Tag: McDonald’s

THE CATALYST OF CHANGE: INNOVATION’S CENTRAL ROLE IN FRANCHISE EXPANSION

Posted on by Franchise Strategist

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However, in the race for innovation, franchisors must remember to maintain brand consistency, as it is a significant part of the franchising model’s appeal. This delicate balance between innovation and brand preservation can be tricky but is crucial to ensuring long-term success.

The Catalyst of Change: Innovation’s Central Role in Franchise Expansion
By Bill Armstrong

As we journey through the rapidly evolving landscape of the franchise business, one fact stands out: innovation is no longer an option but a necessity for franchise companies seeking sustainable expansion. Stories of franchises harnessing the power of innovation to fuel their growth show us that creativity and change are the new norms in this dynamic business environment.

Take, for example, McDonald’s, an iconic franchise that has continually reinvented itself over the years. They pioneered the concept of “fast food” and redefined customer experience by introducing the Speedee Service System, an innovative assembly line for food. More recently, they embraced digital transformation with their “Experience of the Future” initiative, which included mobile ordering, self-service kiosks, and even artificial intelligence-driven decision engines for drive-thru menus.

Another compelling example of innovation at work is Starbucks, which leveraged technology to transform its customer experience. By developing a cutting-edge mobile app, they offered a seamless ordering and payment system that drew customers in with a loyalty rewards program. Moreover, they dared to step beyond their traditional cafe model by experimenting with express stores, drive-thrus, and high-end Roasteries to meet diverse customer needs.

Innovation within franchised brands is not confined to tech giants and international food chains alone. Companies in various sectors, from retail to fitness to education, have discovered the benefits of an innovative approach. In essence, the main thrust of franchise innovation comes from the urge to deliver better value, enhance customer experience, and differentiate from competitors.

However, in the race for innovation, franchisors must remember to maintain brand consistency, as it is a significant part of the franchising model’s appeal. This delicate balance between innovation and brand preservation can be tricky but is crucial to ensuring long-term success.

Franchisors also need to understand the importance of investing in research and development. Identifying and exploring innovative possibilities can pay off massively when those ideas are implemented and become the driving force for franchise growth.

Innovation isn’t just about products or services; it also extends to franchising strategies. For instance, franchises can explore innovative expansion methods, such as multi-unit franchising, area development franchising, or master franchising. These strategies allow businesses to expand their reach while managing risk effectively.

In conclusion, as the franchising landscape continues to evolve, the role of innovation in franchise expansion becomes ever more significant. By staying open to change and embracing the new, franchise companies can survive and thrive in the face of competition and continually changing market dynamics. Innovation is the catalyst of change, propelling franchises forward in their journey of expansion.

The Franchisor/Franchisee Economic Relationship – It’s A New World!!

Posted on by Franchise Strategist

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This specific suggestion will not be adopted by existing large chains, because it would be such an obvious reduction of the current royalty stream. However, well established franchisors could, and should, absorb more of the additional systemwide needs…

THE FRANCHISOR/FRANCHISEE ECONOMIC RELATIONSHIP – IT’S A NEW WORLD !!

restaurant, COVID-19, Roger Lipton, Franchise Money Maker

By Roger Lipton

Almost everybody has noticed that there is an increasing strain between franchisees and their franchisors. It is no accident that new franchisee associations are being formed and existing organizations are getting more militant. There are many intangible reasons, as too many franchisors do not treat their “z’s” as partners. We have written many times that the “asset light”, “free cash flow” model is not reflecting the necessary investments in the system to keep franchisees as profitable as possible. Many franchisees are especially bothered by the fact that their franchisors are spending hundreds of millions, sometimes billions, of dollars buying back stock and making acquisitions, while leaving the franchised operators without the necessary new product development, technology upgrades, marketing initiatives, etc.etc.
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With all of that in mind, the bottom line is the bottom line. Too many franchisees are suffering financially, under more pressure than ever. The typical franchise royalty is 5%, give or take a point, plus 2%, as an advertising contribution. There are often additional charges, not all that material in and of themselves, but adding to an already large burden. Let’s say the franchisee is fortunate enough to be making 17-18% store level EBITDA (and Depreciation is not free cash in the long run). Rebating 7 points out of 17 or 18 points starts to feel like a pretty big load, and there is still local G&A to be carried. Even if store level EBITDA, before royalties, is in the low twenties, 7 points gets to be a bother. Additionally: many franchisees, Dunkin’ Donuts and Burger King and Jack in the Box are just a few examples of mature systems where decent money is still being made at the store level because the store leases were signed ten or fifteen years ago, so occupancy expenses are lower than today’s economics would allow. That’s, of course, why so few new units are being built by many mature franchised systems, especially in the USA. Today’s economics do not allow it.

