The Franchise Times Top 200 report finds that, while growth returned to US franchising in 2010 following a decline in system numbers and revenue in 2009, much of the growth was actually fuelled by international expansion. As financial reporter Jonathan Maze noted, ‘…it remains easier to grow internationally, where many countries are hungry for US brands even if their economies are weak. Slightly less than two-thirds of the Top 200 franchises’ total units were in the US in 2010, down from 67.8 percent in 2009.’ However, he comments that ‘For the most part, franchise systems performed admirably well in the US, a nice rebound after revenues for the Top 200 fell 1.1 percent last year, the first such decline in the list’s history.’

The Franchise Times Top 200 ranks franchises by system-wide sales, with the information being gathered from publicly available data. To be included, systems must have a strong presence in the US, so it is not a global survey; however, it points to some interesting statistics and trends for the franchise sector world-wide.

One of the most interesting comments comes in the opening, where Mr Maze says, ‘One reason the Great Depression was so unusual was the lack of growth in franchising. Bankruptcies were more common than development agreements. During most downturns, franchising grows as debt prices drop and the unemployed target job opportunities.’ Similar reports have come from other franchise-developed countries, including the UK, Australia and New Zealand.

The Top Systems

As always, top of the franchise food chain is McDonald’s. Despite losing its crown for the greatest number of outlets worldwide at the end of 2010, McDonald’s is way ahead on turnover.  The company has worldwide sales of US$77,380 million – Subway comes fourth on the list (after 7-Eleven and KFC) with a mere US$15,200 million. The report says that McDonald’s revenue grew by 46 percent between 2005 and 2010. ‘In other words, McDonald’s in six years added more revenue to its system than KFC earns in a year… On a unit level basis, McDonald’s has left competitors in the dust.’ It calls McDonald’s success ‘unfathomable’ but the company has made huge changes in recent times – see our story on Re-Inventing McDonald’s.

Subway rivals Quiznos, which never properly launched in New Zealand, is at the other end of the scale. From its high of over 5,000 outlets in 2007, it’s decline has accelerated to unprecedented levels, losing nearly a quarter of its US units in 2010. Franchise Times reports that, despite system sales of an estimated US$1.2 billion, ‘The chain is now trying to restructure its debt and is fending off suggestions that it may have to declare bankruptcy.’ Quiznos is owned by the same company, CCP, that owns one of the fastest-growing burger chains, Smashburger, which is currently sitting just outside the Top 200.

It’s interesting to note that Taco Bell, which Restaurant Brands has been evaluating as a possible addition to its New Zealand portfolio, has only 262 of its 5,634 units outside the US, reflecting the difficulty the Mexican food franchise has found being accepted overseas.

Given that its criteria mean the list is heavily biased towards US-founded franchise systems, the achievement of Australian franchise GJ Gardner is noteworthy. The home building company comes in at 125 on the list with worldwide sales of $US503 million. It currently has 18 of its 87 franchises in the US, with another 6 due to open soon. Franchising has been relatively rare in America’s housing sector, and the GJ Gardner model appeals to independent builders who are interested in expanding their businesses but don’t have the time or expertise.

Growth Areas

While the recession may have adversely affected many franchise systems in the US, changing consumer habits have also clearly sparked growth in some areas. New car sales fell by 29 percent over two years, but auto aftermarket franchises boomed. Franchised auto concepts on average saw 5.2 percent growth in systemwide sales with some repair franchises achieving over 28 percent. Snap-on Tools grew by 17.8 percent in 2010.

Employment franchises have also bounced back as firms hire temporary workers again, and most cleaning and janitor services reported good years last year. However, ‘Janitorial concepts are controversial right now,’ Franchise Times reports. ‘Lawsuits against the companies are becoming common. Critics – and now some courts – say franchisees are more like employees than they are business owners.’

Hotels and the travel industry generally had mixed results, but in the personal services category it was massage that proved the star performer. The US-only Massage Envy grew 33.1 percent last year to be ranked 107, behind only the well-established H&R Block Tax Services, the Curves fitness franchise and Great Clips hair care in the sector. Curves actually lost 8.3 percent of outlets although other fitness concepts grew.

In retail, it seems, the trick is to specialise. The fastest-growing retail system last year was the phone retailer Wireless Zone, which had systemwide sales growth of 20.3 percent. Batteries Plus is up 16.2 percent and Budget Blinds up 14.6%. ‘Meanwhile, retailers that sell used items continue to benefit from a frugal consumer,’ says the report. ‘Plato’s Closet grew 17 percent last year and debuted on the ranking at No. 191. Sister concept Once Upon A Child may not be far behind – it grew 9.1 percent last year.’

Sales Incentives

Although the Top 200 doesn’t specifically address the way franchisors are coping with the finance issues in the US right now, the advertisements which appear in the report certainly do. They include offers such as

• ‘New development incentives’
• ‘Enhanced incentives including no franchise fee and royalty reduction’
• ‘Exclusive markets available for multi-unit franchisees’
• ‘New, smaller prototypes’
• ‘Lower start-up costs’
• ‘Special financing to qualified individuals’
• ‘$1 million in incentives for exceptional new franchisees who open four or more’

What impact such offers will have on the long-term viability of the franchise – and relationships with existing franchisees who may have come in before such offers as reduced royalties were available – remains to be seen.

The full Franchise Times Top 200 report is 52 pages long and can be downloaded free.