The 2011 Franchise Times 200: The largest franchise companies
One reason the Great Recession was so unusual was the lack of growth in franchising. Bankruptcies were more common than development agreements. During most downturns, franchising grows as debt prices drop and the unemployed target job opportunities.
This time the credit crisis and the seriousness of recession kept many systems from growing. But that was only a temporary setback. Growth returned to franchising in 2010, based on an analysis of the Franchise Times Top 200, our annual ranking of the largest franchise systems by system-wide revenue. On an adjusted basis, the 200 largest systems saw total sales growth of 6.3 percent. Unit count grew by 5 percent. The upshot: Franchising returned as an economic bright spot.
Several franchise-heavy industries enjoyed good years in 2010. Consumers returned to restaurants. Businesses spent on travel again, resulting in a boon for the nation’s hotel chains (and, in turn, many restaurants). Senior-care services are increasingly popular thanks to aging baby boomers. People always need haircuts. And, oddly, massage franchises have flourished amidst the recession.
To be sure, it remains easier to grow internationally, where many countries are hungry for U.S. franchise brands even if their economies are weak. Slightly less than two-thirds of the Top 200 franchises’ total units were in the U.S. in 2010, down from 67.8 percent in 2009. That 2010 figure was the lowest percentage of domestic franchise units we’ve ever recorded.
Companies with strong international presences were more likely to grow. In addition, many of the largest systems have reached their limits domestically and are now focusing on international unit development to sustain annual revenue growth.
The best example of this is KFC, the third-largest franchise system in the world. System revenue grew a robust 9 percent last year, but that was due entirely to its international success, mainly in China, where pictures of Colonel Sanders are as prevalent as pictures of Chairman Mao. In China, KFC is McDonald’s.
It’s a different story domestically. KFC’s unit count declined last year by 113. Operators struggled, and the chain’s grilled chicken promotion did little to boost the concept’s fortunes. It’s now embroiled in a brutal dispute between the company and its franchisees over remodeling requirements—a dispute that is resulting in even more store closures.
Burger King’s domestic franchisees had an even worse year. The chain’s U.S. restaurant count fell by 260 in 2010. That offset international unit count growth of more than 300, keeping Burger King’s system sales to only slight growth, to $14.8 billion. This allowed the ever-growing Subway to leapfrog the chain, making the Connecticut-based sandwich maker the fourth largest franchise system in the country.
For the most part, franchise systems performed admirably well in the U.S., a nice rebound after revenues for the Top 200 fell 1.1 percent last year, the first such decline in the list’s history. Big systems got going again this year, yet growth was present up and down the list. Over half of the systems, 130, added at least one new unit last year. And 135 of the 200 saw revenue growth.
Several systems with little or no international presence grew quickly last year. The fast-casual burger chain Five Guys surged 25 spots up our ranking, breaking into the Top 100, at No. 97, thanks to strong unit growth that pushed system-wide revenue up 44.5 percent. At No. 96, the sandwich chain Jimmy John’s also broke into the top 100, moving up from No. 104 to 96. Meanwhile, the chicken-wing chain Wingstop debuted on our ranking at No. 164.
Of course, people have to work off those chicken wings and big burgers. Anytime Fitness moved from No. 189 to No. 178, while its rival in the low-cost fitness chain category, Snap Fitness, debuted on the ranking at No. 193.
How we rank the systems
This is the 12th year we’ve published the Top 200. We gather the information through a variety of sources—such as companies’ self-reported data, Securities and Exchange Commission documents, the franchises’ FDDs and other publicly available documents. It is an imperfect ranking. The sheer size of the franchise community, combined with trouble obtaining useful information and changes in systems’ eligibility for the list, means that some companies appear and disappear from the ranking each year. We adjusted the sales figure for this story to remove that factor and to get a more accurate indication of the companies’ actual performance.
The franchises are ranked by system-wide sales, the strongest indicator of a franchise system’s size.
For instance, the cleaning service Coverall has roughly the same number of units (9,416) as Domino’s Pizza (9,351). Yet a Domino’s unit on average made $670,000 in revenue last year. Coverall? $34,090.
Systems also must have a strong presence in the U.S. And franchised units must represent at least 15 percent of the overall unit count. Thus, relatively new franchise entrants, such as the family-dining chain, First Watch, are not on the ranking, even though they are considered a franchise system.
Some things never change; some do
A few things with the ranking never change. One of them is McDonald’s, which has always been the largest franchise system, at least since we’ve been keeping track, and has only solidified that status in recent years—No. 2, 7-Eleven, which we believe may one day take the top spot, remains only a distant threat.
McDonald’s has been unfathomably successful in recent years. In 2005, McDonald’s system-wide revenue was $52.95 billion. This year it was $77.38 billion—46 percent higher. That $24.4 billion would be easily good enough for No. 3 on this year’s ranking. In other words, McDonald’s in six years added more revenue to its system than KFC earns in a year.
Here’s what’s most amazing: Almost all of that has been incremental store sales. The chain’s unit growth in six years was a modest 6.4 percent. Yet it has leveraged its ubiquitous presence and unmatched marketing power to add a long line of new products, including snack wraps, smoothies, higher-end coffee products and Angus Beef burgers. The result, on a unit-level basis, McDonald’s has left competitors in the dust.
On the other end of the spectrum is Denver-based Quiznos. Early last decade, the Denver-based sub chain was one of the fastest-growing concepts in franchising at a time when there was fast growth aplenty. At its peak, in 2007, the chain’s system sales reached $2.1 billion while unit count grew to 5,214.
It has been on a decline since then that accelerated to nearly unprecedented levels last year. Domestic unit count fell nearly 25 percent in 2010. System sales are an estimated $1.2 billion. At one point, the chain was the country’s 48th largest franchise. It has since fallen to No. 74. The chain is now trying to restructure its debt and is fending off suggestions that it may have to declare bankruptcy.