McDonald’s started with one location in 1940. In 2019, they reported having over 38,000 stores worldwide. To call their franchise successful would be the understatement of the century.
But while this number might seem unfathomable to most, it’s the result of a strategic, long term development process. Even a regular old hamburger joint can have that scale of success, with the right team and plan behind it.
That’s the beauty of emerging brands. Through a strategic long term development process, they can turn into powerhouse chains with hundreds or even thousands of locations nationwide.
Oakscale lives and breathes emerging franchise development. We’re constantly on the lookout for the next diamond in the rough. And in our research and business dealings, we’ve figured out how to categorize concepts to decide if they are a brand that can be taken to 100+ franchise units. We wrote about our 5 pillars of franchise success in a previous post, What Is An Emerging Franchise?
In this new series, we’ll be breaking down The Five Pillars of Successful Franchises, according to the internal framework we use every day:
- Unit Economics
- Repeatable Operations
- Scalable Supply Chain
- Passionate Consumer Base / Brand Reputation
- Strong Executive Team
Today’s focus is unit economics. We’ll explore this pillar, along with few examples of franchises that you likely know pretty well.
Let’s start with a definition, which we’ve tailored to the realm of franchising.
Unit Economics: the ability of a franchisee to execute a concept’s business model and receive just revenue + returns.
If you’re a franchisor with poor unit economics, you flat out should NOT be franchising. If your business isn’t already making money, then why should someone else buy your franchise? Franchise development will be an uphill battle from day one, and the effort to reward ratio will be too low to sustain over time.
Similarly, if you’re a franchisee, you should NOT buy a franchise with poor unit economics. Avoiding this isn’t as easy as you’d think however, as many franchises don’t provide a clear picture on the actual economics of their business.
This is why it’s important to look at unit economics from a comparative lens i.e. if an Item 19 says a 1000 square foot burger joint does $1 million in annual revenue, how does that compare to similar concepts?
Your best shot at understanding the profitability potential is by reading through a Franchisors FDD.
Case Studies of Unit Economics
Have you ever wondered how much money you could make owning a McDonalds, Dominos or Cinnabon franchise?
Let’s see where the rubber meets the road, as we review those three brands to help put this unit economics pillar into perspective.
- 79% of domestic stores do $2.3M in revenue, with an operating income of $607,00 before occupancy costs i.e. rent, service fees, and income taxes
- Average Weekly Unit Sales of franchised locations was $22,648, implying annual revenue of a little under $1.2M, with an average EBITDA of 14.4%, or $169,588
- Franchisees located in enclosed Malls averaged $607,701 in annual sales, which resulted in $112,478 in operating income
*According to their 2020 FDD's
Granted, Cinnabon’s mall locations performance likely took a significant hit during covid, so I’d expect both revenue and operating income to decrease by a large amount in their 2021 FDD.
Regardless, from the most recent data we have, we can see healthy six figure profits dropping to the bottom line for the above brands that are beloved by customers nationwide.
Of course, there are more considerations than just revenue and profit. For instance, you’re going to want to look at the size of the initial investment per location, as well as historical franchisee data i.e. how long have the top performing units been open? This will give you a sense of how long it could take you to ramp up to the profitability of existing stores, which then allows you to approximate when your breakeven point occurs off your initial investment.
If you’re reading this however, it’s very likely that you don’t own a Dominos, McDonalds, or Cinnabon franchise - and it’s even more likely that if you wanted to buy one, it’s already sold out in your market!
Emerging franchises are exciting because they (usually) offer you the ability to buy into a franchise before your territory is sold out. The drawback is that you have less data at your disposal to know if the investment will pay off.
Oftentimes, buyers of emerging franchises will do so because they’ve seen high potential from early data, and upon going through due diligence with the brand, feel confident in their ability to replicate the model and financial performance in their local market.
Learn the do’s and don’t of franchise due diligence: What Not To Do When Buying A Franchise.
If you follow the growth of our brand PetWellClinic, you’ll see this playing out in real time, as the franchisor has gone from 5 existing locations, to 71 units in development in the last 7 months alone!
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Ultimately, unit economics is only one of the five pillars of successful franchises. For promising emerging brands that haven’t been proven outside of their market, other criteria needs to be evaluated to determine their potential for success.
Speaking of which, stay tuned for the next edition of this five part series when we dig into repeatable operations, the second box we look to check after strong unit economics. We’ll reveal insights and case studies of brands whose service and products are straightforward for franchisees to learn and deliver consistently.
By that time, McDonald’s will have probably opened 323 more locations.
How many will your brand open?