Franchise Opportunities: McDonald’s Vs Subway
The American first food industry has grown exponentially over the last two decades making franchises an excellent opportunity to find an exceptional niche in the food business. Currently, the fast food market is valued at $198.9 billion and estimated to exceed $223 billion by 2020. A study by Paeratakul et al. (2018) showed that the majority of this market is made up of on-premises restaurants and drive-thrus. Nevertheless, off-premises take-out outlets, cafeterias, and buffets make up part of the market. Over the last decade, the fast food profile has changed from offering unhealthy junk foods to a variety of foods from desserts and healthy sandwiches to ethnic favorites that include Indian, Chinese, as well as traditional American foods. These changes in products have seen the number of franchised quick-service outlets grow from 186,977 in 2016 from almost 28,000 in 2006. This ever-growing U.S. fast food industry has led to the rise of various household brands both within the American borders, as well as overseas.
Figure 1. Number of quick service restaurant (QSR) franchise establishments in the United States from 2007 to 2018.
Figure 1 is a graphic representation showing the number of quick service restaurant franchise entities in the America from 2007 to 2018. Form the data is it clear that there has been an exponential increase in QSRs with the highest being 190,649 in 2017. From the data, it can also be argued that the most significant jump was experienced in 2012.
Figure 2. Brand value of the 10 most valuable fast food brands worldwide in 2018 (in million U.S. dollars)
Figure 2 is a graphic representation of the 10 most valuable fast food brands worldwide in 2018. From the data, it is evident that McDonald’s is the most valuable QSR brand followed by Starbucks and Subway.
Demographic factors
According to a study by Dunn (2017), the estimated number of quick service restaurant franchise outlets (QSR) in the U.S. as of 2017 was 190,649. These establishments primarily include limited-service eating places, fast-food restaurants, beverage bars, cafeterias, ice cream parlors, pizza-delivery outlets, carryout sandwich shops, as well as on-premises baking premised serving pastries. With many QSRs open for 24 hours a day, employees are obligated to work longer hours. Consequently, the level of consumer service experienced in entities such as fast food drive-thrus fluctuates depending on the time of the day. A study by Schlosser (2017), conducted from May to August 2016 indicated that during morning hour or breakfast times 33.4% of drive-thrus expressed very friendly client service ratings of over 7.5 out of a maximum rating of ten. However, by nighttime, this figure had dropped to 28.5%.
For antiquity, QSRs have been called into question over their provision of unhealthy foods. An online server conducted in 2016 by Brindal et al. (2017) on the role played by healthy foods in their choice of foods in fast food restaurants. The results of the survey indicated that only 39% of the respondents chose a fast food outlet due to their healthy foods menu. On the other hand, 69% indicated that the offers on traditional American fast foods such as pizza, buggers, and fries, as well as other eats, played a major role in eating at a particular entity. The restaurant habits survey conducted in the same year indicated that a majority of the individuals who use the services of QSRs are aged between18 and 29 years. In the United States, about 57% aged within the above-mentioned demographic visit QSRs at least thrice a month. According to Brindal, Mohr, Wilson, and Wittert (2017), of the total number of individuals who visit fast foods 53% are men while 47% are women.
When asked on the frequency of dining out at quick service restaurants, 20% of the respondents indicated that they visit a QSR once a week, while 18% indicated that they dine at these entities at least 3 times in a week. On the other hand, 6% of the respondents indicated that they dined in fast food entities on a daily basis.
Figure 3. Share of McDonald’s customers compared to the population in U.S. in 2017 by age
Figure 3 presents a graphic representation of the age demographic at McDonald’s. From the data presented it is clear that McDonald’s biggest clients demographics comes from the ages between 20 to 29 years (25%), followed by 30 to 39 (20%), and 14 to 19 (15.9%). It can be argued that this demographic is shared by other QSRs and that from the age gaps presented individuals who frequent such establishment are from a young or upcoming household or students. As cited by (cite) smaller households are more probable to eat out of the home as compared to individuals living in larger households. Additionally, the study indicated that couples whose children have left home spend approximately 65% more on homemade meals than they do on fast foods. This can be validated by figure 3 above as the lowest age demographic ranges from 60years and over.
