Web Exclusive | October 2012 | By Lori Zanteson

The Profit is Right

Report shows food franchises have better profitability than other franchise categories.

HuHot Mongolian Grill's entertainment model secures profits for franchisees.
HuHot Mongolian Grill's entertainment model secures profits for franchisees.
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The economy may still be sputtering, but the Franchise Business Review’s (FBR) 2012 annual report, “Top 40 Food Franchises,” found that profitability is up for many foodservice brands.

Average franchisee profitability at the top 40 food brands increased 5.8 percent year-over-year in the last 18 months, according to the report. Those brands had a 15 percent higher profitability than the rest of the food franchise category, and 33.2 percent higher profitability than the total franchise average.

The special report compiled data from more than 4,000 food franchisees representing 84 brands and 22,516 franchised locations.

FBR president Michelle Rowan says brands that are financially successful have strong business models and high franchisee satisfaction.

“Slowed franchise sales in ’09 and ’10 forced franchisors to look at unit-level profitability,” she says. “The franchisors we spoke with for our report have really put a lot of work into reducing start-up costs for their [franchisees] and cutting their ongoing expenses through more competitive vendor contracts, etc.”

The Top 40 food brands had a 33.2 percent higher profitability than the total franchise average.

Firehouse Subs landed the coveted top position of this year’s Top 40 list, scoring the highest franchisee satisfaction in the sector. Don Fox, CEO of Firehouse Subs, says that comes from franchisee pride in their products and services.

“They genuinely believe they serve the best food in the business, a belief that is reinforced not only by the guests in their dining rooms, but by volumes of consumer research,” Fox says. “Couple this with the franchisees’ involvement in the mission of the Firehouse Subs Public Safety Foundation, and they are extremely satisfied with the results of what they do each and every day.”  

Fox has focused on building a strong franchisee support structure with a network of area representatives, which he says is critical to the support team.

“We invest more in infrastructure and support than the typical brand, but the results are well worth it,” Fox says. “We also remain very close to our franchise community, and I consider our communication with the field to be excellent. Our growth makes that more of a challenge year after year, but I think we have done a much better job than most organizations of keeping that bond between brand leadership and the franchisee.” 

There are 515 Firehouse Subs locations, with sights set on growing that number to 2,000 by 2020, Fox says.

Trends are working in Firehouse Subs’ favor. It leads what FBR calls a “re-emergence” of subs and sandwiches to the Top 40 list, marking a slight shift in categories that top the list. Last year, 25 percent of companies on the list were pizza concepts.

This year’s report also showed growth in healthier concepts, better-burger brands, and stir-fry and grill concepts like The Flame Broiler and HuHot Mongolian Grill.

The healthy aspect of HuHot Mongolian Grill—along with its entertainment at the grill and appeal to guests of all ages—likely contributes to its profitability and franchisee satisfaction, but it’s much more than that, says Molly Vap O’Shea, director of franchise development.

“The franchisee is a customer,” she says, “and customer service is the No. 1 factor. We supply multifaceted support through in-person visits, training opportunities, tools, and guides for them to use.”

Bryon Itterman, who operates two North Dakota HuHot locations, believes the corporate office’s willingness to listen contributes to operator satisfaction.

“If someone has a good idea,” he says, “it doesn’t matter if it comes from corporate or the franchisee. It’s one of the strengths of this brand.” Internal growth is proof of franchisee satisfaction, says Itterman, who has plans to add three more stores in the next 18 months.

As the brand grows, so, it seems, does this company’s motivation to continue its climb up the Top 40 list. While O’Shea says she does find success in each climb, she uses it to develop new department and company goals, “taking our franchisee feedback and making improvements so they know we're listening.”

This drive to constantly move forward and improve is characteristic of those companies on this list, Rowan says. “The common theme we’ve seen in the past eight years of research is that satisfied franchisees are more engaged and do perform better,” Rowan says. “As one franchisor recently told me, ‘The more engaged franchisees are with us as a corporate office, the better they perform and the happier they are. Why wouldn’t we want that?’”