Some brands are more valuable than others, and the gap is widening. Watch here to find out which brands are the most valuable from Rick Ormsby at Unbridled Capital.
The topic of this episode is Which Restaurant Franchises are in the Most Demand and Why? The answer to this question is more difficult than you'd expect. Initially, consider the restaurants with the most loyal customer following, most innovative products, highest unit count, biggest unit growth rate, most consecutive years of positive sales comps, and brands with a dominant position among their competitors in a narrow segment of the market, such as burgers, pizza, tacos, and chicken. You'll come up with names such as McDonald's, Starbucks, Chick-fil-A, Taco Bell, Domino's, Panera and Dunkin'. These are a handful of the brands that are the best at what they do. However, their franchise models are very different from one another. McDonald's, for example, controls the real estate under most franchisees' buildings. And it therefore has a heavy hand in who enters and exits its brand. The M&A process here is severely restricted. Starbucks, Chick-fil-A, and Domino's are three other examples. Starbucks does a franchise, and Chick-fil-A has a very selective owner-operator model that limits franchisees to only several stores and invests alongside them as a financial partner.
This greatly lessens M&A since franchisees really don't have control. Domino's limits of franchisee from becoming actively involved in another business. And this effectively cuts out M&A for anyone who isn't raised up in the Domino's system, or isn't an existing franchisee. Adjusting for scenarios like this, you're left with a different set of high demand concepts that are in more of a free market investment for a franchisee. Taco Bell, Panera and Dunkin' would be at the high end from a demand perspective.
The next tier contains names such as Wendy's, Popeye's, Buffalo Wild Wings, KFC, Pizza Hut, Burger King, and Arby's. Further down are larger national brands not already mentioned. And some fast casual brands. Finally, the lower tier are regional brands with lower unit count, sandwich brands, casual dining brands, and various pizza brands. There is typically demand here, but at lower valuations, unless the individual franchise is special in some way. If you have any questions or would like to talk further about M&A, please feel free to reach out to us anytime. Thank you.