Restaurant Franchisees & Online Food Delivery | In Practise

Restaurant Franchisees & Online Food Delivery

Former Senior Director, Business Development at Subway

Learning outcomes

  • Impact of coronavirus and potential franchisee closures
  • Franchisee setup costs and requirements
  • Royalty, advertising, and system fees for franchisees
  • How restaurant franchisors work with online food delivery companies
  • Unit economics for franchisees for delivery
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Executive Bio

Dave Barton

Former Senior Director, Business Development at Subway

Dave has over 20 years of experience in the restaurant industry and is the Former Senior Director of Business Development for Subway in the US where he oversees over 10,000 restaurants leading marketing, operations and restaurant development. In 2006, he joined Subway as Division Marketing Manager responsible for 21 markets and over 2,500 restaurants. In 2014, he was promoted to Area Profitability Director in the US where he managed the franchisee network to drive profitability. Dave previously worked at Popeye’s Louisana Kitchen and various restaurant advertising agencies. Read more

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Dave, it’s a pleasure to have you with us today. Could you begin by providing some context to when you first joined Subway?

My background is in marketing and advertising. I started working for an advertising agency, on the Kentucky Fried Chicken account and that’s how I really got into the food industry. I moved to Subway, in a field marketing role. That’s someone in the field, who works with the local marketing co-ops, with franchisees, on how they are going to spend their money, at a local level. I was working with them, for several years. Then our group took on a multifunctional role. We took on, not only field marketing, but we took on field operations and field development, which is unusual for a restaurant company, for one group to take on all three of those disciplines.

That’s how I got into the operations side and then got into the development side, as well. I had a territory of 2,000 to 3,000 stores, which grew to about 5,000 to 6,000. Then it was about 10,000, of our section of the country. Eventually, I headed up that team, across the US.

What is the biggest challenge when you’re in the field, running these co-ops, managing these budgets, managing loads of locations?

A lot of it is communication. Getting communication to every franchisee. Subway is a little bit different from many restaurant companies. We have over 10,000 franchisees. We’ve got about 24,000 locations, in the US. So whether it’s an advertising program, something about a new product, a new operational procedure, getting that communication to each location, each franchisee and then down to their staff, is one of the biggest challenges, across our system and, probably, most systems.

Moving on to look at franchisees, before becoming a franchisee, are there any wealth or other requirements, to become a franchise of Subway or any of those companies that you are aware of?

Normally, for most franchisees, there’s going to be some minimum financial requirements. One is your net worth. That’s what cash you have, savings, plus all your assets. If you own a home, own a car or any other real estate and then your stocks and 401(k) and those type of things. That’s considered your net worth. What that does is, it gives the franchisor an idea of your financial health. Is this person going to be strong in our system? Can they manage the money well? Are they going to be able to grow in the system? Franchisors look at potential franchisees, not for just one location; is this person going to be able to but three, four, five, 10 stores? Your financial health is at least a starting indication of that.

Then you’ve got a financial requirement for liquid assets meaning, what cash do you have on hand? Your checking account, savings, any stocks that you can get out of quickly and have that cash on hand for unforeseen expenses and those type of things, when you’re starting your business. No small business owner wants to go in with zero cash on hand. That helps the franchisor and gives them an indication of your financial health. This guy is going to be strong; he’s going to be able to start his business off in the right way.

What are the ranges we see from Subway to McDonald’s and others?

Subway, net worth, for all those assets, is about $80,000 to $100,000. On a cash on hand, it’s about $30,000. For a McDonald’s, you need to have a net worth of $1 to $2 million, because their expenses are much greater. You’re building a building, you’ve got so much equipment back there. You’ve got 30 to 40 people on staff, so there’s a lot of expenses there. For liquid assets, it’s around $700,000. Normally, to get a McDonald’s you’ve had to have some financial success prior to that. The benefit of a Subway is that our business model is a lower cost of entry, meaning it’s $15,000 franchise fee, so you don’t have to have as much net worth to get in. That’s because our cost structure is lower, as well. We have smaller stores, lower square footage, less equipment, less staff. Those who may not be on the level of a McDonald’s net worth, can still get into the Subway business, along with other franchises, in general.

Have the financial requirements changed, over the last decade or so and do you see them changing, going forward?

They have. They keep creeping up, just as costs keep creeping up, on equipment and on real estate; real estate increases, your leases increase. That net worth and that cash on hand is going to follow that same trend.

What’s the rough split in the industry, between those large management companies that manage multiple franchises, versus the mom-and-pop, one or two?

I would guess, around 50/50. I just read an article, recently, that the top 25 largest investment, financial groups, that own restaurants, make up about 45% of the total revenue, in the restaurant business. I estimate around 50% are the mom-and-pop, or individual franchises that may have five or 10 stores. Then you have your others that are 500 stores, 700 stores, up to 1,500. In the Subway system, it’s quite different. In Subway, about 90% are the individual owner, the mom-and-pop and maybe 10%, who have 50, 100, 300 stores. We’re a little bit different from some of the other restaurant companies.

I suppose, if you’re a franchisor, with a large base of franchisees, under those management companies, you have less bargaining power than you would over a smaller, mom-and-pop shop, in terms of fees and profitability, of the relationship?

No doubt. There’s pros and cons to both. The pros, on Subway’s side, having a lot of individual owners, is that they want to do well; they want to support the company and their financial risk is those one or two stores. While a management company who has 500 or 1,000 stores, they’re going to have more weight with the franchisor and influence them on various decisions. That could be from an operational standpoint, or from a marketing or advertising standpoint. With the large management companies, it’s less franchisees to work with, but they’re bigger and more influential franchisees.

Can we walk through the process of opening a franchise? Maybe looking, first of all, the initial costs and then we can take it from there?

If anyone is interested in a franchise, there’s so much information online, nowadays. You can just put in ‘franchisees’ and there’s tons of sites that will give you information on the restaurant industry and outside the restaurant industry, on franchises. If you go to Subway’s or McDonald’s or Burger King’s website, they’re going to have some general information for people who are interested in a franchise. They will, basically, try to sell you on why you should become a Subway or McDonald’s franchisee. There’s some general information and what they want is, they want you to sign up and say, hey, I want more information. You give your email address, your phone number, personal information. They will usually send you a brochure that has a lot of the details.

Those details are the initial cost, franchise fee – the averages – what’s involved in it, what the franchisor is going to do for you, as a franchisee. Then again, some average costs. Some franchisors talk about the profit potential; some wait for that until you are much further down the line and you can do your own investigation and talk to other franchisees. Once you sign up, you get information and if you continue with the process, you will usually talk to the franchise sales department of the franchisor. You’ll talk about your needs, why you want to be in the restaurant business; why Subway, for example? Then you will progress from there to the approval stage. That’s when they look at all your finances and, as we mentioned before, the capital and assets that you have.

If that all goes well, then they’ll move you forward with finding a location and helping you get set up with financing, which we can talk about more later. Once you find a site and you’ve signed a lease, you’re ready to go. Talking about initial costs, you’ve got your franchise fee. Every franchise company has their franchise fee. For Subway, it averages at $15,000. McDonald’s, I believe, is around $45,000, for that initial franchise fee. That’s a one-time fee. There’s costs on the franchisor to get you set up and that helps pepper some of those costs.

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Restaurant Franchisees & Online Food Delivery

June 4, 2020

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