Franchising continues to permeate an increasing number of countries
and business sectors. Yet while previously non-franchised business
types continue to adopt franchising, some industries are not so
new to the form. Case in point: The fast food sector. In fact, the
fast food industry is probably responsible for today's proliferation
of franchising. Were it not for the likes of McDonald's explosive
growth, from the 1950s onwards, franchising might never have gained
the profile it commands today.
The fast food sector is a dynamic industry featuring a high density
of franchising. It is also one of the most challenging sectors to
operate in, due to an ever-increasing number of operations competing
for the same dollar. Intense rivalry exists between concepts. Indeed,
such is the challenge within the sector that Ray Kroc, the man who
franchised McDonald's, once stated, "If you see a competitor
drowning, you stick a hose down their throat."
Competing and defending market share within the fast food market
has always been a challenging task. Operating within the current
environment is even more demanding. The sector has been rocked by
a number of trends requiring rapid and fundamental action. We explore
three inter-related trends influencing the sector, namely the advent
of lawsuits blaming fast food, a general trend toward healthier
eating and the new low-carb craze. We also touch on the effect of
increased competition before exploring how incumbent franchise systems
are adapting to their changing environment.
The Threat of Law Suits
Obesity has reached epidemic levels in the world, and almost two-thirds
of Americans are overweight or obese. Perhaps opportunistically,
two high profile lawsuits have so far been waged at the fast food
industry's tallest poppy, McDonalds Corp - claiming they didn't
warn customers its food could be fattening. All have so far been
thrown out, and the United States' GOP controlled house voted to
ban class action suits blaming fast food. But industry insiders
[naturally] remain concerned by these recent actions (which are
similar to those waged against the tobacco industry) claiming if
successful they could bankrupt several fast food chains, and leading
economies could be dramatically affected (the US fast food sector
employs almost 12 million people). The response by some players
has been massive. Operations have changed menus dramatically, nutritional
disclosure has improved, and advertisements promoting healthier
lifestyles have increased.
Move to Healthier Lifestyles
Despite the recent legal attention most leading fast food chains
had already begun responding to a general change in customer tastes,
based on a desire to lead healthier lifestyles. No operation has
perhaps responded to this challenge as strongly as McDonald's. McDonald's
introduced fruit, a huge range of salads, wraps and other low fat
options to their menu. Encouragingly, this strategy was credited
with increasing sales in a number of markets, not least Australia
- which bounced back from a loss to post a healthy profit last year.
Thus, the move to a healthier menu can be a profitable one.
Other chains have also followed suit. Wendy's tested milk and fruit
with its Kids Meals, and Burger King introduced low-fat baguette
styled chicken sandwiches. Applebee's introduced a Weight Watchers
menu in all its restaurants throughout the US. Sandwich chains,
such as Subway, are clearly capitalising on the trend toward more
healthy living. The chain has surpassed McDonalds's for the number
of restaurants in the United States. Interestingly, Subway are reported
to have said the health benefits of eating Subway sandwiches are
one reason for its growth.
Low Carb Craze
Fad or not, Dr Atkin's and related low carbohydrate, high protein
diets have rocked restaurant operations throughout the world. Perhaps
nowhere has this diet been more prevalent than the United States,
where recent reports suggest one in four Americans trying the diet,
and more than 10 percent adhering to it at this point in time. Demand
for low-carb products is strong, and increasing. In turn, that increased
demand, has had a twofold affect on the franchise community. First,
restaurants, and fast food operators, have rushed low-carb options
onto their menus (clearly, alienating such a large proportion of
consumers is not an option). Subway recently introduced two low-carb
wrap sandwiches. Burger King joined the train by offering bunless
Whopper hamburgers, and, Hardee's and Carl's Jr feature burgers
wrapped in lettuce. Low-carb options also hit the breakfast menu
at Holiday Inns.
The big challenge for most chains is wrestling with what to offer
as a low-carb substitute to the existing product range.
Some franchised operations have not weathered the low-carb storm
well. Krispy Kreme, the US donut sensation, was recently forced
to publicly downgrade their profit forecasts. Blame was leveled
directly at the low-carb craze. Scott Livengood, CEO of Krispy Kreme
"Our current guidance assumes a continuation of the low-carb
phenomenon that is affecting the industry. Needless to say, we
are disappointed that external forces have caused us to revise
our first quarter and fiscal 2005 earnings guidance."
The second low-carb effect on the franchise community comes in
the form of whole new franchised concepts. Increased demand has
not only pulled low-carb products onto restaurant menus and supermarket
shelves. Whole new specialty retail concepts, such as McSlim's Low
Carb Market, TLC (Totally Low Carb) Stores and Cactus Low Carb Superstore
have been developed and now offer franchise opportunities.
While the fastfood sector has long been regarded as competitive,
the level of rivalry only intensifies. Numerous chains are expanding:
multi-unit development deals are being inked left, right, and center.
