Food Franchise Opportunities

The food industry has succeeded in channeling the strength of chains into lucrative restaurant franchises. This is apparent in the results of Entrepreneur magazine's 2015 Franchise 500, a list of the strongest and most financially sound franchises across all industries. Of the 500 franchises included, 104 were quick-service restaurants. This group comprised the largest industry segment on the list. When combined with full-service restaurants, which accounted for 3 percent of the list, and retail food sales, at 1.8 percent, food franchises accounted for more than 25 percent of the top 500 franchises as ranked by Entrepreneur magazine.

Food Industry Outlook And Trends

• Demographics

  Demographics

  Food franchises are popular because so many people enjoy eating out. In a survey of consumers, the National Restaurant Association reported that 90 percent of those interviewed said they enjoyed going to restaurants. In addition, 50 percent said they considered restaurants an essential part of their lifestyle. An impressive 80 percent of consumers said that dining out with family and friends was a better use of their leisure time than doing the work involved in eating at home.

  While demand is high, the food industry is fiercely competitive because it is so saturated. The challenge is to stand apart from the pack, while offering options that meet the needs of those who eat out the most. The millennial generation is one group that food franchises are competing to accommodate. In 2015, the millennial generation surpassed baby boomers as the largest living generation, according to the U.S. Census Bureau. Millennials, categorized as those born between 1982 and 2000, numbered 83.1 million and represented about 25 percent of the U.S. population that year. At the time, baby boomers totaled 75.4 million.

  In addition to their large numbers, the fact that millennials value eating out is good news for food franchises. Millennials typically began eating out at a young age and continue to make it part of their lifestyle, says QSR magazine, which reports on the food industry. According to a 2016 report by The Food Institute, millennials are a worthwhile market to attract:

  • Millennial households, or those led by people between 25 and 34 years old, spend 45 percent of their food dollars away from home.
  • Baby boomer households, or those led by people between 55 and 64 years old, spend 37 percent of their food dollars away from home.
  • When converted into dollars and cents, millennials spend an average of $50.75 per week eating out.
  • Millennials spend 6.5 percent more than the average $47.67 spent by baby boomers on outside food.
  • The contrast between the groups is more striking when noted that millennials have about 14 percent less overall income to spend versus baby boomers.

  Other demographic changes, such as the fact that the entire U.S. population is becoming more ethnically diverse, also can impact food franchises. In 2004, minorities represented 33 percent of the population, according to the U.S. Census Bureau. In 2014, minorities accounted for 38 percent. The larger minority population is likely to create a greater demand for ethnic cuisines that many types of food franchises can accommodate. For example, in February 2015, The Washington Post reported that almost half of U.S. Asian food restaurant sales came from restaurant chains. However, not all those chains were Asian themed.

• Growth Potential

  Growth Potential

  Looking ahead, food franchises that cater to the tastes and preferences of millennials may be best positioned for success. If millennials continue to spend close to half their food money away from home, as reported by The Food Institute, they'll have a significant impact on the food industry. Every year, they'll be spending $6 billion more eating out than older generations, according to The Food Institute. Franchises that serve natural, healthy and unprocessed options are likely to appeal to millennials. With about 44 percent of millennials identifying with an ethnic or minority group, nontraditional cuisines also are likely to gain popularity.

  With demographics and lifestyle trends in mind, the National Restaurant Association's 2016 "What's Hot Culinary Forecast" reported that locally sourced meat and produce were among the hottest food trends. Natural, healthy options, including kids' meals, also ranked high in this survey of nearly 1,500 chefs. The report also cited ethnic spices and authentic ethnic cuisines among the top 20 trends. Of all ethnic cuisines, the chefs ranked African, ethnic fusion, Latin American, Middle Eastern, Southeast Asian and Mediterranean food as the hottest trends to watch.

  Having the right location is another factor in food franchise success. According to a 2015 report by NerdWallet, a financial advice website, some U.S. cities have a high demand for new restaurants. Based on factors such as population growth and density, median annual income, average restaurant sales per resident and number of new eateries, NerdWallet identified the following cities as "The Best Places to Start a Restaurant":

  1. Cedar Park, Texas
  2. Mission, Texas
  3. Franklin, Tennessee
  4. Smyrna, GA
  5. Round Rock, Texas
  6. Frisco, Texas
  7. Alpharetta, GA
  8. Fishers, Indiana
  9. Milpitas, California
  10. Southhaven, Mississippi
• Industry Characteristics

  Industry Characteristics

  The The food industry is supported by the ongoing success of restaurants, which account for 47 percent of the average American's food dollars, according to the National Restaurant Association. The group reported that restaurant industry sales were set to total $783 billion in 2016, equal to 4 percent of the U.S. gross domestic product. At that time, the industry employed about one in 10 working Americans, or 14.4 million people.