McDonald’s
In the fast food industry, there is no franchise that has a more valued brand than McDonald’s. According to statista.com, McDonald’s has an estimated brand value of an estimated 126.04 billion U.S. dollars and is ranked the highest globally. Started in 1995 by Ray Kroc, Macdonald’s operates 37,241 restaurants in over 122 countries globally and serving approximately 47 million customers on a daily basis. According to a study by Schlosser (2017), over 70% of McDonald’s outlets are owned as well as operated by local businesspersons. Traditionally, a majority of McDonald’s restaurants provide drive-thru (Auto-Mac or McDrive) and counter services. The Mcdrives are majorly located near highways or at service stations. This is contrary to the McDonald’s concept of having stores in high-density city neighborhoods.
How much does it cost to open a McDonald’s franchise?
Initial investment ranges from $989,352-$2,217,045 depending on the location, the initial franchise fee for the McDonald’s name costs $45,000, while the royalty fee is placed at 12.5% at a minimum. McDonald does not charge its franchisees in advertisement charges; however, after the term agreement of 20 years elapses, franchisees are expected to pay $45,000 as the renewal fee.
Subway
Subway (restaurants) is an American fast-food franchise that is operated by doctor’s associates. The entity is the third most valued franchise brand globally with statista.com valuing it at 18.776 billion U.S. dollars by august 2018. Subway has 43,306 restaurants situated in 112 countries globally with about 52% of all stores located in the United States. In 1965, a 17-year-old Fred Deluca opened Pete’s super submarines for only $1,000 that was offered to him as a family loan. Unfortunately, Mr. Deluca passed away in 2015 after being at the helm of the company since its inception. Nevertheless, before his death, he oversaw the growth of a multibillion-dollar entity with total investment estimated at $147,050 – $320,700 in the United States. According to Schlosser (2017), one of the biggest selling point when analyzing subway restaurants is that, unlike its rivals where franchisees need to pay a fortune to run a branded store, for instance, McDonald’s ($989,352 – $2,217,045) or KFC ($1.3-2.5 million), subway only needs about $147,050 – $320,700 dollars. Consequently, although McDonald’s is valued higher than subway, the former has 6065 more outlets.
How much does it cost to open a subway franchise?
The initial investment expected to open a subway franchise ranges between $147,050 and $320,700. The initial franchise fee for the franchise name is $15,000, and a royalty fee of 8%. Subway charges its franchisees an advertising fee of 4.5% over the 20 years of the agreement. Subway has no renewal fee after the agreement period lapses.
From the analysis presented, it can be argued that subways franchise is the best fast food opportunity as compared to McDonald’s. Subway has a lower investment and franchise cost of $162,050 and a lower royalty fee of 8%, as compared to McDonald’s at 12%. Subway is the third most valuable brand in the fast food industry and commands a significant amount of consumer loyalty. This translates to a higher profit margin due to reduced costs. Although the company requests its franchisees to pay an advertising fee, it does have a highly trained marketing team that guarantees a higher competitive advantage. Finally, franchisees are required not to pay any renewal fee after the agreement times have lapsed, a factor that is costly when considering McDonald’s demands.
References
Brindal, E., Mohr, P., Wilson, C., & Wittert, G. (2017). Obesity and the effects of choice at a fast food restaurant. Obesity Research & Clinical Practice, 2(2), 111-117. https://www.sciencedirect.com/science/article/pii/S1871403X08000239
Dunn, R. A. (2017). The effect of fast-food availability on obesity: An analysis by gender, race, and residential location. American Journal of Agricultural Economics, 92(4), 1149-1164. https://academic.oup.com/ajae/article-abstract/92/4/1149/73892
Paeratakul, S., Ferdinand, D. P., Champagne, C. M., Ryan, D. H., & Bray, G. A. (2018). Fast-food consumption among US adults and children: dietary and nutrient intake profile. Journal of the American dietetic Association, 103(10), 1332-1338. https://www.sciencedirect.com/science/article/pii/S0002822303010861
Schlosser, E. (2017). Fast food nation: The dark side of the all-American meal. Houghton Mifflin Harcourt. https://books.google.com/books?hl=en&lr=&id=dU13X_AM_N8C&oi=fnd&pg=PP2&dq=subway+fast+food+restaurant+history+&ots=DoPnTR6kGj&sig=VJj1SIQZqUvtQarVxcQJIvOi-Eo