If you haven’t noticed, the fast food industry is undergoing a rapid transformation. The supremacy of the golden arches and other drive-through restaurants is being challenged by hip new “quick service” joints. Fast, fresh, and moderately priced, the growth of these fast casual chains are being fueled by millennials’ disposable incomes, and their widespread desire for “better quality” food. These relative newcomers on the food scene like Chick-fil-A, Panera, Chipotle, Pei Wei have begun to eat into more established chains’ bottom line. This year may go down in history as the year McDonald’s and Subway began to lose their grip on market share.
The evolution of fast food is evident across the country, and Wall Street is taking note. It’s been splashed all over the papers for quite some time that the two largest chains in America are in trouble. The trends have changed and people are moving toward perceived “fresher” food options. McDonald’s and Subway are still by far the whales of the fast food industry, but they’re facing some strong competition from consumers who are demanding better-quality food. Many investors are disturbed at the news that McDonald’s is shedding millennial customers, when millennials eat out more than any other demographic.
In the past, entrepreneurs around the country were able to enjoy the prosperity driven by growth in quick service restaurants through franchising. Even today, the majority of chains can be owned and operated by an independent person. For decades people around the country have made substantial fortunes as franchisees. According to popular lore, McDonald’s has likely made more millionaires, especially black and Hispanic ones, than any other restaurant chain. Hispanics alone make up more than 25 percent of their domestic franchisees.
Today, many of the chains with brisk growth don’t allow franchising whatsoever. Chipotle, Pei Wei, and Shake Shack run 100% corporate stores. Starbucks, which has begun wading into the fast food industry, also doesn’t allow franchising. Others require massive commitments to franchise, such as Panera Bread. Panera requires a commitment of “typically 15 bakery-cafes in a period of 6 years and a minimum net worth of $7.5 million.” That net worth would put you in the upper 2% of Americans.
Fortunately, most chains are still expanding using the franchisee model. Notable examples of high growth restaurants that franchise include Chick-fil-A. This chain has an exotic arrangement that requires very little money at upfront (only $5,000), but they have an extremely low acceptance rate. Five Guys, Burger-Fi, Moe’s and Dunkin’ Donuts and many others are all accepting franchisees too.
Notwithstanding, the future doesn’t look good for franchising. The reality remains that the highest growth in sales belongs to chains that are not franchised. Wholly corporatizing what was once a path to prosperity for the middle class is not good news for entrepreneurial Americans everywhere. The future of franchising rests in the hands of the fast-food behemoths: McDonald’s and Subway. Whether these well-known restaurant chains remain relevant or fall victim to a changing culture of eating out could spell out the fate of franchising in the United States.