  As you investigate the wide range of options in food franchises, you may wonder why you don't see offers from some of your favorite restaurant chains. While a restaurant chain can have more than one location, it doesn't mean that those locations are franchises. Some of the most successful chains, like hamburger giant White Castle, don't allow franchises. Other chains have a combination of both corporate-owned and franchised locations. For example, McDonald's owns about 15 percent of its restaurants. Corporate-owned locations provide a setting in which franchisors can test new menu items and procedures before rolling them out to franchisees.

• Quick Service Restaurants

  Quick Service Restaurants

  Fast-food restaurants, also known as quick service, are the most recognizable segment of the food industry. All fast-food restaurants combined generate about $227 billion in annual revenue, according to an August 2016 report by IBISWorld, a market research firm. The annual growth rate for fast-food restaurants between 2011 and 2016 was 2.7 percent, according to the report. In its 2012 Economic Census Franchise Report, the U.S. Census Bureau says that food franchises accounted for about 75 percent of all fast-food restaurant employment.

  The fast-food industry includes many companies that are household names. Generations of Americans are familiar with the offerings of restaurants such as McDonald's, KFC, Burger King and Taco Bell. With years of experience, they've perfected the process of providing convenient, high-speed service at low prices. The majority of menu items are premade. While these restaurants usually provide a no-frills dining room for customers, people often take their food with them. To optimize convenience, many locations offer drive-through service.

  Fast-food franchises typically don't offer table service. However, McDonald's introduction of this feature in late 2016 may be a game changer for the industry if the new format proves to be popular. With McDonald's table service, customers place their orders at counters or kiosks then wait at their tables for employees to deliver their food. The change is intended to improve customer satisfaction in the crowded fast-food market, while also competing against the growing fast-casual segment.

  Fast-casual is a new and popular category of quick service restaurants. Brands like Panera Bread, Moe's Southwest Grill, Noodles & Company and Qdoba Mexican Grill offer alternatives to traditional fast-food options. While emphasizing fast service and convenience, these food companies offer more choices for quality and atmosphere. In an analysis of the top 500 restaurant chains, research firm Technomic reported that the fast-casual segment had 11.4 percent sales growth in 2015. That was almost double the gains of any other segment studied.

  Fast-casual restaurants succeed by offering menu items, ranging from sandwiches to pizza, that are made to each customer's preferences. Food typically is prepared after ordering, allowing for a fresher product. Some items, such as rolls, may be baked on the premises. Table service often is limited, but customer service is emphasized. Fast-casual restaurants compete by offering perceived higher quality that highlights the freshness of made-to-order items. Fast-food restaurants compete on price by offering simple and less expensive menu items.

• Full-Service Restaurants

  Full-Service Restaurants

  Full-service restaurants serve food to customers who order while seated and remain in the establishment to eat their meal. Some full-service restaurants also serve alcoholic beverages. Customers pay when they are finished dining. Franchises in this segment are largely categorized as either casual dining or family dining. Full-service franchises include a wide range of experiences, such as Denny's, TGI Fridays, Tilted Kilt and Melting Pot. Some fine dining restaurants, such as The Capital Grille and Ruth's Chris Steak House, also offer franchises.

  Though franchises in the full-service restaurant category have been challenged by the low cost of fast-food and the trends of fast-casual restaurants, this segment has continued to maintain a large portion of dining dollars. In 2014, restaurant and bar sales in full-service restaurants totaled $431 billion, according to Technomic. Full-service restaurants owned 44 percent of total restaurant and bar sales against 55 percent owned by the fast-food segment, which included fast-casual sales.

  As fast-casual restaurants gain popularity among younger diners, full-service restaurants have adapted to try to retain some of this market. Many full-service franchises have increased their takeout offerings, while also emphasizing online ordering and quick delivery or expedited pick up. They've introduced loyalty programs and social media promotions to add value. For dining-in customers, some full-service restaurants have added tableside computer tablets to facilitate ordering and payment.

• Coffee Shops

  Coffee Shops

  Coffee shop franchises offer premium coffee and other specialty coffee-based beverages. Many offer a limited variety of baked goods. Some have a full menu that includes breakfast and lunch items. Options vary by franchise, but may include drive-through service, free Wi-Fi or lounge areas. While most coffee shop franchises are based on a fast-food model, some offer table service. Though coffee shop giant Starbucks does not offer franchises, many well-known options such as Dunkin' Donuts, The Coffee Bean & Tea Leaf and Starbucks' subsidiary Seattle's Best Coffee, do offer opportunities.

