For Big Franchisees, A Booming Economy
We’ve been saying for a while now that big franchisees have had the access to capital and willingness to expand and grow, and the best proof comes from our latest Monitor 200 ranking of the largest restaurant franchisees. Collectively, that group’s sales and unit count easily outpaced the broader restaurant industry.
Last year, the 200 franchisees on the ranking collected $26.3 billion in sales. That was up 10 percent over the previous year.
By contrast, the foodservice industry as a whole grew by 1.3 percent.
That outperformance may actually be understated, considering some of the brands that the 200 operate. For the most part, companies on the Monitor 200 operate older, legacy brands such as Yum Brands’ concepts, Applebee’s, KFC, Wendy’s, Burger King and McDonald’s. Their performance has ranged, but for the most those brands’ unit growth has been limited and their sales growth modest.
And the large franchisees have been growing at higher-than-normal rates for a couple of years now. Since 2009, the franchisees’ sales have grown 20 percent. In short: the economy is booming for big franchisees.
So what is happening? In short: lending and private equity.
Lenders have flocked to franchising. Over the past two years, numerous lenders have entered the restaurant finance market. They’re competing heavily to make loans, mostly to these types of companies: big, experienced operators of legacy brands. With debt cheap, these operators could afford to buy out units.
And there’s been plenty of supply. Much of it has come through refranchising, as brands like Applebee’s, Burger King and Arby’s sell off company stores. Flynn Restaurant Group, the largest company on our ranking with annual sales of $1.2 billion, more than doubled in size since the recession in part because it could buy up company run Applebee’s at lower prices. Carrols Restaurant Group doubled in size last year with its 278-unit Burger King purchase. And Dallas-based operator Sun Holdings grew substantially thanks to two refranchising deals, a 99-unit Burger King deal in Orlando and a 50-unit Arby’s purchase in Dallas.
While many refranchising programs are ending, franchisees are now putting themselves up for sale: a wave of retirements is spawning numerous deals. Many of those came late last year when operators sold before Congress could raise taxes. Those retirements aren’t expected to diminish anytime soon, investment bankers tell us.
The other big issue affecting the largest operators is private equity. In the August edition of Franchise Times, you can read about Flynn Restaurant Group. In that piece, you’ll read how, in 2001, Applebee’s was so worried about an investment in what was then Apple American Group by a private equity fund run by Goldman Sachs that it placed a limit on the percentage of restaurants Apple American could own.
These days, there is no such concern, at least among the legacy brands. Private equity groups either own or hold significant interest in many of the biggest operators, and those private equity groups drive significant growth.
In any event, the consolidation wave that has hit restaurant franchisees isn’t expected to end, and the larger operators are expected to be better prepared to operate in an environment where higher costs for food and labor pressure profits. In short: bigger may well be better right now.
We cover this list more in-depth in the current issue of the Restaurant Finance Monitor, and you’ll be able to read even more when the list is published in Franchise Times in August, when it’ll be known as the Restaurant 200.