Monitor 200 Operators Keep Growing


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The largest franchised restaurant operators keep getting larger as seen in the Monitor 200.

Fueled by an aggressive acquisition strategy, cheap capital and aggressive private equity investment, the top 25 largest franchisees now account for more than $14 billion in topline sales.

The growth in franchisee restaurant companies is staggering. The Monitor 200 franchisees now own an average of 126 restaurants. That’s up 10 restaurants from last year, and 37 restaurants from back in 2010. Overall, the Top 200 franchisees added 2,000 total restaurants between this year and last for a grand total of 25,176 restaurants.

There are 10 franchisees in this year's Monitor 200 ranking that had revenue in 2015 greater than $500 million. Ten years ago there was only one—NPC International, a publicly held Pizza Hut franchisee with 816 restaurants. Today, NPC Restaurant Holdings (No. 2), backed by private equity fund Olympus Partners, operates 1,251 Pizza Huts, but also has become a major Wendy's franchisee with 144 locations.

The largest franchisee in our ranking for five years running is Flynn Restaurant Group, operator of 484 Applebee's, 179 Taco Bells and 47 Panera restaurants. Flynn reported $1.65 billion in revenue for 2015, an all-time record for the top spot.

Flynn's founder and namesake, Greg Flynn, is well recognized for parlaying a successful real estate business into a major restaurant player with his savvy use of financing. Flynn first bought eight Applebee's in Seattle from a long-time franchisee. He later raised $40 million from PE investors to acquire the group's restaurants in Minnesota and Ohio in 2001.

Flynn first appeared on our Monitor 200 ranking in 2002, reporting 81 Applebee's and $195 million in revenue. He then bought and built more locations over the next five years, reaching 142 locations by the end of 2007. During this time, Flynn partnered with Goldman Sachs and private equity investor Westin Presidio.

Flynn's real moment came in 2007 when Applebee's was acquired by IHOP in a heavily leveraged transaction. IHOP CEO Julia Stewart was to forced sell company stores to pay down debt. However, the recession was in full swing and Stewart had few candidates to buy Applebee's stores other than Flynn.

Flynn would later call Applebee's' misfortune "the buying opportunity of all time.”

Franchisee growth shouldn’t come as a big surprise. Behind the growth is an increasingly competitive industry, more sophisticated and technology-savvy operators with the wont for higher returns and a healthy amount of capital floating around, especially from private equity investors.

Whether smarter operators brought investors to the industry or their presence brought better leadership is the classic chicken and egg question. Steven Rockwell, an industry finance veteran and managing director at BTIG focused on the restaurant space, said there is a little of both happening, but the fact is, more private equity investors are pumping money into the industry.

“To some degree, I think the private equity interest in the franchised space is contributing to the rise of the mega franchisees because there are a number of private equity firms that have bought small- or medium-size franchisees and used them as a platform to acquire others,” said Rockwell.

“It’s hard to pinpoint a date, if you go back to the '80s and '90s, there were a handful of private equity firms that made investments in the industry, but the amount of dollars they had then was relatively small," he said.

The numerous Internet disrupters also are changing the calculus for investors across the consumer space. And since 2014, private equity has been struggling to grow and has increasingly large cash reserves. An extra few billion in “dry powder” is an enviable problem, but it means firms are looking for anything Amazon can’t ship.

“They are sitting on a lot of money and they’re kind of frustrated about getting some investments,” said Tom Coba, who served as vice president of Dunkin’ Brands, COO at Subway and consultant with Premier Franchise Advisors.

He said big franchise operators are getting plenty of attention, and not just out of a desperate gamble for growth.

“I think they’re breaking out of their pattern a bit and realizing that some franchisee networks can do the same thing as far as providing a return,” said Coba. “If they put good management and good operators in place, the returns there can be comparable to other investments they make.”

Mega franchisees are also getting cozy with banks, which like the stability of the large operation and are happy to dole out cheap capital. Anil Yadav (No. 9), who now runs 368 restaurants, said he had no problem getting the capital from BBVA Compass and Fifth Third Bank to buy 72 TGI Friday’s in 2015.

“My relationship with lenders has been very good because of my track record financially,” said Yadav back in August 2015. “So access to funding is easy.”

Yadav will be remodeling more than 33 of those restaurants in the next couple years, which highlights another benefit of dealing with large operators. It’s one shared by Michael Kulp, CEO at KBP Foods (No. 18), who said the company would be reimaging 89 of the 91 KFC restaurants it bought in May by the end of 2017.

“As brands get more mature, there are increasing capital requirements for remodels and reimages,” said Rockwell. “We’re seeing that with Burger King and Wendy’s. If you’re a one- or two-unit franchisee, your access to capital is a lot less.”

Those commitments can be impossible without the right cash flow. A remodeling commitment of between $450,000 and $650,000 for a Wendy’s for example, is a lot of capital when the operator has just one or two stores.

“If there’s a franchisee that doesn’t have the capital, let’s say a two-unit franchisee, to upgrade his branding, that brand is probably going to be losing market share to another brand that has the capital to keep the operations fresh,” said Rockwell.

The brand owners—chains such as Wendy’s, KFC, Pizza Hut, Burger King, TGI Friday's and Applebee's—have been more than willing to sell operating control of their company stores to franchisees at relatively cheap valuations. Aggressive franchisee groups with ready access to capital have been in a position to make deals. Flynn, Dhanani Group (490 Burger Kings and 179 Popeyes), Carrols Restaurant Group (705 Burger Kings), MUY! Companies (314 Pizza Huts and 172 Wendy's) and others, stand willing and ready to buy up more stores.

