The Concentration of Power in Franchising
The fast food franchising landscape has been transformed in recent years by a seismic shift toward concentration. As private equity firms have begun partnering with and owning franchises, we have seen franchisees acquire scale and secure financing through more sophisticated means.
Franchisors have quietly pushed for concentration. One major system set a goal at one point — which they denied, but was accidentally inserted into a PowerPoint presentation and seen by a large number of people at a meeting, I’ve been told — of going from thousands of franchisees down to 100.
I represented a client years ago who had 98 stores, and we all considered that as a huge franchisee. The reaction from other people was, “Wow! I can’t believe the franchisor let them get that big! That’s insane!” Today, operators on the Franchise Times’ list of the top 200 restaurant franchisees average 167 restaurants, concentrated in six giant brands, including Pizza Hut, Taco Bell, and Wendy’s. The largest franchisee operates more than 2,300 stores.
Advantages of Size
Size has advantages, of course. If you’re larger, it’s easier to borrow money and develop new stores. That is what franchisors want. Their attitude is open new stores and generate topline revenue.
But as I see it, this raises two issues. First, professional managers are running the franchisor firms, and their careers have evolved during the time of “franchise lite.” Many have never operated or developed stores, and they don’t really understand how to do that. Taking over 400 stores from a franchisee who is not compliant is challenging, especially if you don’t have anybody at the office who knows how to run those stores. A franchisor can’t abruptly close 400 stores, then come back easily from that setback. The result is a situation where franchisees have an odd indirect sort of leverage. Some of these managers may realize that something is lost in not having smaller franchisees who live near their stores. Some of these franchisors — not all, but some — are starting to reverse course and work against consolidation.
The Value of Small Local Franchisees
While it’s exciting to watch these large organizations operate, there is also something exciting about the opportunities franchising affords small businesses. A franchise is a local business with a national presence. And that’s cool. When I grew up in a small town, everybody knew who the franchisees were. You knew who the Dairy Queen family was, and you knew who the Burger King family was. They all sponsored sports teams, they had kids in the high school, and they employed people’s kids. There is something valuable about that that is hard to quantify.
The Future of Small Operators
People say this trend toward big franchisees is going to kill the small entrepreneurial operators. But I don’t see that happening. Ambition and drive don’t go away, they just get redirected. If getting into a giant brand is not going to work for them, they’ll just buy into a smaller one.
I am interested to see whether all of those small-business people who are innovators, who are driven, who would have gotten into the brand at the one-, two-, or five-store level, are going to go into competing brands with a smaller presence, such as the California-based Mountain Mike’s Pizza chain, or perhaps Zaxby’s, a Georgia-based chicken chain that boasts of “building a franchisee community of entrepreneurs.” Will brands like those gain traction because they have that kind of small business energy within them? It remains to be seen. But to me, it is an interesting point of tension to watch.
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