Brands like Subway, Krispy Kreme, Camille's Sidewalk Café,
Cosi Inc, Whataburger, Papa Murphy's, Moes Southwest Grills and
Bob's Big Boy are all on the expansion trail. Meanwhile, a number
of incumbant chains and/or their franchisees are struggling to return
positive results on existing operations. One well-known example
is Burger King where one high profile multi-unit franchisee went
bankrupt, and improved sales and profits are vital in turning other
franchisees and the franchisor operation around.
The above trends raise a number of challenges for chain management.
The following excerpt from a recent Burger King press release reflects
the initiatives undertaken by many leading operations in the fast
"Emphasis is on Return to Core Consumers, Commitment
to Quality, Innovation and Differentiation and Unwavering Dedication
to be 'Brilliant With the Basics."
Indeed, the various challenges of adapting to an ever-changing
market place and environment, and increased competitiveness, are
broadly being addressed by initiatives relating to (1) marketing
differentiation, and (2), improvements in store level productivity
Differentiation & New Marketing Initiatives
A number of chains have responded to the current environment by
attempting to differentiate themselves from competitors, whilst
at the same time making themselves more attractive to existing and
new customers. No chain in the fast food sector has outperformed
McDonald's in this regard. McDonald's sought to distinguish itself
by introducing a range of products, a new focus on store quality,
and the new "I'm Lovin' it" jingle. McDonald's new health
focus involves new Go Active Happy Meals for adults that include
salad, bottled water, a pedometer and advice to walk more. Other
health initiatives include new low-fat dressing, more salads, and
more nutritional information. So far the healthy initiatives have
stood have stood the company in good stead.
McDonald's has also worked hard changing and testing a new image
before rolling it out throughout the group. For example, McDonald's
publicly available revitalization plan explained how experiences
in New Zealand and France proved a fresh, sophisticated environment
could generate increases in sales and profits. According to a recent
press release, Burger King reportedly has a pipeline of 30 new products
now being explored.
McDonald's and a range of other chains, like Starbucks and Schlotzky's
have also sought to differentiate themselves by rolling out Wifi
access (wireless Internet service) in many restaurants.
Another technology-based differentiation example include Papa John's
"Pizza and Entertainment" promotion giving customers a
perishable DVD movie (DVD's become inactive 48 hours after removal
from packaging) free with pizza.
Unit Productivity & Profitability
The late Jim Cantalupo, past McDonald's CEO, recently outlined their
shift in strategy and focus: "[p]reviously, we emphasized adding
new restaurants. Today, our emphasis is on building sales at existing
Nothing focuses attention on operations like intense rivalry. Intense
rivalry pressures both market share and profit margins. As a consequence,
increased competitive activity requires chain operators seek opportunities
for improving both unit productivity and profitability. Numerous
chains are exploring and implementing initiatives intended to improve
both aspects. Burger King and Papa John's are both focusing on doing
the basics well, with some franchisees struggling to service loans.
McDonald's is working with suppliers to identify potential production
and sourcing efficiencies. Importantly, McDonald's is also expanding
testing and use of labor saving equipment, and streamlining processes.
For example, many of their US restaurants are changing from standard
beverage dispensing machines to automated ones that drop and fill
the right-size drink cups as sales are keyed into registers. Another
example includes use of new machines to automatically filter and
change cooking oil, thereby freeing labor. Self-order kiosks provide
7-Eleven, in a related sector, is also seeking to improve both
unit productivity and improvement through standardization. Specifically,
7-Eleven is are seeking to obtain economies of scale in purchasing
and marketing by requiring store owners to order 85 percent of 7-Eleven
THE IMPLEMENTATION CHALLENGE
While there may be compelling reasons for change, implementing new
initiatives is a challenging task. What sells in one market market
may not in another, and new initiatives typically don't come without
expense or risk to existing franchisees. Add to this the famous
failure of some misguided franchisor suggestions (like Ray Kroc's
Hulaburger), and franchisees have a right to initial scepticism.
And here-in lies the sticking point stemming the roll-out of many
new initiatives intended for system-wide benefit. Whereas managers
of company-owned chains can demand store-level operators implement
new ideas, franchising proffers a very different dynamic and environment
for affecting change. While managers of company-owned stores can
be told to change, franchisees must be sold on change. Franchisees
must be convinced the benefits outweigh the costs.
The recent experiences of 7-Eleven exemplify adaptation challenges
inherent in franchising. 7-Eleven encountered extradinary opposition
to their minimum purchase requirement (intended for reducing purchasing
and marketing costs). The agreement has been in negotiation with
franchisees for the last two years. Key franchisee concerns include
reducing freedom in placing orders, and generally reducing franchisee
In another example, International Dairy Queen (IDQ) gained high
profile resistance for their DQ Grill & Chill concept, introduced
about two years ago. A group of franchise owners protested publically,
claiming the initiative requires more investment than some rural
and small town Dairy Queen franchise owners can afford.
Clearly, franchisors need to work very closely with franchisees
on new initiatives. As noted in Jeffrey Bradach's book, Franchise
Organizations, which explores restaurant chain management, affecting
systemwide adaptation is a complex and challenging task. Successful
adaptation requires not only an understanding of organizational
change, but also an understanding of franchisor-franchisee relationship
This article was written in May 2004.