  Coffee shop franchises can count on a steady customer base. The 2015 Zagat National Coffee Survey reported that 82 percent of 1,500 participants said they drank an average of 2.1 cups daily. Another 13 percent drank coffee a few times weekly. The good news for franchisees is that 31 percent of those interviewed said they got their coffee most often from a large national chain. As a result, coffee shop franchises generated annual revenue of $10 billion, according to a November 2015 market report by IBISWorld. This segment of food franchises maintained 5.5 percent annual growth in the years between 2010 and 2015.

  Many coffee shop franchises also serve a wide range of gourmet or specialty drinks that are in high demand. The 2016 National Coffee Drinking Trends Report by the National Coffee Association (NCA) found that 36 percent of 18 to 24-year-olds consumed gourmet coffee. That rate was up from 13 percent in 2008. Consumption of gourmet coffee also increased from 19 percent to 41 percent of 25 to 39-year-olds between 2008 and 2016. In addition, the amount of espresso-based beverages consumed daily almost tripled between 2008 and 2016, according to the report.

• Frozen Desserts

  Frozen Desserts

  Food franchises in the frozen dessert segment serve ice cream, gelato, sherbet and frozen yogurt. Some franchises also offer a limited menu of candy, cookies and fast food. Franchises in this segment may be obtained for a slightly lower investment than other food businesses since some businesses do not provide seating and require a smaller location. Other franchises are set up for self service, which allows for customization while also minimizing workforce costs.

  Frozen yogurt franchises succeed by serving the tastes of health-conscious consumers who want a frozen treat. In December 2015, IBISWorld reported that revenues for all U.S. frozen yogurt stores combined was valued at $2 billion. Frozen yogurt stores experienced an annual growth rate of 18.2 percent between 2010 and 2015, according to the report. Increased health concerns and the introduction of tart-flavored frozen yogurt by new major companies helped industry growth.

  In 2016, the U.S. ice cream and gelato franchise industry was valued at $5 billion by IBISWorld. The industry had experienced 3.2 percent annual growth in the five years between 2011 and 2016. Analysts predicted that the ice cream industry would hold strong because products remained so popular during warm summer months, despite the introduction of other options in the segment.

• Retail Food

  Retail Food

  Retail food establishments include a wide range of outlets. Some operate as grocery stores or convenience stores. Some offer specialty types of food such as baked goods, cheeses or health food. Others specialize in novelty foods such as food gifts or food arrangements.

  A 2015 study by Technomic reported that consumers are making retail food purchases more often, with 84 percent of consumers making at least one retail food purchase a month, up from 79 percent in 2012. Analysts attributed the change to increased spending from consumers in the 18-to-34-year-old age group. The report also showed that convenience store purchases were strong, with almost 50 percent of that age group buying food at convenience stores at least once a week.

• Vending Machines

  Vending Machines

  With some businesses requiring an investment of around $50,000, food vending machines are a low-cost alternative for entering into the food industry. Food vending machines can be managed on a more flexible schedule with less demanding hours than a restaurant. In fact, it's likely you could maintain a full-time job, while owning a successful food vending machine franchise.

  The entire U.S. vending machine industry was valued at $7 billion in a June 2016 report by IBISWorld. The beverage segment, with offerings of cold and hot beverages and bottled carbonated drinks, accounted for 30 percent of revenue. Some of the most popular food vending machines take advantage of the increasing demand for healthy snacks and beverages. When strategically placed in locations like gyms, yoga studios or college campuses, these machines can be very profitable.

• Financial Matters

  Financial Matters

  While food franchises include a wide variety of service modules, start-up costs often are more expensive when compared to other types of franchises. Food franchises typically pay a start up fee to a franchisor for the right to use its name and trademark. The franchisor then assists the franchisee in launching and running the business.

  In return for the support of the franchisor, franchisees pay ongoing fees and royalties, which vary by business. In many cases, the franchisee purchases supplies from the franchisor. This allows the franchisor to maintain quality control with regard to menu items. Franchisees also may be obligated to use the franchisor's preferred suppliers for the purchase of equipment or other goods.

  It's not uncommon for a major food franchise to require that you have several hundred thousand dollars in liquid assets before applying for a franchise. The leading national franchises can require up to $2 million in assets. That's in addition to the franchise fee and other costs you'll have to cover before opening your doors. Franchises differ widely on these requirements. However, your ongoing costs typically will include franchise royalty fees, as well as the cost of advertising, rent or mortgage payments, utilities, payroll and site and equipment maintenance.

• Benefits

  Benefits

  There are numerous benefits to owning a franchise in the food industry. One of the biggest advantages is that a food franchise reduces your risk. From the time you open your doors, your business will have instant brand recognition. You'll be benefitting from the success your franchise has earned regionally or nationally. With that, you'll have an immediate customer base of people who know and enjoy your products. With specified franchise territories, you'll be ensured that you won't have to compete with other franchisees for customers.

