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The 27th Annual Elements of Successful Franchising
Sunday, February 11, 20188:30 am -11:30 am
WELCOME
Rich GreensteinPartner, DLA Piper
Rick MoreyPartner, DLA Piper
Liam BrownPresident, Franchising, Owner Services and MxM Select Brands North America, Marriott International, Inc.
Tom KaiserAssistant Editor, Franchise Times
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Rich Greenstein, Partner, DLA Piper
3
Liam Brown, President, Franchising, Owner Services MxM Select Brands North America
Marriott International, Inc.
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Rick Morey, Partner, DLA Piper
5
Tom Kaiser, Assistant Editor, Franchise Times
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Objectives For Today’s Session:
● Discussion about trends in franchising
● Consider reasons for successful franchise systems
● Current state of joint employer/vicarious liability
● Dive into Franchise Times Top 200+ and Monitor 200 franchisees
● Challenges facing franchisors & franchisees
● Interaction!!!
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TRENDS FACING FRANCHISORS
Top Franchise Categories
● Restaurants
● Wellness and fitness
● Health services
● Beauty and grooming services
● Child enrichment / Education
● Entertain / Recreation
● Maid / Janitorial services
● Pet-related businesses
● Miscellaneous services (tutorial, signs)
Source: www.entrepreneur.com
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What We Should See In 2018?
● Impact of lower unemployment
● Enhancing customer service
● Increase in marketing dollars
● Acquisitions enhance purchasing power with suppliers
● Greater scrutiny of franchisees compliance with local advertising requirements
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What We Should See In 2018?
● Understanding the millennial workforce
● Collaborative work environments – flexibility to combine work and personal lives
● Omnichannel – online and physical presence
● Pop-up venues
● Retail: location, location, location
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Institutional Investing In Franchisees
● Not just private equity anymore
● Not just small franchise systems anymore
● Franchisors like institutional investors for franchisees –sometimes
● Institutional investors like franchisee investments –sometimes
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Institutional Investing In Franchisees
● Non-compete
– Franchisors want dedication to brand
– Investors want flexibility for other investments
● Growth
– Franchisors want controlled growth, concerns over large franchisees
– Investors want growth to generate returns, particularly acquisitions
Some hurdles to overcome in Relationship Agreement
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Institutional Investing In Franchisees
● Adherence to system
– Franchisors want compliance, dedicated management
– Investors want to limit capex
● Transfer, ROFR and guarantees
– Agreements typically assume closely-held entity as franchisee
– Investors need much more flexibility
● Goal for both sides: respect the franchise relationship
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Privacy And Cybersecurity
● Continued vulnerability for franchisors
● Interconnected networks and systems
● Increased scrutiny from government regulators and compliance with industry standards
– FTC
– Payment Card Industry
– State laws
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Privacy And Cybersecurity
● Telephone Consumer Protection Act (telemarketing texts)
– Class Action litigation
– Private/right of action - $500 per text message (treble damages)
● Are your franchisees protecting your brand?
– Is franchisor being proactive?
● Increased focus in M&A transactions
– You must know your target
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Franchisor M&A Market
● Purchase multiples continue to be robust
● Debt markets are still aggressive when financing or recapitalizing franchisor transactions
● More private equity is chasing younger, smaller franchisors
● Rising interest rates have not seemed to temper the market
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Franchisee M&A Market
● Purchase multiples of highly fragmented and dependent on brand and size of enterprise
● Tier 1 brands are trading at all time highs
● Private equity money is chasing large franchisee entities
● Leverage is at very high levels – some calling it a ‘bubble’
● Big consolidation in many brands
● Refranchising strategies seem to be growing
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Technology
● Increased use of “smart devices”
● Perfecting order deliveries – faster and more accurate
● Website compatibility with more devices
● Self-service kiosks
● Artificial Intelligence
● Increasing security protections for data and information
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Technology
● Robotics
● Table top technology
● Enhanced POS systems
● Optimizing content for voice search
● In-car ads
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Employee Poaching
● What do Carl’s Jr., Pizza Hut, McDonald’s and Jimmy John’s have in common?
● No hire, non-solicitation provisions
● Are these provisions anti-competitive? Are they per se unlawful?
● Class action cases
● Do these provisions serve any real purpose?
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Gig Economy And Franchising – Is It A Match?
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FRANCHISOR / FRANCHISEERELATIONSHIP
Ten Characteristics Of A Successful Franchise System
10. A franchisor who embraces change rather than running from it
9. A franchisor who commits itself to provide ongoing training for franchisees
8. A franchisor who recognizes that it is not always right and that input from franchisees can be critical to an evolving system
7. Franchisees who focus on both the profitability of their businesses and the health of the brand
6. When appointing advisory council members, a franchisor who intentionally appoints some “independent” thinking franchisees
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Ten Characteristics Of A Successful Franchise System
5. Franchisees who recognize that they chose to purchase a franchise because they didn’t want to organically create a business
4. A franchisor who helps build a positive relationship with the franchisee
community through transparency and communication
3. A franchise system with a strong brand culture and identity
2. A franchisor who stays vigilant about compliance with system standards
1. A franchisor and franchisees who both recognize that, almost uniformly, their
success is tied together
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Franchisee Associations
● Can work in both large and small brands
● Need structure and purpose
● Need transparency and trust
● Lots of positives
● Potential downsides
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REGULATORY UPDATE
Joint Employer/Vicarious Liability
● “The report of my death was an exaggeration”
– Samuel Clemens
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Joint Employer/Vicarious Liability
● Where we started
– Browning-Ferris
– McDonald’s
● Where we stand
– Peter Robb, NLRB General Counsel
– Hy-Brand
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Joint Employer/Vicarious Liability
● Issue is still not resolved
● What are franchisors doing now?
