The Future of Fast Food, Part 1
It may be the end of the franchising world as we know it. What does tomorrow hold for the name players?
Nothing's a sure thing, not even the continued success of an iconic brand. With the challenged economy and changing consumer tastes taking their toll on the once-infallible McDonald's, and exposing chinks in other grand brands like Burger King and Taco Bell, what is the fate of fast-food's giants?
For one thing, the world of fast food no longer revolves around burgers and tacos--sandwiches are now vying for equal billing, with Subway leading the charge. "We are definitely on par with McDonald's," says Alan Warmund, president of Subway Development Corp. of Washington, DC, an area developer for Subway in Washington, DC, Delaware, Maryland and Virginia. "I know [McDonald's] considers us a player. They keep an eye on us and what we do."
And what Subway is doing, according to experts, is giving customers just what they want. "Subway leads the market with a very simple concept, locks onto a health craze for sandwiches, centers their growth on a spectacular bread, changes to their proteins and their sandwiches," says Michael Seid, managing director of Michael H. Seid & Associates LLC, a West Hartford, Connecticut, management consulting firm specializing in the franchise industry. "Look at the differences of entrepreneurial behavior of a Subway versus a McDonald's--they're two similarly sized companies, yet Subway is able to pull its market up and McDonald's has pulled its market down."
In fact, Subway's success has rocked the world of franchising as we know it. Its domestic unit count continues to surpass that of McDonald's, which has been shuttering units worldwide and recently posted its first-ever quarterly loss. More impressive, the new king of the hill has done what many old-timers can't--they've gained stable footing for the foreseeable future. "The last couple of years, Subway's same store sales have just gone like a rocket. If that success was based on [the ads featuring] Jared, then they could slip and fall, but it's not," Seid says. "That's the beauty of what Subway pulled off. They used Jared as the tip of the spear. The rest of that weapon was their bread, innovative products and better quality meats. They've done remarkably well."
While sandwiches are a franchising success story, the much-hyped cobranding trend is falling by the wayside. "Yum is really the only company I see doing it extensively. They're pretty into it, but at the same time, I don't see it expanding too drastically," says Greg Kahn, founder and CEO of Huntersville, North Carolina-based Kahn Research Group LLC, a consumer behavior research firm. "There's a point where franchises can sort of become a food court within a mall, and nobody really wants to be that. Customers are going toward fast-casual restaurants and away from fast food--they want that family-dining experience as opposed to everybody going their separate ways and then meeting back at a central location."
Besides aiming to provide customers with more choices in one convenient location, cobranding was also designed so franchisees could optimize their space and personnel while increasing profits with the addition of one or more brands. However, "that didn't work very well," says Seid. "You were taking two different day parts, shoving them together and saying, 'This should extend my business,' but the location didn't fit and a lot of the benefits weren't realized."
But don't discount cobranding altogether. It will continue, but probably not with same emphasis. "I see it being used intelligently, but I don't see it being used anywhere near the rate it's been in the past," Seid says. "It just doesn't make sense. The results aren't there to support it except in certain situations."
Though cobranding may not have delivered on its promises of increasing operating efficiencies, multiunit agreements and area developerships are. Today, many franchisors prefer to deal with these mini-chains rather than the traditional mom-and-pop franchisees. "To get the benefit of operating restaurants, franchisees need to get enough of them so they can spread out their fixed costs, management and all that," says James Walewski, director of client development for Thompson Group, an analysis firm specializing in location strategies. "Meanwhile, franchisors are looking at multiunit franchisees, because it makes their franchising agreements a lot simpler. If they can do a blanket deal, that's a lot less paperwork, and they've got one operator that can build as many stores as they want in that area."
But franchisors that focus entirely on multiunit operators may find their pool of potential franchisees drying up. "There are less [multiunit operators] out there than [franchisors] want there to be, clearly," Walewski says. "A lot of these franchise entities are fighting over the same people."
Smart franchisors are finding a balance, building their brands with multi- and single-unit operators. "Those companies that are exclusively doing multiunit deals will slowly come back to where they belong, somewhere in the middle, looking at opportunities on a market-by-market basis," Seid says. "The focus has been shifted, rightfully so, [to multiunit deals], but in many situations, franchisors have overshifted to the point that they're excluding all single-unit franchisees."
In spite of challenges from rising brands and industry trends that didn't live up to their potential, the power of the big-name player remains, particularly in the eyes of customers. As Kahn points out, "Customers care a lot more about how well franchises [meet their needs] than they do about how the stock is doing."
Click here to read "The Future of Fast Food, Part 2."
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