Currently there are around 1 million franchise
outlets in the United States and over 40,000 international ones operated
by U.S. based franchisors. Ownership and operation of these outlets can
differ greatly depending upon their parent corporation. For instance
Burger King franchises around 90% of their restaurants, McDonalds 80%,
Wendy's 79%, and Arby's 69%. Conversely, large investor groups, such as
Bain Capital, can also decide whether to license out the business model
and make money off royalties or operate the franchises themselves,
earning revenue directly. This decision is highly dependent upon the
market in question and impacts future management of the property.
franchisors have three main sources of income, (1) retail sales at
Company-operated restaurants; (2) franchise revenues, consisting of
royalties; and (3) property income from restaurants that the parent
company leases or subleases to franchisees. If a company were to engage
in the first, it would necessarily negate the latter two and vice versa.
In order for the first option to make sense, the specific franchise
would need to operate with larger margins. For example, Bain Capital,
which owns a 93% controlling economic interest in Dominos Pizza, chooses
to sell the franchise rights of most of their stores (including U.S.
based ones) but operates outlets based in Japan. This is because pizza
delivery is considered a luxury item there, with people willing to pay
up to $43.00 dollars for a single delivered pizza. Thus in Japan, it is
more economical to operate rather than sell the franchise rights.
Conversely, in the U.S., where pizza delivery is assuredly not a luxury
item, it makes more sense to sell the franchises as margins are lower.
a parent company choose to own and operate a store, it can receive
benefits related to its applicable real estate. A location operated by a
parent company with investment grade credit, will instantly increase in
value. This is because the locations returns are no longer guaranteed
by an individual franchisee who has no credit rating but by a company
which does. Furthermore, that company can still pull money out of the
property through a sale-leaseback. This allows the company to take
advantage of the properties increase in value and pull capital out for
other uses. These factors are highly evident in net lease properties,
where credit ratings are of high importance and sale leasebacks have
always been very popular. A property which is corporate owned and
guaranteed will typically fetch a much higher price than an individual
franchisee due to the flight to quality in the current market.