The Restaurant Finance Monitor's 2008 Top 200 Restaurant Franchisees
Much has happened in the chain restaurant industry since we last compiled the Monitor 200. At this time last year, we wrote about the difficult operating environment that seemed to be driving customers away from casual dining toward the thrift and convenience of quick service. The "aspirational" user, as industry jargon had it, was feeling the impact of a slowing housing market and the decline of ready home equity cash, and spending accordingly. Looking back, those were the good times.
Then came the great housing bubble burst and with it the aftershocks that seized up credit markets and ushered in the bailouts. Americans were faced with the reality that their houses were worth considerably less than they thought. Restaurant traffic fell off considerably.
That's the environment the top 200 franchisees are operating in. Traffic is down. Food, labor and energy costs are up. And there's a royalty to pay, too. At times like this it's good to be the franchisor. Restaurant company shareholders are reassured by franchise company executives with lines like: "We're no longer in the restaurant or capex business, we're in the intellectual property business." By that they mean the royalty collection business.
The franchisees are the real restaurant operators. They have to try to make money selling $1 burgers even when bun prices are doubling. They have to put money aside to update their décor and repave the parking lot, often at the whim of the franchisor. They have to invest in the new coffee machines that'll likely increase sales, but not necessarily profits.
During Burger King franchisee Carrol's Restaurant Group's recent earnings call, CFO Paul Flanders was asked about the corporate mandate that all restaurants stay open until 2 a.m. and how that was likely to impact sales. "I certainly think it's going to increase sales," he responded. "Whether or not those two hours are profitable obviously is questionable. If they were profitable, my assumption is we would have been open already until 2 a.m."
So with that, we tip our hat to the Monitor 200 franchisees. Collectively, they rang up $21.5 billion in sales last year at nearly 17,000 restaurants, a 5.5-percent increase in revenues over 2006 and an 8-percent increase in units. All told these franchisees operated 75 different concepts.
Yum! Brands franchisees again dominate the ranking, its five brands accounting for 6,246 of the represented restaurants, over one-third of the total. Taco Bell is the most widely franchised concept of the 75 with 37 different operators, followed by Burger King and KFC with 31 and Pizza Hut with 29. The 28 Applebee's franchisees in the list operated 1,157 of the brands restaurants, 86 percent of the entire domestic franchised system.
Will franchise development slow in 2008 along with the economy? A number of restaurant companies have scaled back planned expansion, although the Monitor 200 franchisees will probably go against the grain and continue their growth. That's what entrepreneurs do.
Given the volume of company stores looking for buyers, these large, established franchisees should have plenty of opportunity to add to their unit counts with attractively priced restaurants. Apple American Group's addition of 41 Applebee's restaurants and the private equity firm Olympus Partners' purchase of 89 Chili's early last year are likely just the tip of the iceberg.
Pepper Dining is a new addition to the top 10 this year, along with Wendy's and Chili's franchisee BF Companies/ERJ Dining (formerly Manna) and Panera and O'Charley's franchisee Covelli Enterprises. Together, the top 10 companies generated $4 billion in sales in 2007, operating 2,921 franchised restaurants.
With rebate checks arriving as we go to press, perhaps restaurant traffic will again pick-up. Either way, these companies will find a way to make it through. They're operators, after all.
Ralph Mason didn't bother to quit his day job when he bought a Sonic Drive-In franchise in 1964. At the time, Mason worked for a subsidiary of IBM. He ran into a friend who owned a Sonic in Oklahoma City, thought it was a good opportunity and bought a store for himself.
"I thought at the time it would be a side business," Mason said. He was wrong. It would be a great primary business. "After I decided the first one was good, I opened the second one and quit IBM and went down the road with Sonic. I was a great decision."
Indeed, today Mason is one of three partners who own the nation's largest Sonic franchise. With ownership in 272 locations and annual revenues of $354 million, Oklahoma-based Mason-Harrison-Ratliff Enterprises is the country's sixth largest restaurant franchisee. And its revenues and presence continues to grow: In four years it has added 28 units and $81 million in revenue. It recently worked out a deal to open Sonic stores in Indiana, Illinois and Wisconsin.
Mason-Harrison has grown by following Sonic's franchising strategy of encouraging ownership.
The company no longer operates any stores. Instead, it recruits partners for each of the stores - mostly husband-and-wife management teams. The partners operate the stores, and Mason-Harrison acquires the land and builds the units. It also helps the franchisees get financing.
"We help people get into the Sonic business and continue to be in the Sonic business," Mason said. "We didn't start that process, but it's worked very well."
Mason then quoted Sonic's founder, Troy Smith, who used an analogy of a high school kid's first car to describe the benefits of franchising: "He said, if there's a young guy and he borrows his Dad's car, he might wash and take care of that car. But if he has his own car, he'll be out there shining that car and cleaning it even if it was an old clunker. He's much more interested in that car than he'd be if it were somebody else's."
Mason-Harrison has been around nearly as long as Sonic, which got its start in 1953 and has more than 3,400 locations nationwide. In more recent years, Mason-Harrison has benefited from Sonic's growing popularity - the chain's ads are ubiquitous on cable TV, which has helped generate strong name recognition even in markets it's not located. That has enabled the chain to boast a steady stream of system-wide increases in same-store sales, even during difficult economic periods.
"Sonic is a really good business," Mason said. "Sometimes it's better than others." He worried that rising gas prices would have an impact on the company's business in recent years - given that its business is exclusively from drive-up traffic - but thus far that hasn't been the case.
Yet Mason said that the quality of operations at a particular location is more important to its ultimate success than the overall economy. "Our success is based on our ability to run the stores in a good way," he said.