If I had a dollar for every time over the past five years that I’ve heard, “Franchisees are just better at running stores than giant corporate brands,” I would probably have enough money to pay any chain’s franchisee fee and build a new restaurant.
Such conventional wisdom seemed airtight recently, as franchise-unit openings have far outpaced new locations of company-owned stores in the restaurant industry. Over the five previous years, franchised locations increased their share of all units of brands in Technomic’s Top 500 Chain Restaurant Report, going from 74.2% of locations in 2009 to 76.4% in 2014.
The popularity of refranchising among some of the biggest companies—including Burger King, Wendy’s, Applebee’s and, more recently, McDonald’s—only lends more support to the notion that franchisees are assured to outperform corporate operators at the unit level, all else being equal.
But the data from the Top 500 report do not support the claim. In fact, the study’s 275 restaurant brands that own and operate more than half of their locations logged a 5.6% collective increase in 2014 sales, better than the average 4% increase for the Top 500 as a whole. The subset of 183 chains that do not franchise fared best of all, registering a collective increase of 6.2% in sales in 2014.
The 225 majority-franchised chains registered a below-average sales increase of 3.2% for 2014, and within that group, the 44 completely franchised brands recorded a collective decrease of 1.6%.
These sales figures for the less franchised brands contradict typical industry thinking that franchisees automatically run higher-performing locations.
Granted, there are outliers in both groups, including Chipotle Mexican Grill and its nearly 28% increase in sales by way of zero franchised outlets, as well as 100% franchised Subway, whose 3.3% decrease in 2014 sales significantly impacted the majority-franchised group’s collective results. When we smooth out the numbers to compare majority-franchised with majority-corporate brands, it can miss the nuanced success of a fast-growing brand like Buffalo Wild Wings, which is fairly close to a 50-50 franchise-to-corporate ratio and strategically acquires and divests packages of restaurants in certain markets.
Not that numbers like these will slow down franchising as a growth strategy. There is a lot of investor pressure behind refranchising, and many brands will continue to favor an “asset-light” model as they expand. Of course, there won’t be any shortage of entrepreneurs looking to get into the restaurant industry via franchising either. Finally, those franchisees are opening up or buying more locations because they’re successful.
What ought to diminish, however, is the prevailing assumption that those franchisees automatically operate better than the brands to which they pay their royalties.