On the real estate side, sale-leaseback, real estate investment trusts and individual investors have poured money into restaurant real estate. Cap rates for QSR and casual dining real estate are at their lowest in history. That means restaurant franchisees are foregoing traditional real estate ownership in favor of controlling more stores, even if they are leased.

Then there's the new breed of operator who isn't looking to grow a family business, much different from the industry standard 30 years ago.

“Executives who have been in leadership roles in big businesses seem to be coming into the franchise industry as well and they don’t want to be a mom and pop, they don’t want to run one or two locations,” said Coba, noting operators such as billionaire Reebok founder Dan Fireman and his father’s investment in 38 Dunkin’ units.

So does that mean the end for the American Dream of opening up a franchise and working hard? Not really. It certainly makes it difficult for a new franchisee to jump into a system like Wendy's or Applebee's, but with the new concepts emerging in franchising every day, there are plenty of opportunities for new franchisees and smaller operators.

Is there a danger a franchisee with revenue greater than say, $500 million, is too big? Suffice it to say it depends on the cash flow and leverage of an individual company. Secondarily, a concern might be that a large franchisee could have too many of their eggs in one basket, especially if a brand stumbles. It's more likely, especially if capital remains available for this segment, that franchisees will get even bigger in the future. 

Take a look at the Monitor 200's top 25 operators, see the full list in the June issue of the Restaurant Finance Monitor or the June/July issue of Franchise Times

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COMPANY

REVENUE

MAJOR CONCEPTS

SENIOR EXECUTIVES

1

Flynn Restaurant Group

San Francisco, CA

1,654,919,000

484

179

Applebee's

Taco Bell

Gregory G. Flynn - Chairman/CEO

Lorin M. Cortina - CFO/EVP

2

NPC International

Overland Park, KS

1,223,299,000

1,251

144

Pizza Hut

Wendy's

James K. Schwartz - President/CEO

Troy D. Cook - CFO/EVP

3

Dhanani Group

Sugarland, TX

871,000,000

490

179

Burger King

Popeyes

Shoukat Dhanani - President

Ash Meghani - CFO

4

Carrols Restaurant Group

Syracuse, NY

859,004,000

705

Burger King

Daniel Accordino - CEO

Paul Flanders - CFO

5

Manna

Louisville, KY

814,000,000

261

125

Wendy's

Chili's

Junior Bridgeman - President

Troy Hanke - CFO

6

Summit Restaurant Group

Richardson, TX

756,000,000

290

121

IHOP

Applebee's

Joe Langteau - President/CEO

Doug Shaw - CFO

7

MUY! Companies

San Antonio, TX

631,493,000

314

172

Pizza Hut

Wendy's

James Bodenstedt - President

John Haynie - CFO

8

Covelli Enterprises

Warren, OH

623,600,000

268

9

Panera Bread

Dairy Queen

Sam Covelli - President/CEO

Robert Fiorino - CFO/VP

9

Yadav Enterprises

Fremont, CA

602,200,000

218

72

Jack in the Box

T.G.I. Friday's

Anil Yadav - President/CEO

Grant Norrid - CFO

10

Sun Holdings

Dallas, TX

559,000,000

293

102

Burger King

Popeyes

Guillermo Perales - President Jorge Vargas - CFO

11

Doherty Enterprises

Allendale, NJ

465,059,000

107

42

Applebee's

Panera Bread

Edward Doherty - Chairman/CEO

Jerry Marcopoulos - CFO

12

Boddie-Noell Enterprises

Rocky Mount, NC

445,693,000

336

Hardee's

William L. Boddie - President

W. Craig Worthy - CFO/SVP

13

Tacala

Birmingham, AL

443,417,000

272

66

Taco Bell

Sonic Drive-In

Tim Morrison - President

Joey Pierson - CFO/EVP

14

RMH Franchise Holdings

Atlanta, GA

430,000,000

175

Applebee's

Jeff Neumann - President/CEO

Mark Seymour - CFO

15

K-Mac Enterprises

Fort Smith, AR

421,261,000

247

17

Taco Bell

KFC

Sam Fiori - CEO

Jon Dyer - CFO

16

The Briad Group

Livingston, NJ

397,700,000

87

61

Wendy's

T.G.I. Friday's

Brad Honigfeld - CEO

David Cahill - CFO/EVP

17

SRAC Holdings

San Ramon, CA

375,285,000

245

Burger King

Jerry Comstock - CEO

Steven Grossman - CFO

18

KBP Foods

Overland Park, KS

357,000,000

267

57

KFC

Taco Bell

Michael Kulp - CEO

Alan Salts - CFO

19

United States Beef Corp.

Tulsa, OK

351,138,000

331

6

Arby's

Taco Bueno

Brett Pratt - President Lori Pumphrey - CFO

20

Pilot Travel Centers

Knoxville, TN

339,067,000

205

147

Subway

Cinnabon

James A. Haslam III - CEO

Mitch Steenrod - CFO/SVP

21

Sizzling Platter

Murray, UT

335,483,000

245

29

Little Caesars

Dunkin' Donuts

Ted Morton - President

Emanuel P.N. Hilario - CFO

22

Cedar Enterprises

Columbus, OH

335,000,000

211

Wendy's

James W. Evans - CEO

Shawn Hiller - CFO

23

Harman Management Corp.

Los Altos, CA

333,961,000

135

184

KFC
YUM! Multi

James D. Olson - Chairman

James S. Jackson - CFO

24

* WendPartners Cortland, NY

330,000,000

204

Wendy's

Lewis Topper - CEO

25

D.L. Rogers Corp.

N Richland Hills, TX

329,688,000

234

Sonic Drive-In

Shawn Cather - President

Ron Arlington - CFO

* Denotes revenue estimate 

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