Industry Trends

The Sizzling Trend of Consolidation in the Franchise Restaurant Business: The Private Equity Factor

June 5, 2023

Have you ever wondered what's cooking in the franchise restaurant business? Over the past few years, the landscape has been simmering with considerable changes, primarily due to the infusion of private equity capital and the emergence of large restaurant groups like Carrols, Ampler, and Flynn Restaurant Group. And guess what? The key ingredients — an aging demographic and the impacts of the COVID-19 pandemic — have been putting this consolidation on a high flame.

Private Equity Seasoning the Franchise Industry

One of the key contributors to this trend has been private equity firms. With deep pockets and a thirst for returns, they have been feasting on the franchise restaurant industry's steady cash-flow and scalability.

In fact, over the last decade, private equity has poured a staggering $68 billion into the industry, leading to an annual growth rate of approximately 18% in acquisitions, as reported by BDO USA. Just imagine, that's equivalent to purchasing McDonald's twice, given its $33 billion valuation in 2021!

Stirring the Pot: The Process and Impact of Consolidation

This generous seasoning of capital has stirred up a storm of consolidation among franchisees. One method being 'roll-ups,' a business strategy where larger entities acquire smaller franchise owners and operations. This strategy has led to the creation of mega-franchise groups that hold sway over thousands of units.

Take, for instance, Flynn Restaurant Group. Already the largest franchisee in the U.S., it has expanded its operations by adding more than 1,200 units over the past decade, including well-known brands like Arby's, Taco Bell, and Panera Bread. That's almost the equivalent of adding an entire Chipotle chain to its portfolio!

Similarly, Carrols Restaurant Group, the biggest Burger King franchisee, operates more than 1,000 locations and has an estimated worth of over $850 million. Ampler Burger is not far behind, with 300+ Burger King locations. This consolidation trend is quite like a fast-food order — super-sized!

Aging demographics have also added fuel to this consolidation flame. With many franchise owners reaching retirement age, they often prefer to sell their franchises rather than pass them on to the next generation. This opens up opportunities for big restaurant groups to expand their portfolios and gain a larger piece of the market pie.

The COVID-19 Heat-up

But what put this trend on rapid boil? The COVID-19 pandemic. As small and medium franchisees struggled to stay afloat amidst shutdowns and decreased foot traffic, they became susceptible to acquisitions by larger entities. These macro factors have created a market ripe for consolidation, with more significant entities poised to reap the benefits of economies of scale.

The Sweet Perks of Consolidation

Now, you may wonder, why go through all this trouble? Well, the consolidation and scaling of these large restaurant groups come with some sweet perks.

Firstly, economies of scale enable them to negotiate better terms with suppliers, lower per-unit costs, and streamline operations — all leading to improved profit margins.

Secondly, these entities can leverage advanced data analytics and tech, allowing them to optimize operations, improve customer experiences, and innovate faster than smaller operators. Imagine this: Flynn Restaurant Group, with its scale, has been able to implement state-of-the-art data analytics systems that offer them critical insights to improve performance across their units.

Lastly, these mega-groups can weather market volatility better than smaller entities, thanks to their diversified portfolios.

Serving the Final Dish

In conclusion, the franchise restaurant industry is going through a significant transformation. The infusion of private equity capital, combined with large restaurant groups, has started to dominate the market, reshaping the industry through consolidation.

However, as we savor this trend, we must also be mindful of the potential implications for competition and innovation in the industry. It's essential to strike a balance between consolidation and diversity within the franchise restaurant industry, ensuring its continued growth, innovation, and a healthy competitive environment.

So, next time you bite into that burger from your favorite fast-food joint, remember that you're part of a massive and rapidly evolving industry that's continually looking for ways to serve you better.