Franchising | January 2010 | By Daniel P. Smith

10 Great Franchise Deals

The industry’s best franchise values.

Admittedly, a list of the best values in the quick-service franchise arena is a catalog coated in subjectivity. Yet, there remains an assortment of common characteristics that many franchise values possess.

First, a good franchise deal is more than a simple, by-the-numbers assessment of franchise fees and start-up costs, a method that would fill any list with the pizzerias and sandwich shops that generally require less equipment, operational strength, and build out.

“Plus, you have to understand that a smaller investment is likely to generate a smaller return,” Technomic executive vice president Darren Tristano says. “Sometimes you might have to invest more to get that bigger payout, which can still signal value for the franchisee.”

As restaurant marketers are quick to point out, value means more than a dollar figure; rather, it’s what you get for that dollar. In this exploration for the industry’s best franchise values, the following criteria emerged:

Size: Restaurants with a hefty number of outlets bring economies of scale from supply chain to marketing efforts that smaller operations struggle to replicate. On the other end, those that are too big can buckle under their own weight. Necessary changes can be difficult and complex to implement, breeding a corporate-versus-franchisee mentality that stifles forward movement.

Name Recognition: Brand awareness goes a long way with consumers who want food and experience that matches their expectations.

Momentum: Brands selling off franchises and struggling to stay afloat signal turmoil. In contrast, brands adding units and overcoming the economy’s troubles inspire confidence and strength.

Market Niche: Brands that hold a distinctive place in the industry are well positioned to become a destination spot for consumers and gain a competitive advantage over other outlets.

Average Unit Volume (AUV): When compared against start-up costs and other long-term investments, AUV gives a strong sense of a franchisee’s return on investment.

El Pollo Loco

  • Franchised Units: 243
  • Franchise Fee: $40,000
  • Total Start-Up Costs: $416,850–$789,850
  • Royalty: 4%
  • Renewal Fee: $20,000
  • Marketing Fee: 4–5%

 

A regional player just five years ago, El Pollo Loco has emerged a hot name in the industry. Only four years into its expansion east of the Mississippi, El Pollo Loco, headquartered in Orange County, California, has earned a following for its citrus-marinated chicken and assortment of healthy offerings.

“We are beautifully positioned to appeal to the growing number of consumers looking for healthier options; consumers’ growing demand for bolder, spicier flavors; and the growing Hispanic population,” El Pollo Loco vice president Brian Carmichall says.

El Pollo Loco’s strong lunch and dinner dayparts propelled it to U.S. sales topping $625 million in 2008 and AUV nearing $1.7 million, a number that sits high among quick-serve brands.

Word on the Street: “El Pollo Loco is a favorite … because of its huge growth potential and because of its sales-to-investment ratio. With AUV of $1.7 million and a max start-up of $789,850, you can count on a 2:1 sales-to-investment ratio or higher,” says restaurant expert Aaron Allen, founder and CEO of the Quantified Marketing Group. 

Subway

  • Franchised Units: 22,762
  • Franchise Fee: $15,000
  • Total Start-Up Costs: $114,800–$258,300 (traditional); $84,300–$200,100 (nontraditional)
  • Royalty: 8%
  • Renewal Fee: None
  • Marketing Fee: 4.5%

 

Smiles abound at the Connecticut headquarters of Subway, where the sandwich giant has climbed the quick-serve mountain to capture U.S. sales of $9.6 billion in 2008. The affordability of franchise entry, which sits among the lowest in the industry, and includes incentives for franchisees to open additional outlets, continues to drive the company’s remarkable ascent.

“We keep costs low because we have a simple operation … and we negotiate deals on an international level to keep standards high and costs down,” Subway’s director of development Don Fertman says, adding that the brand’s flexibility allows its outlets to find and enter unusual spaces ranging from c-stores to churches.

Word on the Street: “Subway is attractive for its low investment start-up, which opens it up to the widest base of prospective franchisees,” Allen says. “It also benefits from a clear, consistent, and extremely potent brand image. A concern for the company’s future is the encroachment issue and the continued attack of regional players with higher average unit volumes and aggressive franchise efforts.”

Papa John’s

  • Franchised Units: 2,200*
  • Franchise Fee: $25,000
  • Total Start-Up Costs: $113,823–$528,120 (traditional); $72,500–$376,623 (nontraditional)
  • Royalty: 5%
  • Renewal Fee: $4,000
  • Marketing Fee: 7%

 

Twenty-five years ago, Papa John’s was a former broom closet in a Jeffersonville, Indiana, pub; today, the company generates more than $2 billion in U.S. sales with AUV exceeding $750,000.

Few can match Papa John’s extensive—and clever—marketing push. From founder John Schnatter delivering pizzas and searching for his beloved Camaro to the “Better Ingredients. Better Pizza.” campaign, Papa John’s fashions itself as a pizzeria favoring quality over price, largely avoiding the discount wars of its competitors.

“‘Better Ingredients. Better Pizza’ is not a tagline, but lived throughout the brand,” Papa John’s spokeswoman Tish Muldoon says.

With competitive start-up costs, the international player has positioned itself for additional growth.

“[These are] the most attractive development incentive programs offered in recent years,” Muldoon says, adding that the company has low-cost build out, first-rate systems, and extensive corporate support.

Word on the Street: “The key to prosperity in the pizza segment is quality positioning, clear marketing, and a qualified franchise base,”

Allen says, noting that Papa John’s has all three.

*based on 2008 figures

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