– Same analysis
– Move slightly towards more risk
– Address new technologies
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Impact Of New Administration
● Reduced regulation
● Tax reform
● Tightening immigration policies
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GAAP/REVENUE RECOGNITION
GAAP/Revenue Recognition
● Complicated rules, implementation coming soon
● IFA working with FASB to advocate for franchise model
● Potential impact on franchisors
● Talk to your accountants – now!
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Tom KaiserAssociate Editor / Franchise Times
Objectives For Today’s Session:
● Going behind Franchise Times Top 200+ data to spot franchise industry trends
● Examine what categories are up/down
● Looking back 10 years at historical data
● Merge Top 200+ data with insight from the Restaurant Finance Monitor 200, a ranking of the largest restaurant operators by their annual sales and locations
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Franchise Times Top 200
● Flagship exclusive editorial project
● Published every October
● Ranking of largest 500 U.S. brands
● Breakout of industry categories
● Outside factors influencing franchising
Largest franchises ranked by global sales & units
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Franchise Times Top 200+
2016 2006
Sales $616 Billion $444 Billion
Locations 506,531 386,110
% Franchised 89% 81%
% Int’l 39% 30%
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Company Worldwide Sales
McDonald’s $85.0 Billion
7-Eleven $82.5
KFC $23.1
Burger King $18.2
Subway $17.0
Ace Hardware $15.0
Pizza Hut $12.0
RE/MAX $11.5
Domino’s (new to top 10) $10.9
Marriott $10.7
Top 10 Franchises, By Revenue
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Company Worldwide Locations
7-Eleven 61,805
Subway 45,936
McDonald’s 36,899
KFC 20,604
Pizza Hut 16,411
Burger King 15,738
Domino’s 13,811
Dunkin’ Donuts 12,258
H&R Block 11,933
Coverall 8,610
Top 10 Franchises, By Locations
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Company Worldwide Sales
7-Eleven $44.0B
McDonald’s $28.2
KFC $8.9
Subway $7.0
Domino’s $5.8
Chick-fil-A $5.5
Burger King $5.5
Keller Williams $4.7
Dunkin’ Donuts $3.9
Hampton Inn $3.5
10-Year Sales Growth
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Sales Growth During 2016
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Company Worldwide Locations
7-Eleven 30,125
Subway 19,043
KFC 6,346
McDonald’s 5,853
Domino’s 5,445
Dunkin’ Donuts 4,965
Burger King 4,554
Pizza Hut 3,726
Jimmy John’s 2,169
Papa John’s 2,082
10-Year Unit Growth
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Unit Growth During 2016
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Company International Locations
7-Eleven 27,686
Subway 13,057
KFC 7,573
McDonald’s 5,474
Domino’s 5,217
Burger King 4,900
Pizza Hut 3,591
Baskin Robbins 2,198
Dunkin’ Donuts 1,505
Dairy Queen 1,416
10-Year International Unit Growth
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Company Worldwide Sales
Jimmy John’s 675%
Right at Home 619%
Marco’s Pizza 540%
Wingstop 531%
Edible Arrangements 463%
Firehouse Subs 386%
Plato’s Closet 342%
Buffalo Wild Wings 333%
Tropical Smoothie Café 313%
Batteries Plus 246%
10-Year Percentage Unit Growth
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T200+ Franchise Concentration
% Franchised 2016 2006
100% 67/200 54/200
>80% 143/200 124/200
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Top 200+ by the Numbers
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2016 2006
Revenue $37.5 Billion $21.5 Billion
Locations 26,997 16,915
Multi-Concept 96/200 104/200
Restaurant Finance Monitor 200
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Company Annual Sales Concept
Flynn Rest. Group $1.82B Applebee’s/Taco Bell
NPC International $1.23B Pizza Hut/Wendy’s
Dhanani Group $1.1B Burger King/Popeyes
Carrols Rest. Group $943M Burger King
Manna $820M Wendy’s/Chili’s
Summit Rest. Group $820M IHOP/Applebee’s
MUY! Companies $803M Pizza Hut/Wendy’s
Sun Holdings $730M Burger King/Popeyes
Covelli Enterprises $645M Panera/DQ
Yadav Enterprises $575M Jack in the Box/TGIF
Monitor 200—Largest Franchisees
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#1: Flynn Restaurant Group
● Debuted on M200 in ‘02 w/81 Applebee’s, $195M in revenue
● Now: 485 Applebee’s, 232 Taco Bells, 97 Paneras - $1.82B in revenue – big YOY increase w/TB & Panera
● Partnered w/Goldman Sachs & Westin Presidio in late 2000s, kick-starting growth spurt
● Big break came in ‘07 when Applebee’s was acquired by IHOP, CEO forced to sell company stores to pay debt
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Conclusions: Franchise Times T200+
● 200 largest franchise brands are outpacing the overall economy w/annual increase of 3.4%
● Tremendous international growth opportunities continue
● Over 10 years, % of int’l locations in total store base increased from 29% to 38.9%
● Franchising is often preferred strategy over company-store development
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Conclusions: Franchise Times T200+
● T200 added 11,124 new overseas units in ’16, compared with 926 units in the United States
● Applebee’s, Chili’s and TGI Friday’s all declined
● Some big ‘zees saturated marquee brands, leading to diversification efforts
● Largest 10 brands added $7.8B in sales, up from $7.3B
● Standout brands: Burger King (+5.2%), RE/MAX (+11.8%), Domino’s (+10.1%), Marriott (+7.5%), Chick (+16.6%), Keller Williams (+19.6%)
● Consumers remain strapped by wage growth
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Conclusions: Monitor 200 ‘zees
● The primary concept is often a major brand, but diversifying
● Growth continues coming from consolidation, rather than new unit growth
● Relaxed lending, PE firms, tighter margins and high remodeling costs are driving additional consolidation.