When Ray Kroc started franchising McDonald’s restaurants over 60 years ago, the royalty was 1.9%. By the 1960s, franchisors had started charging 2-3%, by the 1970s 3-4%, by the eighties 4-5%, and 5% seems to be the standard today, plus advertising and other fees.

Read the entire article click here https://www.liptonfinancialservices.com/2019/03/the-franchisor-franchisee-economic-relationship-this-is-not-your-fathers-world/

Franchise Restaurants Show Modest Gains – What’s Happening On The Ground?

Posted on by Franchise Strategist

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McDonald’s is the sales standout, and they are in a class by themselves, providing value and upgraded quality to a population hungry for price/value. Taco Bell is also an exception, for similar reasons. Even Domino’s and Wingstop, who have put up great numbers in recent years, are reporting only modest gains at the moment.


RESTAURANT MAIN STREET – WHAT’S HAPPENING ON THE GROUND??
By Roger Lipton

We have long believed that the restaurant industry provides an excellent leading indicator as to consumer sentiment. It is much easier to adjust dining habits, every day, than to plan and spend for large ticket items.

Quite a few restaurant companies have reported their quarterly results, ending 6/30. The sales and traffic trends, collectively, indicate that not much has changed in terms of consumer optimism. The table below provides the reported results for comp sales, including a breakdown, mostly provided by company operated locations, relative to traffic, pricing and menu mix. Also shown on the table are the outlook, when provided, relative to commodity and labor expense.

No Meaningful Improvement
The company operators show, with just a couple of important exceptions (Chipotle and Starbucks) modest comp gains, more than offset by pricing and menu mix, so traffic is negative almost everywhere. The only other outlier is Diversified Restaurant Holdings, franchised operator of the Buffalo Wild Wings system, going against very easy comparisons. Most importantly, In terms of third quarter to date, virtually no one is guiding toward a meaningful improvement. In our view, Chipotle and Starbucks (with the strongest trends) can be viewed as “special situations”. Chipotle is bouncing back from their multi-year troubles and doing a great job with mobile app/delivery, and Starbucks is the premier worldwide brand selling an addictive product by way of an extraordinary employee culture and great technology.

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The franchising companies that have reported are showing a similar trend, modest sales gains in almost all cases. The franchising companies steer away from reporting traffic, but it is safe to assume that pricing and sales mix trends are similar, so traffic is no doubt down. McDonald’s is the sales standout, and they are in a class by themselves, providing value and upgraded quality to a population hungry for price/value. Taco Bell is also an exception, for similar reasons. Even Domino’s and Wingstop, who have put up great numbers in recent years, are reporting only modest gains at the moment.

Delivery On The Rise
It’s important to note that, within the sales mix, delivery, curbside and in-store pickup, are rapidly increasing portions of the revenue mix, so dine-in traffic is down materially more than the comps that are reported. We haven’t heard any restaurant company bemoan, though they could, the fact that their physical plants are only fully utilized a few evenings per week.

In addition to the sales and traffic trends, we are equally interested in the commentary relative to cost expectations, namely commodities and labor. Expectations are mostly higher for commodity costs, dramatically so for chicken wing prices. It is clear that the benefit a year or so ago from lower commodity prices is in the rear view mirror, and higher cost of goods is likely. Labor expense, predictably, is expected to move ever higher.

CONCLUSION:

The beat goes on. With prime costs, as well as other expenses such as insurance, common area charges, utilities, etc. also increasing, it takes more than two or three points of comps to improve margins. A handful of the larger premier operators such as Starbucks, McDonald’s, Darden, Domino’s and Wingstop continue to provide better the best results. However, even among these “best of breed” operators, it’s a battle for market share and an increasing challenge to generate a worthwhile return on incremental investment.

Roger Lipton
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About Roger Lipton
Roger is an investment professional with over 4 decades of experience specializing in chain restaurants and retailers, as well as macro-economic and monetary developments. After earning a BSME from R.P.I. and MBA from Harvard, and working as an auditor with Price, Waterhouse, he began following the restaurant industry as well as the gold mining industry. While he originally followed companies such as Church’s Fried Chicken, Morrison’s Cafeterias and others, over the years he invested in companies such as Panera Bread and shorted companies such as Boston Chicken (as described in Chain Leader Magazine) .