  While the success of your franchise will ultimately rest on your shoulders, you'll have the support of your franchisor to lean on. Since your franchisor has a stake in the success of your franchise, the corporate team will be willing to help ensure you start strong. Before you open, a franchisor can advise and assist with decisions such as selecting the right location, securing financing, hiring staff and purchasing equipment. You'll have the benefit of your franchisor's experience in navigating zoning codes, food inspections and other business regulations.

  As a franchisee, you'll also have access to a menu proven to please. Your franchisor will share the proprietary recipes and secret ingredients needed to duplicate their unique products. It's likely that you'll also receive extensive training in the proper preparation and presentation of these items. In fact, you may have to attend an extensive all-around training course to help ensure your success in the franchise.

  You'll also benefit from the fact that there's strength in numbers. As a franchisee you'll gain from the buying power of the combined franchise network. You'll also reap the rewards of regional or national advertising. Large franchises can produce impressive campaigns that an individual owner would be unable to duplicate alone.

• Important Considerations

  Important Considerations

  Some of the most significant disadvantages of food franchises stem from the very characteristics that make these types of businesses attractive. Customers seek out their favorite food franchises because they know what to expect regarding menu items choices and service. However, this may limit your ability to be creative and flexible in menu choices, food preparation and operating procedures. Depending on your franchisor, you also may be committed to follow specified standards in areas such as vendor choices, hours of operation, number of employees and advertising.

  The success of a food franchise, like the entire restaurant industry, is susceptible to factors that you may not be able to control. In economic downturns, it's likely that people will reduce how often they eat outside their homes. Your business also can be drastically affected by negative customers' opinions or reviews on the Internet and social media.

  For a food industry franchisee, maintaining food safety is a challenge as well as a responsibility. The impact of unintended mishandling highlights one of the most significant food industry problems, and can cause sickness or even death. From a business perspective, food problems in other franchise locations may affect your business, as you'll be considered guilty by association. While not franchised, the Chipotle restaurant chain proved this to be true. In 2015, separate outbreaks of norovirus, salmonella and E. coli sickened over 500 people in 14 states. Though the company had more than 2,000 locations, the reputation of the entire chain suffered long-term effects. One year after the incidents, Chipotle reported a 22 percent decrease in year-over-year restaurant sales across the chain.

  Some food franchisors insist that you operate your franchise as an owner-operator. In those cases, you'll be expected to be on-site in a hands-on position. In addition to overseeing the business aspects of your franchise, you'll have to be vigilant about food safety and proper preparation. Food franchises are subject to local zoning codes and ongoing health inspections. A misstep could jeopardize you profits with fines or temporary closure.

  Given the rate of employee turnover in food franchises, you may be needed more often than not to pitch in on the front line. In 2015, the turnover rate in the accommodations and foodservices industry rose to 72 percent, according to a report from the U.S. Bureau of Labor Statistics. The rate, which increased from 66.7 percent in 2014, represented the fifth consecutive year of turnover rate increases. Since restaurants employ a high number of teenagers and students, your workforce is likely to be less permanent as they change lifestyles. You may be competing with other franchises to retain experienced, mature foodservice workers.

• Characteristics for Success: Who Should Consider a Food Franchise?

  Characteristics for Success: Who Should Consider a Food Franchise?

  With so many options in the food industry, you're likely to find a franchise to match your interests and goals. You'll make the most of the support that a food franchise has to offer if you're prepared for the demands and challenges you're likely to encounter. Having certain strengths and skills may help you enjoy what you do and grow a profitable business in this demanding, but lucrative, industry.

  You should consider a food franchise if:

  • You have a background in restaurant management. Whether by education or experience, your knowledge of the food service industry will save you precious time in getting up to speed on the basics.
  • You can afford a large investment. In addition to high start-up costs, food franchises often require that a franchisee have significant savings and liquid assets on hand to protect both the franchisee and franchisor's investments in case of failure.
  • You have an education or experience in business management or marketing. You won't have time to be overwhelmed by basic concepts in marketing or accounting.
  • You have a knack for numbers. Analyzing data on issues such as customer traffic patterns can help you plan accordingly for staffing and inventory.
  • You're willing to learn new ways of doing what you may already know. Though you have a working knowledge of the industry, you may have to attend some "re-education" to learn procedures specific to your franchise.
  • You're passionate about the food industry. Since the majority of food franchises have fewer than 50 employees, it's likely that you may need to help out on the front lines from time to time. It will seem less of a burden if you truly enjoy interacting with customers.
  • You enjoy working with people. Your people skills will be important in both managing employees and accommodating customers. Strengths in these areas will help you provide the best possible experience and a good reason for customers to keep coming back.