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Conclusions: Monitor 200 ‘zees
● Largest 25 ‘zees now account for more than $15.5B in topline sales, up from $14B the previous year
● Monitor 200 ‘zees own an average of 135 restaurants, up 9 from previous year
● Back in ‘10 that number was only 89
● 11 mega ‘zees had revenue in ‘16 greater than $500 million
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What’s In Store For The Future?
● Int’l development remains a viable growth opportunity
● Low interest rates & capital availability continue fueling franchising
● Private equity funds and family offices increasing investments in ‘zors & ‘zees
● Capital migrates to largest brands
● Don’t expect a return of restaurant IPOs
● For more information: [email protected]
● Copy of report at FranchiseTimes.com
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CONTINUING CHALLENGES FACING FRANCHISORS AND FRANCHISEES
INTERNATIONAL
The Continued Growth of International Franchising
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2017
Still Predominantly North American
81/100
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International Growth
▪ 200 Top Franchisors now have 39% of their units outside the U.S.
▪ 2014-2016: Top 200 Franchisors understand unit growth as a percentage of total growth was 78.9%
Courtesy of Franchise Times
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International Growth
● Small and large franchisors
● Less capital required
● Not just a money grab
● Brand visibility
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Factors Influencing Where To Pursue International Opportunities
● Population
● Regulatory framework/Politics
● Currency
● Legal system
● Supply chain
● Infrastructure
● Labor Force
● Competition
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Beware of…
● Timing issues
● Selecting wrong franchisee(s)
● Short term gain at expense of long term success
● Failing to use experienced counsel
● Selecting wrong structure (master franchisees-area franchisees)
● Doing it on “the cheap”
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The Legal Aspects Of International Franchising
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Franchise Laws Around The World: At The End Of The 1970’s
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Franchise Laws Around The World: At The End Of The 1980’s
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Countries With Specific Franchise Laws: December 2017
THE AMERICAS
Antigua and Barbuda
Argentina
Barbados
Brazil
Canada
Alberta
British Columbia
Manitoba
New Brunswick
Ontario
Prince Edward Island
Mexico
United States
Federal
Several States
Several States
Several States
WITHIN EU
Belgium
Estonia
France
Latvia
Lithuania
Italy
Romania
Spain
Sweden
NON-EU
Albania
Belarus
Georgia
Moldova
Russia
Ukraine
CENTRAL ASIA
Mongolia
Kazakhstan
Kyrgyzstan
Turkmenistan
ASIA
China
Japan
Macau
South Korea
Taiwan
Vietnam
SOUTH PACIFIC
Australia
Indonesia
Malaysia
AFRICA
South Africa
Angola
Tunisia
WESTERN ASIA
Azerbaijan
Does Not Include:
• Codes of conduct which do not provide for governmental or private enforcement, even if promulgated under governmental authority.
• Bodies of law (e.g. commercial agency, distributorship, competition, intellectual property, etc.) which may also cover franchising.
• Registration requirements that exist in many countries under various laws (e.g., franchise, foreign exchange, intellectual property, competition, etc.).
Blue = Disclosure Law
Green = Relationship Law
Red = Disclosure & Relationship Laws
Black = Other
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Conclusions:
● The future looks favorable for franchising
● Emphasis remains on attracting quality franchisees
● Technology will remain an important consideration for franchisors and franchisees
● Regulatory environment is favorable
● Large franchisees are prospering
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Q&A
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Contact Information
Rich Greenstein
Email: [email protected]
T: 404-736-7816
Liam Brown
Email: [email protected]
T: (301) 380-8735
Rick Morey
Email: [email protected]
T: 312-368-7088
Tom Kaiser
Email: [email protected]
T: 612-767-3209
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DLA Offices And Relationship Firms
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