MarketLine Blog

Burger King shows franchising is the way to be profitable

The FRANdex is a stock market index that tracks the market cap of a basket of companies which act primarily as business system franchisors. The latest (Q1 2014) report on its performance reveals that it has outperformed the S&P 500 index since 2006. It looks like these companies are doing something right.

In fact, learning how to “do something right”, and then passing on the knowledge, is central to the business model of successful franchisors. Take Burger King, for example. Founded in 1954 as a quick service burger restaurant, there are now close on 13,700 outlets worldwide bearing the Burger King logo and serving its flame-broiled burgers. But the company itself only operates 52 restaurants, or around 0.4% of the system total. The rest are owned and operated by franchisees, who can buy into the system for an investment as low as $300,000 – within the reach of moderately prosperous individuals as well as companies. It is the franchisees who lease the restaurant premises, broil the burgers, and recruit the serving staff. They pay a percentage of their sales to the franchisor as royalties and contributions to a marketing fund, and all profits after meeting the costs of running their restaurants are their own.

Burger King’s contribution to the system is almost entirely in the form of intellectual property. Over many years, it has developed the business system it offers to franchisees, whom it trains intensively in everything from the equipment to buy to the way to recruit employees. It also develops the recipes, and handles marketing and advertising centrally.

For the franchisees, the benefits include the ability to access a strong brand and a proven operational model. For Burger King, the benefits include a reduction in management costs and a way to expand rapidly without the need to access much capital.

Burger King financial indicators, $m

2011

2012

2013

Company restaurant revenues

 1,638.7

 1,169.0

 222.7

Franchise and property revenues

 701.2

 801.9

 923.6

Total company restaurant expenses

 1,447.4

 1,037.2

 195.3

Franchise and property expenses

 100.2

 115.1

 152.4

Company restaurant revenues minus expenses

191.3

131.8

27.4

Franchised restaurant revenues minus expenses

601.0

686.8

771.2

Selling general and administrative expenses

 418.5

 347.6

 242.4

Net income

 88.1

 117.7

 233.7

 

Number of company-owned restaurants

 1,295

 418

 52

Number of franchised restaurants

 11,217

 12,579

 13,615

 

In 2011, Burger King made the decision to re-franchise all but the 52 Florida-based restaurants it now owns, a process completed by 2013. As the table above shows, this was accompanied by a strong increase in net income, even though total revenue decreased: the re-balancing of revenue and costs between the franchisor and franchisees looks to have been highly favorable to Burger King. With a strategy of continued expansion, especially in emerging markets, its current business structure promises profit growth for Burger King going forward.

For more, please explore our related research:

Franchising: Foodservice and hotel companies grow using Franchising

Global Fast Food: Industry Profile

Burger King: Quest to reverse slumping sales

Burger King Worldwide: Company Profile

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