Franchise Times' Restaurant 200
The fevered pace of consolidation continues in the restaurant industry, meaning the big continue to get bigger in the face of some serious challenges.
At year-end 2018, the Restaurant 200 oversaw 28,642 restaurants and generated $40.5 billion in revenue—up 3.58 percent from last year’s rankings. The top 25 generated nearly half of that, or $18.1 billion. At No. 1, for the eighth year in a row, Flynn Restaurant Group saw $2.3 billion in sales, making it the first private franchisee to crest the $2 billion mark.
What did change this year is an incredible investment in technology, efficiency and new ways to get food to consumers, plus more and more financing options for major operators.
That quality technology empowers better ability to scale, making it easier for large operators to get ever larger. And while capital was slightly more difficult to get than prior years, large operators have proven their prowess and have ample options from every facet of the financial world, including alternative lenders, private equity, securitized debt instruments, family offices and yes, even traditional banking relationships.
All that fuels a feedback loop where large operations can get larger and more efficiently spread overhead over a huge number of restaurants. It also allows them to absorb smaller franchises or tap into the ongoing refranchising push.
But scale isn’t everything. The largest operators on the list are ready and have growth in their DNA—that’s not an easy thing to adopt.
Flynn Restaurant Group said operations actually became easier as the company grew. The group was also the fastest grower in 2018, adding $485 million in sales, mostly driven by a massive acquisition of United States Beef Corp.’s 368 Arby’s restaurants. CEO Greg Flynn credits the “state and federal” model for that growth.
“The whole idea is that it is difficult and ineffective to run multiple restaurants with central command and control. It’s too complicated and there are too many local factors,” said Flynn. All of the nearly 1,250 Applebee’s, Arby’s, Taco Bell and Panera restaurants are broken into geographic clusters of 20 to 40 stores in a market with its own “general autonomy” to make operational policy, employment and investment decisions.
Flynn added with the state and federal model, there is no limit to the company’s growth.
But there are plenty of groups at which massive scale just leads to massive problems. Whether it’s too much debt, a lagging brand or a management team that can’t make it work, scale doesn’t always snowball.
“I witnessed a franchisee’s financial ‘house of cards’ more than once in my career working with tier-one brands,” said Dine Brands Global’s former chairwoman and CEO Julia Stewart. “In each case, an inexperienced franchisee over-leveraged in an attempt to get big quickly, eventually collapsed or went bankrupt.”
Flynn acknowledged a “distressed situation” involving an Applebee’s franchisee selling 69 restaurants to franchisor Dine Brands Global last December. The former franchisee, Apple Gold, operated the units in North Carolina and South Carolina. Another of the brand’s large franchisees in southeast Ohio, RMH Holdings, filed for bankruptcy last year. It settled a court battle with the franchisor, allowing RMH to retain ownership of its 146 restaurants.
While there were lots of retirement parties and big acquisitions, some of the 14 companies that completely sold out likely had market conditions to blame. Rosy consumer sentiments and modest wage growth should mean a great market for restaurants, but there are too many units and more chain restaurants coming online every day. That leads to anemic traffic and consumer indifference. Throw in intense, historic labor pressures and high multiples and it’s no wonder groups large and small are selling out.
U.S. Beef was the largest, but Cerca Trova (No. 42 last year) sold 107 Outback restaurants to private equity firm HIG Capital. Gold Coast holdings (No. 44 last year) dropped off the list after selling 76 TGI Fridays units back to the company, and Cambridge Franchise Holdings (No. 55 last year) sold 150 Burger King restaurants to Carrols (No. 4).
These were all companies at scale with nine-figure sales volumes, enough to tap into many benefits of a large entity, but it’s a tough time to run a restaurant business. Large companies are feeling the same panic as small ones, leading them to open their wallets on technology and embrace off-premises channels, looking for any traction. Digital ordering, loyalty, social media and labor management are hot solutions—anything to blunt the impact of the many existential forces at work across the industry.
The late, famous management consultant, Peter Drucker, wrote that entrepreneurs when challenged shift resources from areas of low productivity and yield into areas of higher productivity and yield. That explains the technology imperative in restaurants today, a game changer that’s elevated big chains such as Domino’s and Starbucks. But for others, it’s a steep cost of just staying in business. Those that have the resources and management capacity to sort their way through it will continue to grow.
About this project
Our annual Restaurant 200 franchisee research, prepared by sister publication Restaurant Finance Monitor, 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 Matt Haskin at (612) 767-3200 or email@example.com.