Hey Hot Potatoes,

Welcome to the latest edition of the Hot Potato Newsletter. Now, have any of you seen ‘The Founder’, a film that takes you through the journey of Ray Kroc? It’s the story about the man who grew McDonald’s into the empire that we know today. One of the key components to McDonald’s success has been their use of franchising to grow their business. McDonald’s is now in over 100 countries with over 38,000 restaurants, a fast-food chain that has truly pioneered the franchise model. With that being said, have you ever thought about starting your own restaurant or food business but not sure where to start? Well, this edition might be your calling, as today we dive deep into the world of franchising. We look at what it is, the costs involved, the pros, cons and whether it’s a route worth exploring. Let’s get into it!

In today’s email: To franchise or not to franchise, that is the question.

Read Time: Approx 7 mins

Restaurant Franchising 101.

Sources: Eater / Etakeawaymax / Franchise Supermarket

Franchising in it’s simplest terms is a business model where a company e.g. McDonald’s allows another company to use their brand name, products and services for a fee.

Key Points:

1. Franchising Explained: In the world of franchising, you have three main stakeholders: The Franchise, Franchisors and Franchisees. To break these down further, a franchise is a business where the parent company licenses out the rights to use its brand name, products and services. The Franchisor is the owner of the parent company and grants licenses out to the franchisees. A franchisee is simply a business owner who pays a fee to a franchisor to license a parent company’s trademarked concept at one or multiple locations.

2. The UK Market: Some quick stats in the UK specifically show franchising is big business. The franchise industry contributes £15bn to the UK economy and it has seen a 46% increase over the past ten years. This shows the strength of the franchise model and the opportunity it provides out there. The total number of people employed within franchising has now reached 621,000, an increase of 70% also over the past ten years. Franchising is clearly a model that is growing in popularity and the growth isn’t expected to stop anytime soon.

3. Examples: In terms of fast-food franchises, some of the most popular are McDonald’s, KFC, Taco Bell and Subway. Other brands include the likes of Nando’s, Wagamama, Pizza Express, TGI Fridays, and Frankie & Benny’s.

The franchise business is big business and it is a model that has stood the test of time. It is also a model that now covers pretty much all segments, from QSRs (Quick Service Restaurants) to casual dining.

What are the typical costs involved?

Source: Eater / Start up Loans

When it comes to costs, how much are we talking then? Well, it differs largely from brand to brand, but most models will include an upfront franchise fee and take a percentage of revenue from all sales. Let’s explore the costs of some of the biggest chains in the US.

Key Points:

1. Upfront Costs: These can range anywhere from $10k to $45k on the upper end. These costs, also known as a ‘Franchising Fees’ are a one-off cost you have to pay to entitle you to use the brand name, products and services of the chosen brand.

2. Percentage Revenue: All franchises will charge fees on a monthly basis, and these tend to be around 2-6% of your gross sales, also known as royalties. However the brand Chick-fil-A in particular offers quite a different model; here the initial fee is pretty low in comparison to others, but they charge much higher monthly fees, receiving 15% of gross sales as well as 50% of the remaining pretax profit each month.

3. Other Costs to Consider: Other than the typical restaurant costs, some franchises charge ongoing monthly fees to cover marketing efforts. Then you have the likes of insurance costs and professional services e.g. accountants, lawyer and architects to consider when building and opening your site. There are also fees to renew your franchise agreement and another fee when you choose to sell your franchise.

4. Total Costs All In: Judging by the rough numbers from the big brands in America, starting a franchise can cost you anywhere between just over $100k to $1mn. Plus, for some brands, you will have to prove you have a certain level of wealth just to be able to become part of a franchise so that they know you’re a safe bet!

As we can see, franchising can add up, but it does largely depend on the brand as costs do vary greatly. There are also some big barriers to entry, such as the capital needed just to be considered to be a franchisee. What are your thoughts so far… if you had the money, would you like to own a franchise?

What are the pros of franchising?

Source: Apicbase

Owning a restaurant franchise can have big benefits in comparison to owning an independent brand. With franchises, you have a wide support network, instant brand recognition, you can benefit from competitive costs they get at scale and even find raising funds a smoother experience.

