Why do fast food companies usually franchise their restaurants instead of operating the locations themselves?
In: 101
Franchising is a way to address two big growth-related problems:
Capital and Risk.
If you open a new restaurant yourself, you have to come up with the money up front to buy/rent the space, buy equipment, hire and train staff, advertise, the list goes on and on. If the location goes south, you’re still on the hook for that money. On the other hand, if you simply vet franchisees, you let them put up the money and take the risks, and all you provide is the brand name, supplies, and high-level marketing.
Now granted, you’ll earn far less profits of the whole amount of sales, typically between 4 and 6 percent of gross sales, but considering you’ve really put nothing up other than your brand name, that’s actually a pretty solid deal.
And it’s not a terrible deal for the franchisee, either. You’ve got a known profitable businss, free marketing, and hopefully a supply chain which is incentivized to help you maintain the brand’s value. Of course, that’s not always true. Subway is the cheapest and worst franchise in the business, or it would be second-worst if Quiznos hadn’t finally forced itself out of business through sheer greed and incompetence.
Fast food companies aren’t in the food business, they are in the real estate business. The people in the food business are the franchisees
When some of these companies were first founded, they didn’t have enough money to open 100 restaurants. Franchising allowed them to open 100 places by using other people’s money. McDonald’s is rich now, but it wasn’t always super rich.
The McDonalds in my town (in Ireland) is a money printing machine. Part of that is the draw of the brand but for local people, a huge part of it is that the franchise owner was already a well known and well respected business owner in the town.
If they operate the restaurant themselves, they have to either own or rent the building.
The actual building is the biggest risk with opening a new restaurant. Your company already exists and already sells food, so you know your name, your brand, your menu, are all good. The main thing that makes a new restaurant fail is a bad location. There are so many reasons this can happen – bad road access, bad parking, bad public transport, not enough people nearby to work there at the price you can afford to pay them, bad area for crime, area that just has people who don’t want to buy your food, etc etc.
So, if it turns out that where the building is is a really bad location (which may not be something they can know before opening), then they are stuck paying for a location they don’t want and that possibly neither does anybody else.
If they franchise, then the franchisee takes this risk and uses their money for this part.
Simple as that.
Leverage. Same reason all business ventures eventually seek outside investment. It’s way more lucrative to leverage profits off other peoples’ money than your own.
if a McDonalds ever fails, the franchisee (the owner of that one restaurant) loses a lot , McDonalds corporate still keeps all the money they got from that restaurant running as long as it did
Watch the Founder with Michael Keaton it does a great job of explaining the economics of Fast Food
People work harder when they’ve got skin in the game. A huge part of owning a franchise for a major company like McDonald’s is making sure you meet their standards and reflect positively on their brand at all times. If you had to pay $1million in licensing fees to open a McDonalds and they can pull it if you don’t measure up, you’re going to work hard to measure up.
If you try to run a major franchising operation with manager employees, you have to have a lot of oversight or you tend to suffer from complacency when people are only showing up for the paycheck.
Creating a brand that is franchisable enough to have people pay YOU to give them your system, means you are buying “managers” who have a very real financial investment into the success of your brand. Their success is your success, and they can’t quit like an employee, so they will do more to keep the business successful.
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