Many different types of restaurant franchises are to be found on our high streets and in our shopping malls. There are fast-casual outlets, where made-to-order sandwiches, panini, salads and desserts are prepared, catering for the busy office, factory or construction worker or shopper. Cheap and cheerful fast food outlets are always plentiful, offering burgers, kebabs, fried chicken or pizza for those on a budget or in a rush. There are specialist coffee houses, offering an array of freshly brewed coffees from around the world, along with a tempting selection of muffins, cookies and cakes. Then there are restaurant franchises offering more substantial and up-market cuisine, often specialising in food from a particular country such as China, Italy or Japan. Although still reasonably priced, a meal at such an outlet will cost more than at other restaurant franchises, with marketing strategies directed principally at white collar workers and premises often sited near government complexes, universities and hospitals.
Restaurant franchisors enter into franchise agreements, which grant franchisees the exclusive right to develop and operate businesses at certain locations. Initial franchise fees are recognized as revenue when all material services and conditions required to be performed by the head office have been substantially completed, which is generally when the restaurant opens. Franchisees are required to pay royalties to the head office, based on a percentage of gross sales as reported through the franchisees’ point of sales systems. The royalties are recognized as revenue in the period corresponding to the sales reporting period. Typically, weekly reports on sales at each franchise location are received by the head office and revenue is calculated directly from those reports. Franchisees are usually required to contribute to an advertising fund, typically at a rate of up to 2% of total franchisee gross sales.
Restaurant franchises market their menus primarily through targeted local store marketing efforts, mail drops, media advertising, and print campaigns. The franchising company relies on the cash deposits from franchise sales as well as royalty fees from existing restaurant franchises to support the expenses of the business. Revenue is derived from the sale of franchises, from royalties paid by franchisees and from the sale of food and drinks at the franchised restaurants. Revenues can be increased by adding new company-owned restaurants, selling new franchises and expanding the range and consumption of food and beverage products sold.
The unprecedented economic conditions of 2008 have resulted in a significant reduction in the sales of new restaurant franchises and many companies have had to reduce corporate overheads. The ability of the smaller franchises to fund their operations will depend on the length of time of the current economic downturn, future performance and the ability to successfully implement business and growth strategies. However, food related businesses tend to hold up well in a recession, especially those at the bargain end, and there is every reason to be optimistic that this trend will continue.