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Double Digits: Top 10 franchise systems pull away from rest of the pack

It’s good to be at the top.

The bigger a company gets, usually the slower its rate of growth. But that’s not the case with companies on the Franchise Times Top 200, our ranking of the largest franchise systems in the country. The largest franchise systems keep pulling away from the rest.

Collectively, the 200 largest operators’ global revenue grew 8.9 percent last year, to $545.1 billion, while their unit count grew 3 percent. Yet for the top 10 companies, total global revenue grew 13.4 percent. And the two largest franchise systems, McDonald’s and 7-Eleven, grew 15.8 percent, collectively.
The Top 200 has been top-heavy since we first published the ranking in 2000, when the 10 largest franchise systems accounted for 45.2 percent of total sales. That percentage has increased ever since, and the 10 biggest companies now account for more than half of the 200 franchises’ overall revenue, 50.2 percent.

Download the 2012 Franchise Times Top 200 Franchise Systems here.

International development

One reason for increased dominance is their ability to grow internationally. Many of these largest franchises have developed well-known brands that are in demand in foreign countries. And they’ve created sophisticated systems, enabling them to speed their growth in places like Asia and Europe and Latin America even as market saturation slows domestic development.

Franchise systems overall are increasingly reliant upon overseas markets for growth. When we first compiled this ranking, 24 percent of the Top 200 franchises’ units were in other countries. By last year it had risen to 34 percent. To look at it another way, while the number of domestic units in systems on the Top 200 grew 32.1 percent in 12 years, the number of international locations more than doubled, growing 112.9 percent.

7-Eleven’s continued international growth is remarkable. The chain, based in Dallas but owned by Japan’s Seven and i Holdings, saw international unit count grow 12.2 percent last year. It added 4,070 international locations last year. By comparison, the No. 9 company, Circle K, has 3,946 international units, total.

Louisville, Kentucky-based Yum! Brands now gets more of its profits from China than it does anywhere else, thanks to the strength there of its KFC brand, No. 3 on our ranking. And some time in the next year or two, No. 15 Domino’s Pizza will have more units internationally than it does in the United States.

Smaller companies have been focusing on foreign investment, too, and more franchises are investing in it earlier in their life cycles. “You have to diversify your portfolio,” said John Reale, chief operating officer, international, for Atlanta-based franchisor Focus Brands. “If you have everything built in the U.S., and the U.S. goes into recession, you’re in a tough spot.”

Besides, growth in the United States is tough right now. Reale said his company’s brands, including Moe’s Southwest Grill (No. 152), Schlotzsky’s, Cinnabon and Auntie Anne’s Pretzels, could double their international presence in four years.

Auntie Anne’s revenue last year grew 20.3 percent, rocketing the chain up the ranking from No. 159 to 140. The company is about to open its 300th international location. Cinnabon is just outside of the Top 200 at No. 208, up more than 50 spots from last year. Cinnabon is nearing its 500th international unit. Its foreign unit count could soon surpass the number of domestic outlets.

Unloading company units

Another big trend in the franchise sector is the companies’ growing reluctance to operate units. In our first ranking, 79 percent of the locations of Top 200 brands were operated by franchisees. Last year, franchisees owned 88 percent. In other words, the company-owned unit count was cut nearly in half, from 21 percent to 12 percent.

Much of this is due to refranchising, or the sale of company-owned units to franchisees. Between 1999 and 2006, the number of company-owned units grew by 16 percent. But since the end of 2006, company unit count on the Top 200 has plunged 22.4 percent as franchisors shed 16,671 locations.
Numerous companies on our ranking, especially restaurants, have engaged in some form of refranchising, including McDonald’s, KFC, Burger King, Pizza Hut, Taco Bell, Jack in the Box and Applebee’s.

McDonald’s company-owned unit count has declined by 5 percent over the past five years, by 1,731 restaurants. Jack in the Box sold off 641 units in that time, while Applebee’s owner, DineEquity, shed 339 units, according to information from Piper Jaffray.

A few companies have been bucking this trend: Panera Bread (No. 33), Buffalo Wild Wings (No. 52) and Five Guys (No. 83) have all purchased franchisees recently. Those companies’ profit margins are making operations more desirable for the franchisor.

Read on for all the ins and outs of this year’s Franchise Times Top 200, plus 300 more.

Articles by Jonathan Maze
Research by Matt Haskin and Abbi Nawrocki

Top 200
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