The 2007 Franchise Times 200: The largest franchise companies
Growth despite challenges: Top 200 yield higher sales
By Paul Olson
While October conjures up thoughts of ghosts and goblins for most folks–and signals the beginning of Christmas shopping season for the more ambitious among us–here at Franchise Times headquarters it marks the unveiling of our annual Top 200 ranking of the country’s largest franchise companies.
After months of soliciting sales and unit count data from more than 1,000 companies, ranging from multinational household names to lesser-known franchisors. We offer readers a look back on what the prior year held for some of the largest players in franchising.
Without further adieu, then, we present our 2007 Top 200 ranking of the country’s largest franchisors based on worldwide system sales for 2006. Once again, not content with ranking just the largest 200 franchisors, we’ve compiled our ‘Up & Comers’ ranking of the next largest 100 systems, too. And we do mean systems. Though the rankings contain just 300 company names, the sales they depend on come from untold numbers of franchisees, some large public companies and other single-unit entrepreneurs, all contributing mightily to the sales and unit counts shown here.
The economic environment in 2006 was not nearly so turbulent as it is right now, though it wasn’t without it’s uncertainties and concerns. Economic growth was relatively strong last year, with GDP growth of 3.3 percent, slightly ahead of 2005. The fallout of irresponsible subprime lending–and borrowing–had yet to materialize and many homeowners continued to tap their home equity for discretionary spending. This helped to buoy consumer sentiment despite meager wage growth, and Americans spent $9.2 trillion on goods and services, growing consumer spending at a healthy 3.2 percent rate in the process.
Of that, the Census Bureau estimates that $4.3 trillion went to retail and food service purchases, those made at the types of businesses that dominate franchising. Compared to 2005, this wasn’t robust growth, and concerns about rising gas prices and stalling home values began to increase. Average gas prices began and ended 2006 at around $2.20 per gallon, but jumped a full dollar higher during the summer months.
Against this backdrop, the companies of the Top 200 managed collective worldwide sales of nearly $445 billion, an impressive 6.4 percent increase over 2005. Unit growth for these companies was not nearly so robust, however, with the 5,879 additional company and franchised locations up a mere 1.5 percent over 2005. The Top 200 companies actually shed domestic units last year, counterbalancing continued global expansion by the multinationals to the tune of 6,500 additional foreign locations. Unlike the prior year’s heavily franchised-led growth, unit development in terms of company versus franchised locations was far more balanced last year.
The Top 200 retains 184 companies from last year, 81 of which improved their ranking along with 18 that held pat and 85 that edged down. The 16 companies new to the Top 200 are evenly split between those that graced the Up & Comers list last year and those that are completely new to the ranking. All-in-all, franchise-operated units continue to outnumber company-operated units by a ratio slightly better than 4 to 1.
In terms of industry representation on the Top 200, restaurants again reign supreme. Despite the myriad problems faced by the casual dining sector last year, the 71 Top 200 restaurant chains accounted for $188 billion in sales, a 7-percent increase over 2005. The 119,000 domestic restaurants they operated at the end of last year accounted for about 20 percent of all restaurants opened in the United States. Still, nearly 30 percent of these companies’ restaurants serve customers overseas, and 83 percent of those locations belong to the five biggest restaurant brands.
The quick-service sector can take credit for much of the increase in restaurant sales, benefiting as it has from consumer anxiety, in addition to rapid international expansion. McDonald’s reported systemwide sales growth of 7 percent across the globe in 2006 and Yum! Brands’ KFC chain expanded heavily across India and China. A total of 17 fast food companies on the ranking had sales in excess of $1 billion last year.
Not surprisingly, sales growth was swiftest nearer the other end of the ranking. Zaxby’s increased sales some 40 percent last year as it added half as many units. Buffalo Wild Wings managed to grow sales over 30 percent in 2006, rewarding shareholders with 60 percent returns in the process. And bad-boy-of-the-sandwich-set Jimmy John’s increased its unit count by more than 100.
While restaurants generated the most sales, the 41 hotel chains on the Top 200–with a combined 20,000 domestic and 4,000 international locations–generated the most sales growth. Smith Travel Research estimates that domestic hotels managed to raise rates some 7.4 percent on average last year, at nearly twice the rate of inflation. This helped the industry to grow domestic revenues to just under $100 billion last year despite occupancy rates that were essentially flat.
The ability of hotels to successfully take such significant pricing is the function of a few variables, including continued business traveler demand and the falling dollar. Smith Travel Research’s Vice President of Global Development Jan Freitag points to healthy midweek group and business travel and strong weekend leisure business as revenue drivers for the lodging industry. Additionally, he cites the role the weakening dollar has played in attracting European tourists to America for relatively cheap vacations.
The ranking’s retail companies managed collective sales of $76 billion last year led by the No. 2-ranked 7-11 chain, operator of some 25,000 international convenience stores. Five retail chains on the ranking–Ace Hardware, Matco Tools, The Athlete’s Foot, Cartridge World, and Play It Again Sports–boast 100-percent franchised systems.
The catchall group of companies combined in the “All Other” industry category includes franchisors from all corners of the economy. While these businesses generated just 7 percent of all Top 200 sales last year, they collectively account for one in five Top 200 units and are responsible for spreading the franchise model into new and evolving economic sectors.
The healthcare sector may not spring to mind in relation to franchising, but a number of Top 200 companies are taking advantage of aging demographics and the growing demands on our healthcare sector by franchising elder care solutions, medical staffing services, pharmacies and other health and fitness concepts. Numerous companies have found niches tending to the variety of services demanded by our ever-growing commercial and residential building supply.