Fast Food Franchising Flourishes

There's nothing more American than fast food restaurants - and some of them even serve apple pie! Fast food franchises have been meeting the growing needs of the country's on-the-go car culture and diverse life styles, complete with late-night hours and 24-hour service.

For decades, hamburgers, tacos, chicken, pizza, and subs were the mainstay of the fast food sector. In recent years, as customers began seeking healthier options, these standbys have been joined by wraps, smoothies, salads, frozen yogurt, and more. In 2010, one franchisor began offering vending machines containing fresh fruits and vegetables, protein drinks, and other health-oriented snacks.

In the world of franchising, fast food is the largest category by far, accounting for between 35 and 40 percent of all franchises. Worldwide, the U.S. leads the fast food market, with more than half of the market sector's total value. American fast food brands are coveted by consumers all over the world, and U.S.-based franchisors have responded, increasing their efforts to spread their brand internationally.

While more Americans are seeking healthier food, they still want it fast, ready to eat, and ready to go. And today's successful fast food franchise brands have shown their ability to adapt to changing tastes by changing their menus, their look, even their marketing and advertising.

So what is fast food? Definitions vary. Let's start with the basics. Also known as QSR (quick serve restaurants), establishments in this category include food that is prepared and served quickly (5 minutes or less); made from preheated or precooked ingredients; served in a pre-packaged form for takeout or eating in the restaurant; and is ordered and paid for in advance, at the counter or drive-through.

Fast casual, the next step up from fast food, shares many of these traits, but is characterized by a higher percentage of sit-down diners, a more upscale décor, slightly longer preparation time, and in some brands, food delivered to the table.

Fast food opportunities come in every size and shape. At the lower end, mobile kiosks and vans operated by one person offer a first-time franchisee an entry opportunity that is both affordable and manageable. At the upper end are large establishments with seating, a drive-through, dozens of employees, and a complex operating system.

Clearly, not all fast food brands are created equal. Take the world's top two fast food franchise brands, McDonald's and Subway. McDonald's, long the world's leader in number of locations, recently was surpassed by Subway. While both have more than 32,000 units worldwide and each has restaurants in about 100 countries, it costs more (a lot more) to open a McDonald's. On average, the cost to open a Subway runs from about $85,000 to $250,000, while a McDonald's will cost you between $1 million and $2 million (depending on size, location, cost of real estate, etc.).

Subway is often described as a good brand for first-time franchisees, not only because of its relatively low cost of entry, but also because of the simplicity of its operation. McDonald's on the other hand, requires not only more capital, but the ability to manage a larger, more complex operation and, often, greater number of employees.

The downturn in the U.S. economy following the crash of September 2008 resulted in consumers reigning in their discretionary spending and "trading down" from casual sit-down restaurants (full table service) to fast casual to fast food. In response, franchise brands in the fast food category began a race to the bottom, cutting prices and offering items for $1 or less. In many cases, consumers responded--after all, they still liked to eat out, but felt compelled to spend less.

One result: fast food brands (as well as fast casual and casual) have worked hard to present consumers with perceived "value" for their money. Fast food brands did this by reducing prices and/or increasing portion size. Fast casual brands are striving to provide customer with value through better service and providing some bargain items on their menus.

To meet changing consumer tastes, fast food brands have retooled their menus, offering healthier options, better coffee, and a wider selection of breakfast offerings to expand their customer base and spread their revenue across all day parts. Many also spent the past few years remodeling and upgrading their look, streamlining their operations, and improving their supply chains to reduce internal costs - positioning their franchisees for greater profitability as the U.S. economy recovered.

The brands and operators who succeeded in trimming their expenses and streamlining their operations found themselves in a good place in late 2010 and early 2011 as the economy began to rebound and consumers felt more comfortable about spending more of their discretionary dollars.

Fast food franchise brands provide solid opportunities for first-time franchisees. In fact, many of today's successful multi-unit franchisees began working part-time in a fast food restaurant, moving up to manager, general manager, and eventually buying their first franchise unit. They became experts in every aspect of operating that brand, and many soon added more units and stepped back from daily operations to more administrative and management roles as their franchise organizations grew. The better brands provide not only management training programs, but also groom their high achievers to become franchisees.

There also are an increasing number of franchisors offering several related fast food brands. This allows franchisees to add new brands more easily than dealing with a new franchisor, since they have proven themselves as successful operators with their first brand from that company.

Looking ahead, the opportunities for fast food franchise operators are sky high.

Published: April 18th, 2011

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