns 225 of the 500 companies. So more than 50 percent of the 300 smaller companies not on the Top 200 have private equity ownership. There is much less public ownership among those brands, and many franchises are sold to private equity groups or other investors as they reach a certain stage in their growth.
Private equity groups love franchising. The business model enables brands to grow fast, because they place the onus of financing new units on a bunch of small companies (franchisees) rather than a single company. Because franchisees are funding their new units either through debt or their own cash, franchise systems have low capital requirements and thus are generally more profitable.
Companies have thus been more likely to franchise locations over the years. In 1999, companies on average franchised 79 percent of their units. Companies on this year’s ranking franchised 85 percent of their locations.
But international development has been the biggest change over the years.
Consider Louisville, Kentucky-based KFC, the third largest franchise system on our ranking. In 2013, the chicken chain increased its total unit count by about 700 restaurants. Yet while its international presence grew by more than 800 units, the number of U.S. restaurants fell by 127.
Another example is Burger King. Last year, the Miami-based burger chain, ranked fifth on our list, lost 28 units in the United States. But the company’s majority owners, the Brazilian private equity group 3G Capital, has been pushing overseas development. Last year, Burger King added nearly 700 international locations—12 percent unit growth. The chain has added 1,500 international units in just two years.
This makes the company’s pending acquisition of the donut chain Tim Hortons (No. 18) all the more interesting. Tim’s, being Canadian, is already mostly outside of the U.S. But only 38 of that chain’s nearly 4,500 units are outside of the U.S. and Canada. You can bet that number will change quickly with 3G ownership.
There was very little change among the top franchises. The top seven, McDonald’s, 7-Eleven, KFC, Subway, Burger King, Hertz and Ace Hardware remained unchanged this year. Circle K and Pizza Hut switched spots to No. 8 and No. 9, respectively, but there were no newcomers to either the Top 10 and the Top 25.
And once again, the ranking was top heavy. On their own, McDonald’s and 7-Eleven represented 16.5 percent of all sales in the Top 200. The top 10 franchises, meanwhile, represent nearly half of the total sales for the 200—$292.6 billion overall.
But that’s actually been falling. In 2011, the Top 10 accounted for 50.2 percent of overall sales, and last year that fell to 49.9 percent. Slowly but surely, the smaller franchises, at least among the ones on this ranking, have been gaining ground.
This year’s ranking has 12 newcomers, a somewhat higher-than-usual number. That includes Sears Home Appliance Showrooms, a franchise that emerged in recent years and submitted its numbers for the first time this year. It debuts at No. 87.
Another one is Eye Level Learning Centers, which makes an appearance at No. 100. Eye Level is a Korean education franchise that only recently became eligible for our rankings with its growth in the U.S.
To be eligible for the Top 200, a franchise must have a sizable presence in the U.S. And franchisees must own at least 15 percent of the system’s units. Information for the ranking is compiled using companies’ own submissions as well as publicly available data from the SEC and franchises’ franchise disclosure documents. (For details on our methodology, see page 64.)
We did have some dropouts this year. Realogy, which owns real estate franchises Century 21, Coldwell Banker, Sotheby’s and ERA, refused to provide the individual brands’ information this year. Real estate franchises’ numbers are estimated using a formula, and we did not feel comfortable estimating the brands’ sales without access to the brands’ data.
As a result of the loss of those brands, we adjusted prior years’ numbers to eliminate those brands so we could more accurately compare this year’s ranking with last year’s.
Research by Matt Haskin, Nick Sommers and Abbi Nawrocki.
Research for next year’s ranking begins in April. If your system would like to submit information for the first time, or if the contact person changes for established participants, contact Abbi Nawrocki, firstname.lastname@example.org.
The Franchise Times Top 200 is an annual ranking of the 200 largest franchise systems in the U.S. by global systemwide sales, based on the previous year’s performance. This year, for the third time in a row, we also ranked the next 300 systems for a total of 500.
We use a combination of companies’ voluntary reports and publicly available data, including the franchises’ most recent franchise disclosure documents and Securities and Exchange Commission filings.
To qualify, a company must be a legal U.S. franchise. Franchisees must own at least 15 percent of the company’s total units. The company must also be based in the United States, or have at least 15 percent of their total units in the United States.
Systemwide sales is defined as the total sales for both franchise and company units. Those sales figures should represent sales to customers, and not corporate sales to franchisees or prospective franchisees, such as royalty revenue or franchise fees. Other revenue not directly related to franchising should not be included.
If two companies reported the same systemwide sales, the higher ranking is given to the company with the most units. Preference is also given to companies that voluntarily report their systemwide sales, rather than those companies for which we must estimate the sales figures.
Franchise Times’ estimated revenue for hotels is based on a formula multiplying the chain’s revenue per available room (RevPar) by the number of rooms and the number of days in the year. RevPar comes from the company, or from industry estimates.
We estimate real estate companies based on 2.5 percent of their reported sales volume. Real estate companies report sales based on total volume of homes sold. So if a home is sold for $200,000, it would be listed as $200,000 in revenue. FT’s estimate would count $5,000 in revenue earned as a commission from the sale.
We estimate travel agencies based on 12.5 percent of their total sales volume. Like real estate companies, travel agencies report sales volume based on the value of the vacations sold, rather than their commissions. For more information, contact Matt Haskin at email@example.com.