Franchise Times' Restaurant 200
The largest restaurant operations keep getting larger. Fueled by big acquisitions bought with cheap capital or private equity investment, the top 25 operators now account for more than $14 billion in revenue. That is a $1.4 billion increase from 2014 results in our annual tally of the nation’s largest restaurant franchisees.
Revenue for the top 10 companies alone grew by $1 billion. The top 10 now account for $8.5 billion in sales. Overall, the Restaurant 200 account for $34.6 billion in top-line sales. That’s an average of $173 million in sales for each operator.
“For me to keep my growth, I really have to look for other brands,” he said. “You look for buying opportunities. It’s another area of business. You cannot grow if you can’t buy, so I have to buy.”
The growth shouldn’t come as a big surprise—we noted similar movements in the industry last year, but the reasons for the amalgamation are difficult to pin down.
In the mix is an increasingly competitive industry, more sophisticated operators, the desire for bigger returns and a healthy amount of capital floating around, especially from private equity investors.
Whether smarter operators brought investors to the industry or if their presence brought better leadership is a classic chicken and egg question. Steven Rockwell, formerly a managing director at BTIG focused on the restaurant space, said there is a little of both happening, but the fact is, more private equity investors are pumping money into the industry.
“To some degree, I think the private equity interest in the industry is contributing to the rise of the mega-franchisees. There are a number of private equity firms that have bought small or medium size franchisees and used that as a platform to acquire others,” said Rockwell.
“It’s hard to pinpoint a date. If you go back to the ‘80s and ‘90s, there were a handful of private equity firms that made investments in the industry, but the amount of dollars they had then was relatively small and there were only a few of them.”
The numerous Internet disruptors are also changing the calculus for investors across the consumer space. And since 2014, private equity has been struggling to grow increasingly large cash reserves. An extra few billion in “dry powder” is an enviable problem, but it means firms are looking for anything Amazon can’t ship.
“They are sitting on a lot of money and they’re kind of frustrated about getting some investments,” said Tom Coba, who served as VP of Dunkin’ Brands, COO at Subway and consultant with Premier Franchise Advisors.
He said big operations are getting plenty of attention, and not just out of a desperate gamble for growth. “I think they’re breaking out of their pattern a bit and realizing that some franchisee networks can do the same thing as far as providing a return,” said Coba. “If they put good management and good operators in place, the returns there can be comparable to other investments they make.”
Mega-franchisees are also getting cozy with banks, which like the stability of large operations and are happy to dole out cheap capital.
Anil Yadav, who now runs 368 restaurants, said he had no problem getting capital to buy 72 TGI Friday’s in 2015, with some internal cash and the rest from BBVA Compass and Fifth Third Bank.
“My relationship with lenders has been very good because of my track record financially,” said Yadav back in August 2015. “So access to funding is easy.”
He’ll be remodeling more than 33 of those restaurants in the next couple years, which highlights another benefit of large operations. It’s one shared by Michael Kulp, CEO at No. 18 KBP Foods, who said the company would be reimaging 89 of the 91 KFC restaurants they bought in May by the end of 2017.
“As brands get more mature, there are increasing capital requirements for remodels and reimages,” said Rockwell. “We’re seeing that with Burger King and Wendy’s if you’re a one or two unit franchisee, your access to capital is a lot less.”
Those commitments can be impossible without the right cash flow. At between $450,000 and $650,000 at a Wendy’s for example, that’s a lot of capital when an operator has one or two stores.
Companies like GPS Hospitality, which picked up 86 Burger King restaurants in 2015, have the cash flow to renovate. The No. 36 company started renovating the bulk of the restaurants immediately. That keeps the brand fresh in the crowded, 1 million-unit restaurant environment.
“If there’s a franchisee that doesn’t have the capital, let’s say a two unit franchisee, to upgrade his branding, that brand is probably going to be losing market share to another brand that has the capital to keep the operations fresh,” sad Rockwell.
Franchisors are acting as happy gatekeepers for growing operations, who push for more efficient operations, but they’re not just going to hand out hundreds of restaurants to anyone with a pile of capital since they have to work with the operators for the long term.
“We earn our ability to grow,” said Kulp. “KFC and Taco Bell and Yum Brands in general is not going to allow us to become a half-billion dollar company in their portfolio if we’re not out there leading by example.”
The stability that keeps banks happy also means regular royalties for franchisors. “There’s so much more stability,” with large operators. “Even a small multi-unit operator has a lot of ups and downs,” said John Metz, who straddles the line as a Denny’s franchisee and franchisor as CEO of Hurricane Grill & Wings and comes in at No. 175 on the list.
Having a bench of good people means good operations, but also means getting new restaurants up to speed faster. “When you have 30 to 40 stores, you can bring management out of another store,” said Metz.
Then there’s the new breed of operator that isn’t looking to grow a family business, much different from the industry standard 30 years ago.
“Executives that have been in leadership roles in big businesses seem to be coming into the franchise industry as well and they don’t want to be a mom and pop, they don’t want to run one and two locations,” said Coba, noting operators like billionaire Reebok founder Dan Fireman and his father’s investment in 38 Dunkin’ units. “They’ll find a way either through their own financial wherewithal or link up with a private equity firm or other executives to get enough money to have a much bigger network.”
Fireman, and those like him, isn’t going to be getting sticky behind the counter—it’ll ruin his suit. So does that mean the end for the American dream of opening up a franchise and working hard? Not really. It certainly makes it difficult for a new franchisee to jump into a system like Wendy’s or McDonald’s, but with the new concepts emerging, there are plenty of opportunities for new franchisees and small operations.
Metz said that while he prefers to grow Hurricane Grill & Wings with multi-unit operators, it’s not that easy. “The problem is there are only about 1,000 of the big, big multi-unit operators and everybody is inundating them with opportunities,” said Metz. So, he has options for franchisees, full-service sport grills for the big developers and smaller, more simple restaurants for mom and pop operators.
Coba said there’s still plenty of room for small and single operations, especially in smaller markets. Focusing only on large operators can be damning when “that takes out of the game of meeting someone that could be the best operator of your brand in their town,” said Coba.
ABOUT THIS PROJECT
Our annual Restaurant 200 franchisee research includes questionnaires, phone surveys, and in some cases, a review of public documents such as annual reports, 10Ks and FDDs. We sincerely thank the companies that responded to our surveys, as most of the top 200 companies in this year’s ranking provided us with their complete data.
Our report consists of ranking companies according to revenue generated by the company’s franchised restaurants. If the company happens to operate a restaurant concept that is not franchised, or is the franchisor of another concept, we will not include that number in the overall revenue or unit count. In some cases where an acquisition took place during the year, we derive pro-forma revenue in calculating the company’s ranking.
For companies that did not respond to our survey, we confirmed the number of units operated by their company, and then estimated the revenue. In the case of a tie in the amount of total revenue, we settled the tie in favor of the company with the most units. If you believe your company might make the Restaurant 200 list or we’ve missed you (or you know of another company that should be listed), please contact Liz Olson at (612) 767-3200 or firstname.lastname@example.org.
Wells Fargo Restaurant Finance provides financing to corporate restaurant brands, restaurant franchisees, experienced commercial real estate investors who own restaurant properties, private equity firms, and other investors in restaurant concepts. Our loan products include: syndicated corporate senior financing, fixed and floating rate term loans, acquisition facilities, sale-leaseback financing, bridge/development financing, working capital revolvers, and interest rate risk management. For more information, visitwww.wellsfargo.com/restaurants.