For the first time since our Franchise Times Top 200+ list began in 1999, some of the very largest brands in franchising showed year-over-year sales declines or surprisingly soft growth given the ongoing narrative of economic recovery in the United States, the results of our exclusive research project show.
Sales at McDonald’s fell 1.5 percent in 2014, Subway dropped a worrisome 3.2 percent and the top 10 brands taken as a whole only increased their sales by 0.6 percent, whereas the top 200 grew by a much healthier 2.1 percent. While the reasons appear to be brand specific, rather than some overall trend, they point to a significant change in the franchising status quo.
Like a space shuttle’s heat shield, the industry’s leading edge is bearing the friction for an industry that remains in an opportunistic growth spurt fueled by economic growth at home, continued international expansion, and renewed interest from private equity firms and Wall Street.
A meager increase
The top 200 franchises increased their worldwide sales to $595.9 billion in 2014, up 2.1 percent. They added 15,820 units, for 496,217 worldwide units total, a 3.3 percent bump from the prior year.
Comparing the top 200’s 2.1 percent sales increase to previous years, that number was 2.9 percent in 2013, 5.6 percent in 2012 and a roaring 8.8 percent in 2011. The top 200 increased unit counts by 3.3 percent in 2014, compared with 3.4, 3.9 and 4.3 percent, respectively, in the previous three years.
This is the second year in a row the top 10's sales increase lagged the top 200's performance. In 2014 that number was 0.6 percent, compared with 0.5 percent in 2013, 5.8 percent in 2012, and a boffo 13.2 percent in 2011.
With no change in the ranking of the five largest franchises—in order, McDonald’s, 7-Eleven, KFC, Subway and Burger King—both McDonald’s and Subway have broken their timeworn winning streaks.
Amid high-profile struggles to compete with fast-casual and better burger rising stars, McDonald’s shed $1.34 billion in sales compared with 2013, while adding 829 (2.3 percent) new units. Subway lost more than twice that, as a percentage (3.2), shaving $600 million from its annual sales, creaking under the weight of its scale with similar competitive pressures. It increased its store count by 2 percent, adding 858 new units worldwide in 2014.
On sales slighter higher than $17 billion (19.4 percent of McDonald’s annual take), Burger King led the top five by adding $716 million in global sales and 705 new units, down 30 in the U.S. and Canada, and up 735 abroad.
An historic decline
In our list’s 16-year history, Subway and McDonald’s had never delivered year-over-year sales decreases. 7-Eleven had previously declined twice, and Burger King had three decreases, but has been resurgent with six straight years of sales increases, capped off by its 4.4 percent gain in 2014. KFC sales have never declined in our list's history, and this year revenue again grew, 1.7 percent.
Many of the largest franchise systems have shed company-owned units in favor of franchisee-backed growth, as evidenced by a decline of 489 company units within the top 10. Looking at the overall top 200, 84.7 percent of all locations are franchised, versus 15.3 that are company held, numbers that are virtually unchanged from 2013.
Exemplifying this trend, KFC (No. 3) jettisoned 100 U.S. units in 2014, while adding 645 abroad. Even so, given the scale of its 19,420 worldwide units, the global chicken restaurant remains 73 percent franchised. Another example is Pizza Hut (No. 8), which added just 62 U.S. locations in 2014, but added 576 international units during the year.
Based on total worldwide system sales, our ranking rewards systems for how much they sell in a given year, rather than how many units they build. By that measure, 7-Eleven (No. 2) remains the largest with 55,801 units, and Subway (No. 4) is the world’s largest restaurant chain with 43,154 units, compared with 36,258 for McDonald’s.
Cashing in, moving abroad
Looking abroad, franchising’s largest brands have saturated their home turf and are concentrating their efforts on adding company- and franchise-owned locations outside of the United States.
Of the 6,417 franchised units added in the United States by the 200 largest franchise systems, only 234 were built by companies in the top 10, as saturated brands look overseas for further growth.
The differences in both strategy and results remain stark, with the top 200 franchises increasing their worldwide sales by $12.2 billion. This class of 200 added 506 new company-owned units and 6,417 franchisee-run units in the United States, with respective increases of 1.1 and 2.5 percent. Beyond our borders, the combined top 200 added 3,662 new company and 5,235 franchise units.
Several systems, particularly restaurants, have looked to cash in on Wall Street’s growing interest by going public, most notably in specific sectors within the franchise market, like fast-casual restaurants.
Some newly public notables include Planet Fitness (No. 80), Bojangles (No. 87), El Pollo Loco (No. 103), Wingstop (No. 111), and The Joint (No. 390). Del Taco also became a public company by way of a reverse merger.
Read on for full listings, Nos. 1 through 500, plus 12 industry breakouts, four top 10 charts and unusual tidbits about franchising’s finest, all part of the Franchise Times Top 200+.
The Franchise Times Top 200 is an annual ranking of the 200 largest franchise systems in the U.S. by global systemwide sales, based on the previous year’s performance. This year, for the fourth time in a row, we also ranked the next 300 systems for a total of 500.
We use a combination of companies’ voluntary reports and publicly available data, including the franchises’ most recent franchise disclosure documents and Securities and Exchange Commission filings.
To qualify, a company must be a legal U.S. franchise. Franchisees must own at least 15 percent of the company’s total units. The company must also be based in the United States, or have at least 10 percent of their total units in the United States.
Systemwide sales is defined as the total sales for both franchise and company units. Those sales figures should represent sales to customers, and not corporate sales to franchisees or prospective franchisees, such as royalty revenue or franchise fees. Other revenue not directly related to franchising should not be included.
If two companies reported the same systemwide sales, the higher ranking is given to the company with the most units. Preference is also given to companies that voluntarily report their systemwide sales, rather than those companies for which we must estimate the sales figures.
Franchise Times’ estimated revenue for hotels is based on a formula multiplying the chain’s revenue per available room (RevPAR) by the number of rooms and the number of days in the year. RevPAR comes from the company, or from industry estimates.
We estimate real estate companies based on 2.5 percent of their reported sales volume. Real estate companies report sales based on total volume of homes sold. So if a home is sold for $200,000, it would be listed as $200,000 in revenue. FT’s estimate would count $5,000 in revenue earned as a commission from the sale.
We estimate travel agencies based on 12.5 percent of their total sales volume. Like real estate companies, travel agencies report sales volume based on the value of the vacations sold, rather than their commissions. For more information, contact Matt Haskin at firstname.lastname@example.org