Key Points:

1. Support Network: When you become a franchisee you have instant access into a wide support network; this could be anything from marketing advice, to getting help with systems on site, training of staff, business advice from other franchisees and general support for queries and issues you come across. Being a franchisee means you have a wealth of resources to help you tackle problems head on, so it can feel less daunting.

2. Brand Recognition: One of the biggest advantages of becoming a franchisee, assuming it’s a strong brand, is instant brand recognition with a loyal group of followers. In simple terms, if you opened a McDonald’s restaurant, the likelihood is your restaurant would be busy from the get go, whereas an independent brand that no one has heard of will need to invest more in marketing and promotion to get people through the door. While it doesn’t guarantee success, it certainly helps create strong demand when starting out.

3. Out the Box Package: Most franchise opportunities out there take care of a lot of the restaurant functions, including marketing, supply chain processes and training, meaning there is very little for you to worry about. This in theory makes it more straight forward to operate and manage as you are working from a well oiled machine, it’s been done before and there is less uncertainty.

4. Competitive Costs: There’s strength in numbers right? Well when you join a franchise, you benefit from their larger collective buying power on the likes of ingredient costs, utility rates etc. In some cases, franchises negotiate deals on your behalf, so all you need to do is run your restaurant while they take care of everything else.

5. Easier to Raise Funding: As we have explored and will continue to in the next section, big upfront costs are required to get your first franchised site up and running. From franchise fees to investing in the restaurant fit out, it all costs money. However, thanks to the strength of the brand’s reputation and repeated success of the model and wider business, banks are much more likely to lend money to a franchisee.

So it goes to show that going down the franchise route can have pretty big benefits; from a large support network, to lowered costs and even easier borrowing, these are all factors that increase your chance of making the business a success. If you’re ever considering becoming a franchisee of a brand, its worth going to the International Franchise Show, an exhibition where hundreds of brands attend looking for new franchise partners.

What are the cons of franchising?

Source: Apicbase / Peckwater

Whilst franchising can be an attractive proposition, there are some drawbacks to consider, such as the lack of control in decision making, the high costs (as mentioned) involved and the threat of bad press.

Key Points:

1. Lack of Control: Whilst franchising offers all the infrastructure for a franchisee, the flip side of this is that you have very little say in decision making. Whether that’s having input in marketing activities, suppliers used or your menu offering, overall there is not much you can influence or control. Granted, it’s understandable as franchises want to maintain consistency across all sites regardless of who the franchisee is, but this means the opportunity to be creative and have some input is sacrificed as a result.

2. Big Cash Investments Needed: When it comes to franchised restaurants, big cash investments are expected. If you take the example of McDonald’s, in the US, you need a minimum of $1mn to get started. This includes the franchisee fee, real estate costs, equipment costs, inventories and any renovation work required. So for the big brands, you need a good chunk of cash!

3. Risks of Bad PR: Similar to the lack of control, when you are part of a larger brand, any negative PR can hurt your business, despite it having nothing to do with you, your location, how you manage the business or the customer experience at your site. I mean imagine this, you’re a McDonald’s franchisee and another franchisee out there lets standards slip, perhaps they made someone seriously ill or had a nasty rat infestation... this will get bad press and could put people off coming to your site because they’re worried you follow the same practices.

Look let’s be honest, if you want to go into the restaurant biz and are someone who has that creative flair, then entering the franchise world is probably not the right step for you. But, if you do enjoy hospitality, have a few spare quid lying around and are happy to accept the constraints of a franchise business, then why not give it a shot!

Today we’ve run through all things to do with franchising. With everything that you know now, is it something you would ever consider?

Now, with the Christmas lights up on Regent Street and the Christmas tunes sneaking their way into my Smooth radio daily playlist, in the words of Michael Bublé, ‘It’s beginning to look a lot like Christmas.’ With the festive season closing in fast, it is a super important period for the hospitality sector, particularly due to bumper sales. In next week’s edition, we delve into how you can absolutely nail the festive period this year, from maximising revenue to ensuring your operations are on point.

Thanks for reading and don’t forget to subscribe to stay updated weekly on all things hospitality!

Bon appétit,

Max Shipman, Editor-in-Chief, Hot Potato

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